When finance met marketing

'Half of our marketing budget is wasted. We just don't know which half.' The old saying remains frighteningly true. But FDs do see the value in marketing these days, as Richard Young discovers

It is traditional for finance directors warily eying an economic downturn to dust off the shears and start attacking the marketing department's budget. In the hierarchy of cost-cutting, the 'cake decorators' (as one FD calls them) fall somewhere between the fruit bowls in the meeting rooms and the CEO's upgrade to first-class air travel.

Traditional, maybe - but it is also a myth. In fact, it is pretty hard these days to find an accountant in business who doesn't recognise that the marketing department is crucial to their company's success.

In a recent survey conducted by Deloitte, board level respondents placed marketing above every other driver of growth - including workforce development, leadership acquisition, technology and alliances - as a means of meeting their five-year targets.

And yet... The same survey also showed that, in most companies, the actual role of marketing is confused. Is it advertising? Margin protection? Product development? Worse, 77% of respondents - who were mostly senior management and board level marketers and other managers - said marketing is not fully appreciated by employees in general.

And while the vast majority of CEOs see marketing as a key driver of growth, only 31% of CFOs feel the same way. Deloitte calls this dichotomy a 'false dawn' for marketing. So it seems the rather snide joke, 'half of the marketing budget is wasted, we just don't know which half', still holds true.

Colour me finance

What is apparent is that the finance function now acknowledges that half of the marketing budget is money well spent. If the old antagonisms between finance and marketing - caused in part because the marketers sometimes see themselves as artists or psychologists rather than businesspeople - have dissipated somewhat, it is because both sides have learned to talk each other's languages.

'Yes, the marketing director has to understand the numbers, but the FD must also understand strategic marketing,' says Peter Hatherly, CFO at Accantia, the cosmetics group that makes the Simple range of products. 'Most of what this company is about is marketing, it's our business model. So you can't think strategically without understanding it. As an FD, you'd be useless in a board meeting if you only wake up when the numbers are discussed.'

According to the Designer FD report, based on a survey of MDs and headhunters conducted by Microsoft, Hatherly's experience is typical. One MD commented: '[The FD] is such a diverse role, we would be looking for experience in a number of areas - people, corporate, fiscal management, financial acumen. He would need to be a visionary with some marketing nous.'

Any business' finance director can learn from the way their peers in fast moving consumer goods (FMCG) - where the pressure is keenest - look at marketing. 'Your ability to withstand pricing pressure is all down to the brand,' says Jeff van der Eems, CFO at United Biscuits. 'We work hard to maintain our relative position against other brands and that gives us more flexibility, especially when times are tight.'

He points out that the companies with a strong, long-term financial track record have always understood their consumers better than their rivals. That is an important point: marketing today is not just about advertising or even market research; it is about communication. 'We know we have to spend money to reach them more effectively,' he says.

Facing reality

The expanded role of the finance director - no longer just a number-cruncher, but a broad-based strategist and business partner to the CEO - has helped this shift in sentiment over the past 10 years. But two other factors have forced accountants to take a more benign view of marketing.

First is the fact that business itself has changed, particularly in the mature (some might say ageing) liberal economies in the West. Business is now global, which means competition can arrive from anywhere at any time. The inputs are more variable, whether that is transport costs or revolutionary new communication methods. And most companies in these economies are now services-orientated - manufacturing is largely about cost; services are about consumer perceptions. Add those factors together and marketing has become critical to survival, not just growth.

The second factor is that tangible assets now represent a fraction of the value of most companies. Baruch Lev, professor of accounting and finance at the Stern School of Business in New York, has tracked the market-to-book ratio (that is, market value against tangible assets) of the Standard & Poor's 500 since the early 1980s. The average figure rose from just over one (meaning a company was worth the value of its assets) in the early 1980s to a peak of six by 2000, falling back to 4.5 by late 2003.

So understanding what drives intangible asset values has become vital for ambitious accountants. Even the accounting standard setters have acknowledged that marketing must be measured. Under IFRS 3, for example, companies are required to report the value of their acquired intangible assets, separated into five different categories: marketing, customers, artistic, contracts and technology-based.

Result? FDs are clear that they cannot even do their 'policing' job properly without understanding the dark arts. 'I don't need to be a world-class expert in marketing, but I need to know how it works to be able to bring accountability and discipline to that function,' says Frank Bandura, FD at restaurant chain Carluccios. 'That means I'm adding value - hopefully as a trusted business adviser, not just an accountant.'

Marketing adds up

But this has not been a one-sided rapprochement. Marketing directors have also worked out that the best way to cement their own position round the boardroom table is to show they understand the bottom line. (There is also realpolitik at work: it is the finance guys who will determine the size of their budget.)

'It's a question of being able to explain how returns will be generated, and justifying your case with a decent investment appraisal,' says accountant Richard Staszkiewicz, who has been running courses on finance for marketing managers for 15 years. 'So “it enhances brand image” is not great as a justification. But if you can put some value on the outcome, and particularly if that value can be measured consistently over time, the finance function will be more impressed.'

'Developing marketing metrics is the right aspiration,' says van der Eems. 'But you don't want science to get in the way of art. Coming from a finance background, it's important to remember that marketing is by definition imprecise. In that sense, it's a bit like making sausages. You know what result you want at the end; but you really don't want to know too much about how you got there.'

Equally importantly, you don't want the marketers to be distracted from their creative tasks. Van der Eems cites the marketing manager at one of his previous companies who was actually too analytical, too weighed down with metrics. 'The CFO is there do the analysis,' he says. 'Finance sets the boundaries and principles, based on the resources you have available and the margins you want for the business, which is something we're good at. All marketing has to do is stay within those boundaries.'

Balance of power

The bottom line for accountants remains... the bottom line. And that is probably where marketing scores least well. Individual marketing projects can be well costed, managed with discipline and the results codified; the marketing department's budget can be met; and brand value can be shown to be rising over the long term. But, with one or two exceptions (direct marketing, for example), there are still no simple ways of demonstrating how marketing spend today drives cash tomorrow.

Marketing suffers by comparison, then, because other activities deliver incontrovertible results. 'You can be great at marketing, but if you don't address costs, you'll hurt profitability and that feeds through into every area of the business,' says Paolo Pieri, FD of online travel agent lastminute.com. He is a marketing native - as ex-FD of Virgin Retail, he certainly appreciates the value of branding. But even he recognises that there are sensible limits.

Accountants can be real enablers in this respect, helping marketers stay on the straight and narrow. And if marketing is now about broad consumer communication, its success within the business is about inter-departmental communication. Many of the FDs we spoke to talked about 'breaking down silos' inside their businesses to enable this to happen.

But talking frankly about what marketing achieves on specific projects is also important. Van der Eems calls this a 'marketing feedback loop'. 'Even if you're not holding marketing to account by a rigid series of measures, you all need to look at what happened with each marketing activity and then work out why you got the result you did,' he says. 'That's how you make sure it works better next time.'

The key, one FD told accounting & business, is for marketing to learn from the way finance has shifted its gaze from the ledgers to the wider business: 'The marketing guys understand the drivers of the business from a client perspective, but have little understanding of the financial side of the firm.' That, more than anything, would help FDs value marketing more - and perhaps help them forget about the half of the budget that's wasted.

Further reading

• How marketers are tackling metrics
• Article on Lev Baruch
• ACCA research on intangibles
• ACCA approved marketing training

Richard Young is a freelance writer and editor, and former editor of Real Finance. E-mail: Richard.young@gmail.com