Tag Archives: Contract Compliance Audits

Are Agency Relationship Managers a Luxury or Necessity for Advertisers?

26 Jul

madison avenueIn the “good ole” days of full-service ad agencies, 15% commission and powerful, independent ad agency brands… responsibility for an advertiser’s agency relationships was typically limited to a handful of executives within the organization, up to and including the CEO. 

Over the course of the last 30+ years, agencies decoupled, remuneration programs evolved, ad agencies went public, and agency holding companies rose to power and the number of agency partners on a client’s roster have greatly increased.  Unfortunately, as agency rosters grew in breadth and their interaction with client personnel expanded across the organization, there was one area that was overlooked.  Simply, “Who” would be responsible for these important relationships?  Factor in CEO and CMO turnover rates and one can begin to understand why client/ agency relationship lengths are now measured in years rather than decades.   

For those who believe that advertising agencies play vital strategic roles in building and positioning brands for long-term success, driving near-term demand generation and in furthering an advertiser’s understanding of their customer base, agency turnover is a risky and expensive proposition.   

“Remember upon the conduct of each depends the fate of all.” ~Alexander the Great 

In order to stabilize client/ agency relationships and to optimize performance across their agency network, many advertisers have invested in the addition of Agency Relationship Management specialists.  Working across an advertiser’s organization to assist Marketing, Procurement, Legal and Finance with the various nuances of effective agency stewardship this position can be a vital component of any supplier relationship management initiative.   

From contracting for agency services to developing remuneration programs and performance evaluation processes to overseeing contract compliance assessments and cost benchmarking audits there is much work that goes into maintaining an effective and efficient marketing supplier network which may include dozens of agencies.  The Agency Relationship Management specialist brings the subject matter expertise to counsel internal stakeholders on industry “Best Practice” and the experience to help shape decisions pertaining to key aspects of the organization’s agency stewardship efforts. 

As importantly, from an agency perspective, this position can and should serve as an advocate and an ombudsman providing an objective perspective when it comes to resolving issues or mediating disagreements.  By further providing unambiguous, consistent two-way communication between the partners and their respective stakeholders coupled with the establishment of clear expectations regarding agency performance the odds of building strong, enduring relationships are greatly enhanced.

This service can either be maintained internally at the client (by appropriate personnel with both broad and deep advertising experience – client and agency side) or the service can be outsourced to a select qualified and dedicated specialist or group. 

For those advertisers who view their agencies as partners rather than vendors, and who want to foster increased involvement, contribution and interactivity, a strong case can be made for the addition of the Agency Relationship Manager role.  Responsibilities would entail being the “hub” of all things related to agency stewardship, developing a marketing agency database cataloging all aspects of the client/ agency relationship and agency performance, disseminating information to all stakeholders and sharing industry “Best Practice” insights on this important area.  It is a role which requires a tremendous amount of patience and tact, but one where the value provided far outweighs the salary investment outlay required to improve an organization’s agency stewardship and financial management practices. 

Advertising Financial Monitoring

30 Dec

????????????????????????????????????????What is it?  Should a marketer consider it?  Should it be done out-sourced or done in-house?  Three great questions as it relates to a growing aspect of marketing accountability.  

Let’s start with a brief overview of the advertising financial monitoring function and its role.  Marketers have historically made significant investments in advertising ranging anywhere from 1.5% to 5.0% of gross sales, depending on their category, market position and growth posture.  Many organizations have struggled to establish a causal relationship between this investment and in-market performance results; overall, by product, by marketing mix element and or by agency partner.  The goal of advertising financial monitoring is to provide timely, relevant feedback on the stewardship of advertising investment across geographies, brands, agencies and disciplines. 

An effective advertising financial monitoring program provides a streamlined framework for timely capture and analysis of data to yield insight into handling of the organization’s marketing budget and performance of agency partners.  Corporate strategy and accountability protocols serve as the basis for developing the processes to be employed.  And the advertiser’s individual contracts with agency partners establish the performance metrics to be tracked and reported on.  

