The phenomenal popularity of sport, as evidenced by the amount of sports coverage on television and, has led companies in all manner of industries to recognise the value of sports sponsorship as a powerful means of brand promotion. Think, for example of Benetton's relationship with Formula One, Sharp's sponsorship of Manchester United and Volvo's sponsorship of the PGA Championship. Similarly, the two major sporting events hosted in the UK in 1999 (the Cricket and Rugby World Cups) have ensured enormous global coverage for sponsors but also significantly underlined the need for realistic targets and an understanding of the sport in which they are entering.
Although some of the topics detailed below will be primarily for lawyers to consider the majority of the key issues in any sponsorship agreement will have to be dealt with by commercial departments at the 'deal-making' stage. It is vitally important, therefore, that brand managers are equipped to address relevant concerns and negotiate any contentious points if, for example, the marketing director suddenly announces that the company is about to become the next shirt sponsor of Chelsea football club at the cost of £2 million per season.
The key to negotiating a successful sponsorship agreement is to keep the commercial objective in mind at all times. The objective is to build brand awareness. This is achieved by obtaining the maximum possible exposure of your brand in association with a sport, an event or a sportsperson which has a high profile positive PR image. With this objective in mind the following are among the key questions which need to be addressed at the outset of any contract negotiation:
The Rights Package
The rights holder (the governing body, club or agency) will offer a package of rights. This package needs to be probed to ensure that the company understands what is on offer. For example does the right to brand shirts mean the right to brand home, away and third kits? Does it apply to all teams including women and juniors and at all matches including European fixtures? What size will the branding be and where will it be positioned? Detail is the key here. The rights schedule should be the longest part of the contract. After all it describes what your £2 million is buying. The company should also establish what additional inventory the rights holder controls - there will almost invariably be a number of additional rights which the rights holder will be able to grant. It is up to the company to ensure it gets value for money. Clearly different questions need to be asked of the rights holder depending on the sport in issue. Knowledge of the sport is obviously a huge bonus though there are specialist sports marketing agencies and legal practices which can provide valuable industry expertise to maximise the commercial value of the deal if the company is new to sponsorship or to a particular sport.
The company needs to know how many other sponsors there are. If there are other sponsors it needs to know whether there is a sponsor hierarchy and, if so, where the company fits in that hierarchy. Whenever there are a number of sponsors the company needs to think about the effects of dilution on the rights it is acquiring - 3 perimeter boards at a match may create a huge impression if they are the only boards but their impact may be negligible if another sponsor has the remaining 27 boards or there are 9 other sponsors with 3 boards each. If the company is going to be the "principal" sponsor, it should make sure the sponsorship agreement says so and that the rights holder agrees not to grant any rights to others which, either individually or in aggregate, will undermine that status.
The degree of exclusivity which is acquired by the sponsor can often determine the success of the sponsorship. For, the company will want to use the rights granted to it by the rights holder to promote particular products and/or services - be they hamburgers, life insurance or mobile phones. Accordingly, the company needs to ensure that the rights holder will not grant any identical or similar rights to a third party in respect of the same type of products or services otherwise the company will be giving its competitors carte blanche to ambush its rights. The company's "exclusive" product/service category needs to be defined as widely as possible - bearing in mind any UK or EC competition law restrictions. The company should also establish what control the rights holder has over the environment in which the sponsorship rights will be delivered. Can it, for example, prevent the company's competitors branding all of the poster sites outside the stadium or prevent the broadcaster of the match altering the broadcast signal to insert or remove sponsor branding?
Existing Restrictions on the Rights
The company should identify what current restrictions there are on its ability to exploit the rights. Restrictions may exist because the rights holder has pre-existing commitments or because it hasn't assembled the rights package correctly so that, for example, player appearances cannot be included in the rights package without obtaining individual consents from each of the players or their agents. Restraints may be imposed by the governing body of the sport in question - it is always sensible to obtain a copy of the governing body's handbook to see what restrictions this places on advertising and promotion within the sport. Restraints may also be imposed by national or European law - particularly if the company is a tobacco or drinks manufacturer.
Protecting the value of the Rights Package over the Term
The sponsorship agreement should legislate for events which may occur over the term of the sponsorship agreement which might have a significant impact on the company's ability to exercise the rights or gain maximum exposure for the rights. For example the relevant governing body might decide to ban shirt advertising or, more feasibly, to centralise its commercial rights and insist that all the teams competing in its league or cup competition must wear branding for the league or cup sponsor. Since broadcast exposure is crucial for brand promotion possible changes in the level and type of broadcast coverage over the term of the sponsorship should be carefully thought about - how would the company feel if coverage of the sport moved to a digital cable platform?
The valuation of the rights package can be arrived at in a number of ways and knowledge of the market for comparable rights is important to ensure that the company is receiving value for money. Fees are structured differently in different sports. In a club sponsorship, the sponsorship fees are likely to be a mix of a fixed fee with additional bonuses payable for the team/club's success in national and international competitions. Whenever the fee includes a bonus element the company needs to think carefully about the circumstances in which the team's performance would generate benefits for the company that would justify the payment of a bonus on purely financial grounds. For example success in European competitions means far more to company which has a substantial European market than one which trades only in the UK. Royalties may be payable if the sponsor uses trade marks or other rights to create merchandise. (Whilst sponsorship is primarily about PR and image, it can also be used to create new product lines). Additional fees may also be payable for personal appearances etc. Careful thought must be given to the circumstances in which the company might be entitled to a reduction in the sponsorship fees because the property it has agreed to sponsor is diminished over the term of the sponsorship and how any such reduction would be calculated.
Term and Renewal Rights
The sponsorship agreement will obviously state the term of the sponsorship arrangement which will inevitably be linked to the seasons of the sport in question. The company should consider whether it wants an option to renew in order that it can build on the public recognition and goodwill that it generates during the initial term of the sponsorship.
Usual rights of termination for breach and insolvency should obviously be included in the sponsorship agreement. Thought should also be given as to whether there are any other circumstances in which the company would not wish to continue the sponsorship for example if the team is relegated, or the commercial rights to the principal league and cup competitions in which the team competes are centralised. If the sponsorship concerns a tournament certain payments may be tied in with the general success of the event and therefore depend on television audience figures or attendances at matches. Again a knowledge of the sport is useful to identify what issues might arise.
The company will be undertaking the sponsorship in no small part to receive the reflected glory from the sport, sportsperson or event. However, there will be occasions in the sporting world where the rights holder has behaved in a manner that will reflect badly on the sponsor. The company should, therefore, also ensure that as well as including the standard termination provisions, consideration is given to the type of incident(s) that would prevent the sponsor from wanting to continue the relationship. The sponsor should be careful to insist when involved with a club, for example, that disrepute clauses are drafted widely enough to cover the misdemeanours of the players and/or the coaching staff.
Management and Building the Relationship:
The company will maximise their sponsorship if relationships with the rights holder are strong and it is an association which fits well with consumers. Whilst not a point for the contract negotiations, the company needs to decide at an early stage who will be responsible for implementing the sponsorship and whether the company has the resources and capabilities to manage the sponsorship within their own commercial department. Sports sponsorship, particularly in those sports that can generate vast public awareness, is expensive and like any other significant business expenditure needs to be properly managed to leverage the best return. It is the successful exercise, not the acquisition of the rights, that will build the brand.
First published in Brand Strategy in November 1999.