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Companies are vying for customers’ time and attention, two very limited resources.
Business leaders always try to differentiate themselves from the competition to cut through the noise of social media. They may wonder if a corporate sponsorship is a solid strategic investment.
Trusted advisers who hold the CGMA designation place themselves at the heart of this kind of critical business decision. They know how to analyse data to offer strategic advice to leaders and can help evaluate if a corporate sponsorship is a business decision worth exploring.
Corporate sponsorship can prove a mutually beneficial partnership: The company gets to promote its brand, and customers create a positive mental link between your company and the entity you sponsor, such as youth football.
But sponsorships can be complex, and weighing long, and short-term benefits against potential risks is a crucial piece of the puzzle. Companies must also consider factors like return on investment and potential financial risk.
Three elements to consider are value of the sponsorship, terms of the contract and commercial risk of your corporate sponsorship.
Quantifying the value of a sponsorship
Sponsorships are an extension of the company’s ad campaigns and other strategic marketing efforts.
As with any corporate investment, companies must financially justify sponsorships. But appraising the ROI of a sponsorship can be a challenge as the company looks to measure how the sponsorship will impact the business.
How can you validate the financial investment of a sponsorship?
Firstly, you’ll want to define the company’s cost of capital as compared to the potential return on investment. The capital asset pricing model (CAPM) is a helpful tool to estimate the cost of equity, measuring the theoretical return on investment to ensure that it’s proportional to the risk of investing capital. The financial model demonstrates the link between systematic risk, meaning risk caused by factors beyond the company’s control, and the expected rate of return on investment.
CAPM is part of the Strategic level, the third and final level of CIMA’s CGMA Professional Qualification, specifically in the F3 Financial Strategy Syllabus.
Articulating terms and conditions
The goal of a sponsorship is to increase visibility for your company, but not just any visibility will do. A company’s logo should be preserved. Whilst the company is sure to provide the logo in various sizes, the contract needs to specify that misuse or changes to the logo are not allowed.
A representative from your company should monitor the production of merchandise or equipment to ensure the logo is displayed correctly. And it’s not a bad idea to have someone attend events where the brand is being displayed to see the sponsorship in action.
To monitor the success of your sponsorship, you’ll need to identify business metrics. For example, when the logo appeared during a match, was there any press coverage? Metrics inform the ROI and will be valuable when considering a future sponsorship opportunity.
Linking your company to another brand
Commercial risks could come into play when you tie your name to a third party, such as a sports team.
How can you mitigate the risk of adverse publicity should a scandal happen, the team underperform, or a star athlete leave the team?
Plan for unknowns by scenario planning, asking ‘what if’ and analysing possible outcomes. Exploring different scenarios allows you to identify possible drivers that could negatively affect your company’s brand.
After scenario planning and analysis, if the company is ready to proceed, the next step is to create the contract carefully. Contract terms and conditions should include length of the sponsorship, the rights to terminate the contract and guidelines for ethical separation.
Companies rely on commercially minded, financially strategic leaders to create value at all levels and optimise business performance.
Combining financial, commercial and business know-how, management accountants deliver valuable strategic insight to ensure a company invests in the right sponsorship.
The Chartered Global Management Accountant® (CGMA®) designation is the most widely held management accounting designation in the world. AICPA & CIMA, together as the Association of International Certified Professional Accountants, offer the most relevant finance qualification for business.
Byline: Paul Turner, regional vice president of UK & Ireland at AICPA & CIMA.