How many marketing services agencies does your company employ?  It is not atypical for an advertiser to utilize dozens of agencies to formulate and execute the advertising and marketing plan; Full-Service Agency-of-Record, Creative Services Shops, Media Agencies, Diversity Shops, Digital Agencies, Public Relations Firms, Social Media Shops, Regional Marketing Firms, Shopper Marketing Specialists, Event Marketing Agencies, Direct Response Shops, Sale Promotion Agencies, etc…   

In our contract compliance, fee reconciliation / billing, and agency performance review experience, one of the biggest shortcomings is a lack of clarity around “Who Owns” the agency relationship.  A weakness often resulting in overlapping agency responsibilities, limited agency oversight or control, lack of performance monitoring and limited transparency into an agency(s) stewardship of client resources.   

What is your annual marketing spend?  $75 million?  $650 million?  What would efficiency gain in the range of 1.5% to 9.0% mean to your organization?   This is a typical return-on-investment for improved and focused accountability.  Beyond financial yields, benefits are derived from a streamlined data gathering process and a constant flow of process improvements.  Most importantly, advertising financial monitoring will positively shape agency behavior for resource investment and in-market performance.  In the words of Michael Josephson: 

“What you allow, you encourage.” 

Outsource or Build?  It’s the same old discussion – most organizations don’t have the requisite technology or resources to architect, implement and manage such programs in-house.  As well, there is the significant benefit of having access to niche counsel which compliments in-house marketing, procurement, and finance team knowledge. 

As a result, each stakeholder in the marketing planning and investment cycle becomes awakened to the potential for achieving heightened levels of performance.   That is a good thing. 

Interested in learning more about the benefits of an “Advertising Financial Monitoring” program?  Contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com for a complimentary consultation on this topic.

Deadlines Don’t Make Great Partners When It Comes to Marketing Procurement

3 Dec

hThe economic forecast for 2013 can be summed up in one word, “uncertain.”  One of the results of this uncertainty will likely be downward pressure on corporate budgets…. including marketing spend.  Whether this results in budget stagnation or enterprise expense reduction initiatives, companies will be looking to balance their revenue generation efforts with the need to contain expenditures.

Point-in-fact, a recent study released by the UK advertising agency group IPA, found that as of the end of October 2012, marketing budgets “had been reigned in during the third quarter of this year to a greater extent than at any time since 2009.”  Of note, 23% of survey respondents “reported a reduction in marketing spend” with only 18% indicating that their budgets had increased.  According to the group, that -5%+ differential “represented a dramatic fall” when compared to the -1.1% in the second quarter and +1.0% in the first quarter of this year.  

In light of this challenging environment, it is highly probable that corporate procurement will be asked to expand their involvement with marketing to identify potential cost savings for the coming year.  These types of corporate edicts complete with succinct timetables and “hard” cost-reduction targets can create challenges on both sides of the aisle.  If procurement and marketing haven’t already forged a close working relationship and a base level of understanding of the role that each group plays and the expertise that they bring to the task at hand, then the risk exists that the process will be fraught with anxiety and tension.  Clearly Bill Phillips had it right when he intoned:

“Stress should be a powerful driving force, not an obstacle.”

Unfortunately, this is not always the case.  One has to look no further than the political gridlock in Washington D.C. over the “Fiscal Cliff” to see that time-constrained processes designed to address challenging financial issues are difficult, to say the least.  Stakeholders tend to become more entrenched in their views and focus on defending budgetary “sacred cows” or attacking perceived “excesses” rather than working together to map out a balanced approach. 

Marketers, let’s be honest, whether you’re managing a $15 million budget or a $500 million marketing budget, there are always opportunities for improved efficiency’s.  The key to success in working with procurement on a near-term expense reduction initiative is to help identify the “nice to have” budgetary line items versus the “need to have.”  Remember, it is still marketing’s obligation to optimize the organization’s revenue potential during uncertain times.  Prioritizing areas to explore to achieve the organization’s expense reduction goal will be a significant help to the procurement team and will provide the catalyst necessary to jump-start the process.

One area often overlooked by marketing and procurement teams when seeking hard cost savings are the dollars that can be generated from a historical review of the organization’s marketing investment.  Agency contract compliance audits and billing reconciliation reviews can yield significant financial true-up opportunities as well as potential future savings.  In our experience, it is not a-typical for a contract compliance audit to return between 2% – 9% of audited billings in the form of financial returns and or future savings to the advertiser. 

Best of all, by engaging an independent contract compliance auditor this process can take place concurrently with the efforts of marketing and procurement in reviewing the existing/ proposed budget for potential savings.  Further, given the historical, data-driven approach which should be the hallmark of a contract compliance audit, the process requires little time on the part of the marketing and procurement team members and virtually no time on the part of the agency account teams that often play a critical support role in working with the client to identify potential budgetary savings. 

Every dollar’s worth of saving is generated from historical rather than future expenditures and the risk to the organization demand generation efforts are significantly lessened. This is precisely the type of scenario in which all stakeholders can find grounds for agreement.

Interested in learning more about the benefits of compliance auditing and its role in an enterprise expense reduction initiative?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on the topic.

 

Do Advertisers Get What They Pay For?

17 Sep

do advertisers get what they pay forToo often, the answer is “No” advertisers do not get what they’ve paid for.  These shortfalls typically manifest themselves in two camps: 1) Lackluster service levels and work quality; and 2) Financial stewardship missteps.  Needless to say, both can have a negative impact on the efficacy of an organization’s marketing investment.

How can this be?  You ask.  There is a truism in the advertising world that what is inspected is respected.  Organizations that don’t apply this standard to their agency partners and third-party vendors are, quite simply, at risk. 

There are a number of factors that can impact service levels and work product.  These can include excessive agency staff turnover, deficient levels of involvement by senior agency personnel on the business, process limitations that squander time or fail to produce “memorable” work that is on strategy.  These items can result in high levels of project rework, scope creep, relationship dissonance and, if not kept in check, can negatively impact an advertiser’s demand generation efforts.  Make no mistake about it, this carries economic consequences that limit an advertiser’s return on marketing investment (ROMI).

Sound financial stewardship of an advertiser’s funds by their agency and third-party vendors is the fiduciary responsibility of each and every supplier.  However, an advertiser cannot leave anything to chance.  Tight contract controls regarding agency staffing, scope of work, remuneration parameters and reconciliation and reporting guidelines are a must and represent the first line of an accountability defense. 

Additionally, advertisers should require their media agency partners to conduct thorough post-buy analyses, conduct regular third-party billing reconciliations and to secure compensatory media weight and or cash for audience under delivery on a timely basis.  In the creative services arena, agencies should be monitored to insure adherence to the organization’s cost controls, production management and third-party accounts payable guidelines to insure that an advertiser’s billing and accounts payable expectations in these areas are being met. 

The financial impact of shortcomings in any of these areas can be significant.  In our agency contract compliance auditing practice it is not unusual to identify one-time errors or systemic oversights that can represent between 1.0% and 9.0% of an advertisers budget.  So what can an advertiser do to insure that they are securing maximum value for their advertising expenditure?  In the words of noted businessman and author Albert E.N. Gray:

“Inspect what you expect.”

Clients that have clearly articulated their expectations regarding agency staffing, deliverables, performance criteria and reporting have a much better chance to achieve their objectives and ensure they’re getting their “money’s worth.”  However, an advertiser must go beyond this important first step and incorporate a transparent process for auditing agency contract compliance and assessing performance relative to their stated goals.  The notion of an audit inspection should not send a negative message.  To the contrary, it is respected aand understood as a necessary control process like any other, such as balancing the cash-register daily in retail.   Call it what you would like (review, continuous monitoring, compliance testing, advertising audit), it’s simply a thorough way to ensure the millions of dollars spent on advertising are tracked appropriately.  Too many large marketers do not have such a process in place.  The combination of these actions will afford an advertiser the opportunity to drive each of the stakeholders that comprise their marketing supply chain to extraordinary performance.

It should be noted that supplier accountability management is not a one-and-done proposition.  Implementing and executing a system which has an ongoing monitoring component, often utilizing independent auditors, is necessary to ingrain the requisite processes into the culture of the advertiser and each member of their marketing services agency network.  In the words of the great philosopher Aristotle:

We are what we repeatedly do.  Excellence, then, is not an act, but a habit.”

Interested in learning more about marketing accountability and how to implement the appropriate controls and transparency?  Contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com for a complimentary consultation on this topic.

It’s Your Money and Your Reputation

26 Jun

advertiser's reputationDo you know what happens to your organization’s money, once it has paid the advertising agency?  If you’re like most advertisers you probably don’t know and may not even care.  Perhaps you should. 

Advertising agencies, regardless of the contractual definition of their role (agent vs. independent contractor), act on an advertiser’s behalf to procure and pay for services, space, time, etc… purchased from third-party vendor organizations that are related to producing and distributing the client’s advertising and communications messaging.  In turn, the advertiser is billed by the agency, typically upfront on an “estimated” basis for those goods and services with payment due to the agency in 15 to 30 days from receipt of invoice.  Terms between agency and client are usually set to insure that the agency has the client’s funds prior to the time third-party vendor invoices are presented for payment. 

For most advertisers, there is little transparency into the financial transactions between their advertising agencies and their third-party vendors, which number in the hundreds, if not thousands.  This lack of transparency results in diminished advertiser control and increased risks associated with third-party vendor reconciliation and accounts payable management.  Risks typically fall into four areas: 

  1. Clear and unambiguous title to any and all intellectual property/ work product
  2. The advertiser’s reputation among 3rd party vendors
  3. Treasury management “opportunity” costs
  4. Exposure in the case an agency became unable to pay its creditors 

AARM conducts agency contract compliance and financial audits of advertising and marketing agencies on behalf of advertisers.  In our experience it is rare to see a client-agency contract that identifies clear terms and conditions for the agency’s handling of third-party vendors or in establishing processes and controls to allow the advertiser to monitor performance in this area.   Don’t advertisers want to know if and when third-party vendors have been paid?  If vendors were paid at the agreed upon rate or something less?  If the reconciliation process resulted in credits, discounts or rebates that are due back to the advertiser?  Who are the vendors being utilized? 

Based on our financial audit experience, there has been a clear trend in recent years of agencies stretching out disbursements to third-party vendors well beyond their payment terms, as measured by “Days Payable Outstanding” or the time lag from vendor invoicing to agency payment to the vendor.  There can only be two reasons for this performance and neither is particularly sound.  Firstly, the agency may have flawed vendor reconciliation processes and or they are putting inadequate resources against this “non-revenue generating” area of their business.  Secondly, the agency is seeking to maximize interest income from float.  Simply defined, “float” is the amount of money that the agency has collected from the advertiser but has not yet disbursed to a vendor.  In almost all instances, agencies both earn and retain the interest income on this float. 

Within the agency community it is often joked that interest income (from float) is an agency’s best client; “It pays on time and never complains.”  However, when it comes to the advertiser’s reputation the risk of being labeled a “slow pay” is no laughing matter.  Whether deserved or not, such a reputation can carry both opportunity costs and economic costs in the form of vendors charging higher rates to compensate for their “carrying costs” or not offering preferential treatment.  Nor do many client-side CFO’s find much humor in lost interest income opportunities, aged vendor credits or delayed earned but unprocessed discounts and rebates.   

When the size of an advertiser’s budget is considered and the fact that this investment is being managed through a small group of agencies, who in turn handle purchases and payments on behalf of the advertiser with hundreds of diverse third-party vendors ranging from media property owners to production studios to third-party ad-servers, it may be time to perform an independent assessment of performance in this important area. 

After all, we’re all familiar with the adage: “What is inspected is respected.” 

Interested in learning more about the financial portion of an agency contract compliance audit?  Please contact Don Parsons, Principal at AARM at dparsons@aarmusa.com for a complimentary consultation.

 

Performance Integrity

18 Jun

In the world of athletics, independent performance assessments are the rule.  In baseball, umps call balls and strikes, in tennis linesmen determine whether a ball is in or out, in football referees call out players for rule infractions.  Given the competitive nature of athletic competition at all levels and the economic impact performance integrity can have in collegiate and professional sports, it is unfathomable to think that the governing bodies overseeing these entities such as the MLB, USTA, NFL or NCAA would allow athletes to self police their contests. 

Is business any less competitive?  When companies consider the value of a point of market share, the impact of positive sales on earnings-per-share or the investment level being made in marketing as a percentage of their selling-and-general-administrative expense the answer would most certainly be “No.”  So why is it that when it comes to marketing performance integrity, self-assessment is the rule rather than the exception? 

In business, as in sports, there are winners and losers.  There are several characteristics that impact whether an organization can be categorized as a “winner.”  These characteristics include, but are not limited to, a company’s market position, year-over-year sale’s increases, customer loyalty/satisfaction and return on shareholder equity.  An organization’s marketing investment and the resulting performance of that investment largely determines an organization’s in-market success.  Given the potential impact marketing has on company performance, don’t you believe that stakeholders (i.e. Share Owners, Board of Directors, Senior Management) would want to insure the integrity of that “performance?” 

Perhaps it makes sense for business to take a lead from their sporting organization counterparts and commit to the independent performance assessment of their marketing partners as a mechanism for optimizing this important investment.  This is certainly not a foreign concept in business – just as public corporations are required to utilize independent auditors to vet the accuracy of their financial statements it would be reasonable, and make good sense, to apply this concept by engaging 3rd party agency contract compliance and performance auditing firms to assist in assessing the efficacy of one’s marketing spend.  The learning and any resulting financial reconciliation related to the audit process would yield dividends on multiple fronts well into the future.  In the words of one of America’s founding fathers, Thomas Paine: 

“Character is much easier kept than recovered.” 

The practice of engaging agency compliance auditors to provide a fair and balanced look into the performance of an organization’s marketing agency network is relatively commonplace in Europe.  This movement has also been gathering momentum within the world’s largest advertising marketplace… the United States of America.  Employing independent auditors is not done to impugn the character of the agencies whose compliance and performance is being evaluated.  Rather, it is performed to validate that the advertiser has, in fact, the appropriate legal, financial and governance controls, fraud detection and performance monitoring processes in place and that the reporting and subsequent level of transparency which it affords the company are satisfactory.  

Given that we started this article with a sports reference, it is only appropriate that we end with a pearl of wisdom from one of major league baseball’s most accomplished players, Hall of Famer Yogi Berra: 

 “You can observe a lot by just watching.” 

Interested in learning more about the benefits of agency contract compliance and performance audits?  Contact Don Parsons, Principal at dparsons@aarmusa.com to schedule a complimentary consultation today.

Accountability Doesn’t Obviate the Need for Governance

12 Jun

It has been ten years since Sarbanes-Oxley was enacted by the United States legislature.  The SOX Act, as it is commonly known, covers a number of issues ranging from corporate governance to internal controls and reporting accuracy.  The law came into being as a result of high profile corporate and financial scandals at Enron, WorldCom, Adelphia and Tyco International.  The monetary impact of these events on investors around the globe was both profound and devastating.

As firms began to grapple with SOX compliance requirements, they implemented processes and procedures designed to enhance transparency and improve governance at all levels of the organization.  In the context of a business, Wikipedia offers this definition of governance: “Governance relates to consistent management, cohesive policies, guidance, processes and decision-rights for a given area of responsibility.”

While it took awhile and in some organizations, a longer period of time than in others, marketing’s turn to go under the microscope has come to pass.  In light of the investment level being made by companies, this is certainly no surprise.  Given the complexity of the marketing-advertising supply chain, the use of agents, independent contractors and 3rd party vendors, and the lack of transparency often afforded advertisers, the only surprise is that it has taken this long for organizations to begin to “peel back the skin of the onion.”

For progressive companies that have created a culture of accountability, increased governance and its impact on marketing spend, and all that it entails, represented few challenges.  However, in many organizations the notion of “governance” was interpreted by client-side marketing and advertising agency representatives to be a full-frontal attack on their integrity.  Further compounding the process was the fact that marketing was, and to some extent remains a bit of a “black box” to corporate finance, audit and procurement departments.  In many instances, these departments simply don’t have the subject matter expertise on-staff to help guide their efforts to understand the nuances and complexities of the marketing area.

What do we mean by “complex?”  From the size of an organization’s marketing agency network which could include dozens of firms (earlier this year PepsiCo pared their agency network from 150+ shops to 50) to the hundreds of statements-of-work and purchase orders issued in a given year to the thousands upon thousands of bill-to-client invoices and 3rd party vendor invoices which are processed.  Remember, these include a staggering number of revisions to the ad industry’s typical modus operandi, an “estimated billing” approach in which the advertiser is billed upfront for all or a portion of the creative and or media activity for a given period.   In an estimated billing scenario, it is the advertiser who fronts the money, not the agencies and not the media sellers that bear the risks for their investment.

The good news is that there are a number of competent, highly-regarded, independent agency contract compliance audit firms that can provide capable assistance to an advertiser.  The subject matter expertise which they bring includes insights into most all facets of the marketing supply chain as well as industry “Best Practice” in the area of accountability.  Further, they provide an excellent bridge to enhance communication and further understanding between marketing and their agency network and the governance process championed by finance, audit and procurement.

The time has come that there should be few corporate marketers and fewer marketing agencies that resist an organization’s governance initiatives.  There is no reason, and frankly, no excuse in any quarter for not “stepping up” to enhance transparency and improve the reporting and controls a company has in place to safeguard its marketing investment.  In the words of Stephen Covey:

“Accountability breeds response-ability.” 

Interested in learning more about the role of contract compliance auditing in supporting your company’s governance efforts?  Contact Don Parsons, Partner at Advertising Audit & Risk Management at dparsons@aarmusa.com for a complimentary consultation.

Do Perspectives Drive Outcomes?

4 Jun

By way of background, I have spent my entire career as a marketing professional.  Of note, I have both advertising agency and client-side experience in addition to having worked in the field of marketing accountability, auditing marketing spend and marketing agency performance.  Hence, I have always been perplexed by the notion that marketing executives were thought by some to be unwilling participants in working with their peers in procurement or finance to help them better understand and assess the stewardship of an organization’s marketing investment.

I don’t believe that anything could be further from reality.  The truth is that the vast majority of marketing professionals have an inordinate sense of obligation to go along with a fiduciary duty to invest their organization’s marketing budget in a manner that will yield the greatest possible return… whether that is brand positioning, revenue generation or market share increases.  To that end, marketers and their agencies work diligently and tirelessly to make every dollar invested work as hard as possible.

Of note, many industry pundits feel as though advertising agencies have fallen from their pedestal and position of respected “partner” to that of a “vendor” who does little more than sell their wares for the best possible price to the highest bidder.  In spite of the fact that the average client-agency relationship tenure is a few years rather than a decade or more as in the recent past, categorizing an agency as a vendor unfairly diminishes the role and contributions made by both the agency community and the client-side marketers that direct their efforts.

Thus, it was no surprise to see the results from CMG Partner’s recent survey that found CMOs had expanded their roles and perspectives within their organizations, becoming something akin to a “CEO of Marketing.”  The trying times related to the global recession and the downward pressure on marketing spend at a time when organizations sorely need to drive demand generation, while challenging, have forged a stronger breed of senior marketing executives.  The report also recognizes that while the marketing profession has made considerable gains in terms of greater corporate influence, it is on “the threshold, rather than in full flower.”  The report concluded that the CMO must “not only earn his or her place at the table” but also “his or her voice.”

So how can marketing executives take advantage of the upward corporate trajectory to achieve broader authority?  One answer would be to fully embrace the use of independent third-party compliance and performance audits to improve corporate transparency into all facets of the marketing supply chain and openly share how an organization’s investment is being stewarded by the marketing team and their agency network.  Transparency and recommended improvement opportunities can help to further the understanding that other corporate stakeholders have with regard to marketing plans, processes and outcomes.  Further, independent reviews of the efficiency and efficacy of the marketing spend can benefit marketers by building peer level trust in their resource decision-making framework and the competency of their agency partners.

An independent assessment of a marketing agency’s contract compliance and performance does not emanate from a lack of trust on the part of a client organization.  Advertisers that have embraced progressive corporate governance initiatives have an obligation to ensure that the large sums of money being invested in this important area are being managed capably and in concert with the terms and provisions of the client-agency agreement.  Thus, the agency community, like any good corporate partner, should both welcome and support a client’s efforts to hold marketing accountable to the same standards that other functions within the organization are held to.  Agencies can benefit from the process as well.  Both as it relates to the independent validation of the investment that they make in the relationship as well as to use the compliance audit process to better align their resource investment and remuneration with the client’s business objectives.

In the words of Michael Josephson, one of the United States’ most sought after ethicists:

“What you allow, you encourage.”

Interested in learning more about the potential benefits of a marketing agency compliance audit?  Contact Don Parsons, Principal at Advertising Audit & Risk Management for a complimentary consultation at dparsons@aarmusa.com.

Why Go to a Doctor for an Annual Check-up?

29 May

Whether in our business or personal lives, third-party inspections are a fact of life.  Public companies are required to engage independent financial auditors to review their financials.  Many U.S. firms are subject to independent inspections by OSHA to ensure compliance with the Department of Labor’s employee safety and health standards.  And for purposes of establishing a tax base, local governments employ independent appraisers to assess the value of commercial and residential real estate.

Certainly there are times when we rue the fact that we are subjected to outside scrutiny.  However, independent inspections are both necessary to protect stakeholder interests and provide valuable insights that enable businesses, governments and individuals to mitigate risks and drive improvements.

So when it comes to marketing accountability, why do so many organizations eschew independent third-party reviews of their agencies’ processes, contract compliance, financial compliance and performance?  Sadly, in a majority of instances an advertiser allows its agency partners to self-police themselves by providing their own internally generated performance reports on topics ranging from how they invested and stewarded their client’s media dollars to the agency’s time-of-staff investment; or the timeliness with which they paid vendors; or processed discounts, rebates and credits back to the client.

Given that the marketing budget is often the largest component of an organization’s SG&A expenses, one has to ask, “Does the absence of third-party marketing agency oversight make sense?”  “Are there benefits which accrue to the organization by not engaging independent auditors to review compliance and performance across their marketing agency network?”  Can one honestly answer “Yes” to either of these questions?

Marketing accountability audits take several forms ranging from contract compliance reviews, process and performance assessments to financial and media audits.  Conducted by professional independent auditors the process is designed to help advertisers and their agencies mitigate financial and legal risks, improve work processes, verify the equitability of agency compensation, and enhance reporting and communications.  The objectivity, transparency and best practice comparatives yielded by an independent marketing agency audit can provide a positive basis for creating solid, performance-based relationships with each of an advertiser’s marketing agency partners.

It makes sense to outsource since the analytical software, industry knowledge and specific subject matter expertise required to conduct a comprehensive examination of an organization’s marketing spend are typically not available within the advertiser’s Finance, Procurement or Internal Audit staffs.

It is virtually standard practice for client-agency agreements to allow advertisers the “right to audit” all aspects of the agency relationship ranging from agency resource investments to fee reconciliations to financial transaction details and supporting documentation. 

Ironically, very few advertisers enact their right of independent examination, a right that they felt important enough to negotiate into the contract on the front-end of the relationship. 

In the word of noted American author, Bodie Thoene:

“What is right is often forgotten by what is convenient.”

Interested in learning more about marketing agency accountability audits?  Contact Don Parsons, Principal at Advertising Audit & Risk Management for a complimentary consultation at dparsons@aarmusa.com.

Auditor Compensation Should be Aligned With Client Objectives

15 May

audit compensationAt the recent ANA “Agency Financial Management” conference in Boca Raton, FL there was much conversation around the topic of “contingency” auditors and the relevancy of recovery based compensation models for media and contract compliance audit firms.  This perspective was largely fueled by presenters representing fee-based firms and associations.   Whether their perspective was driven by a desire to pander to their association members, the agency representatives at the conference or somehow believing that being a fee-based auditor was somehow the lesser of two evils is unclear.

In our opinion, this is a largely irrelevant, self-serving position that masks the true benefits of third-party independent marketing audits and reviews.  Our position is that audit compensation models should be treated no differently than those of other professional services firms… including advertising agencies.  Compensation should be tied directly to a scope of services.  These deliverables drive the value of the audit including; contract compliance, process improvement, agency performance assessments, improved reporting/ transparency and or financial reconciliation.  The notion that compensation methodologies somehow skew audit results is a direct affront to the integrity of the advertiser.  The fact is that it is the historical agency billings/ advertiser payments and their basis that determines whether or not the advertiser is entitled to a financial true-up, not the manner in which an auditor is compensated.

If an audit determines that an agency owes their client money due to billing errors, earned but unprocessed credits, rebates and discounts or time-of-staff under-delivery, the findings have nothing to do with how the advertiser has funded an audit.  Like performance based compensation systems espoused by agencies, a combination fee plus performance incentive compensation approach is equally valid and viable for auditors.  The key is to align auditor compensation with the advertiser’s business objectives and culture.  Encouraging their professional services partners to have “skin in the game” as it relates to the financial efficacy of the audit, whether based upon recoveries or future savings is a standard, professional approach for advertisers to employ.

Importantly, performance based compensation systems provide the requisite incentive for audit firms to look beyond the time-capped limitations of fee-based approaches to ensure a thorough assessment based on a comprehensive data review rather than sampling.  Further, the need to audit, whether part of an enterprise accountability initiative, tied to marketing agency turnover or simply following best practices related to enterprise-wide financial risk management protocol, often requires financial flexibility when it comes to funding the initiative.  Thus, a blended compensation system which includes a base fee and performance incentive can enable the advertiser to advance their audit program within the current budget year, without jeopardizing Procurement’s, Internal Audit’s or Marketing’s other initiatives.

During the aforementioned ANA conference, it was suggested by one client-side marketer that “those types of audits,” referring to contingency audits, are frequently initiated by procurement, not by marketing.  Let’s be honest, virtually all third-party audit activity emanates from finance, internal audit or procurement.  Unfortunately, in spite of the fact that an organization’s marketing spend represents one of the largest components of an advertiser’s selling and general administrative expense, U.S. marketing executives have yet to fully embrace their organization’s accountability initiatives.  Focusing on auditor compensation is simply a misguided attempt to further delay any third-party scrutiny.  And if this is not the case, ask those marketing executives to underwrite the cost of a fee-based audit and gauge their reaction to the request.  In the words of noted American author, Katherine Brush:

“Most passport pictures are good likenesses, it is time we faced it.”

At AARM we conduct contract compliance and agency performance audits for a broad-range of multi-national advertisers, many that are represented on AdAge’s “Top 100” advertisers list.  For the record, we are compensation agnostic.  Our goal is simple – to structure a compensation approach that aligns our efforts with the client’s business objectives, culture and audit deliverables.  Of note, in AARM’s process all audit observations are vetted with the agency prior to being shared with the client.  Therefore, if there exists any erroneous findings or the agency feels as though they can share additional information to clarify the findings represented in the audit, the opportunity exists for the agency to address those items before the audit report is published.  In the end, the facts are the facts, regardless of the manner in which an audit firm is compensated.  If an advertiser doesn’t feel as though they can trust the results of the audit, then we would suggest the real issue was the screening process employed on the front-end to select the audit partner, not the compensation program.

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