Consumer Privacy Protection Regulators are Ready. Are You? 

27 Jan

Time for ActionData regulation isn’t new, but many marketers are at risk because of incomplete and or inadequate processes to comply with consumer privacy regulations. This is despite much publicized notifications and warnings related to regulatory enforcement and the levying of fines for non-compliant activity.

Marketers have been tasked with collecting, utilizing and sharing consumer data more responsibly. This means providing consumers with the ability to understand whether data is being collected from them, what data is being captured and the purpose for which that data is being used. Further, marketers must provide consumers with the ability to request that their personal data be deleted and made unavailable for specific purposes.

The challenge has been that there is no omnibus global or federal law that covers all geographies, business sectors or data types. As a result, most marketers are focused on the two broadest-reaching, most comprehensive laws:

  1. General Data Protection Regulation (GDPR) – Adopted by the European Union which went into effect May 25, 2018.
  2. California Consumer Privacy Act (CCPA) – Went into effect January 1, 2020. Coverage expanded with the passage of the California Privacy Rights Act (CPRA), which went into effect January 1. 2023.

Regulation covers a myriad of personal information types including personal identifiers, commercial information, internet or other electronic network activity and other data such as geolocation, biometric, audio, visual, thermal, olfactory or similar information, professional or employment-related and educational information.

Failure to comply can be costly. CCPA infractions will cost marketers $2,500 per violation and $7,500 if the violation was deemed to be intentional. So, for marketers with consumer databases containing tens of millions or hundreds of millions of names, the risks are real. Consider the fines levied by the European Union for GDPR violations:

Top 5 GDPR Fines (Source: Enzuzo)

  1. Amazon – $780 million
  2. WhatsApp – $247 million
  3. Google (Ireland) – $99 million
  4. Google – $66 million
  5. Facebook $66 million

Note: Sephora was fined $1.2 million in November of 2022 for CCPA violations. This was the first CCPA settlement. Risks accelerate as the July 1, 2023 “Enforcement” data nears for the CPRA.

While many marketers have updated “Privacy” and “Data Collection” notices on owned websites, this is nothing more than table stakes in this privacy focused era. Marketers must create platforms, systems and processes that provide a full view of their data, where it’s stored, what it’s used for, where it was gathered from and whether the proper permission was secured. Understanding “Consumer Rights” under these laws is a good starting point for developing such protocols:

Consumer Rights Under the CCPA 

  • Know that personal data is being collected on them
  • Know what personal data is being collected
  • Know if their data is being shared or sold and to whom
  • Ability to opt-out of their data being sold
  • Personal access to their data
  • Option to request that businesses delete their personal data
  • Protection against discrimination for exercising their privacy rights
  • Extra protections from data collection if they are minors

It should be noted that the regulations apply to all marketers, whether they’re focused on Business to Consumer (B2C) or Business to Business (B2B). At present, the CCPA broadly defines “consumer” to include “individuals acting as representatives of their employers.” While there are B2B exemptions that cover certain verbal or written communications with a consumer, the amendment (AB 1355) is highly nuanced and worthy of marketers securing legal guidance.

Beyond the notification of consumers and the provisioning of viewability and opt-out mechanisms, businesses will be tasked with protecting personal data in a safe and secure manner addressing threats to the confidentiality, integrity and access to the personal information in their databases. In addition, marketers will want to review and likely update agreements between their organizations and third-party data processors. These updates should include language requiring such suppliers to maintain data inventories, use due diligence questionnaires, provide records of processing actions, require the syncing of consumer response processes, allow for onsite assessments and audits, and require the mapping of any data elements shared with any party… including data that was sold.

While marketers await regulatory standardization within select markets, near-term it behooves marketers to understand that privacy requirements vary by geography and by sector and that a best practice would be to structure compliance programs to satisfy the strictest legislation, which should cast the broadest net when it comes to complying with other guidelines.

This article was written for informational purposes and not meant as legal guidance.

Fraud and the Lack of Transparency. What Actions are you Taking?

26 Jan

fraudsterReflecting at the end of 2022 there were two articles that piqued my interest (links below). The articles dealt with two issues that have plagued the ad industry for years now… the monetary impact of ad fraud and the lack of transparency surrounding programmatic digital media. According to Nick Swimer, an Entertainment and Media Partner at Reed Smith, LLP; “The lack of transparency is costing businesses millions and driving false impressions, which in turn is undermining trust in the industry.”

Advertisers, on the whole, currently invest more than half of their budgets in digital media. A high percentage of this activity is purchased programmatically. Based upon a review of these articles, the monetary impact and attendant risks faced by advertisers in this area are eye-opening. This is on the heels of the 2020 study by the ISBA and PwC which found that only 51% of spending in this area made it to publishers. Of the remaining 49% balance, 15% of total advertiser spend could not even be tracked or attributed.

Given the economic climate and the negative impact on marketing budgets, it is natural to wonder why there isn’t a greater proclivity for action on this front among marketers.

Support for industry trade associations such as the ANA, IAB, and their key initiatives (i.e., Trustworthy Accountability Group (TAG), regulatory outreach and lobbying efforts, etc.) are important steps in this area that will yield results for marketers over the long haul. However, immediate action is required if marketers want to safeguard their investments sooner than later.

Near-term, there are a few key steps that marketers can take to mitigate the negative economic impact that fraud and non-transparency related risks can have on their budgets:

  1. Update media agency contracts to secure comprehensive audit rights, establish a principal-agent relationship and clarify expectations regarding the agency’s fiduciary responsibilities.
  2. Conduct periodic contract compliance, financial management, and performance audits of media agencies.
  3. Assess and tighten media controls including Media Authorization Form language, Buying Guidelines, campaign monitoring and post-buy reporting, agency-generated third-party vendor insertion order language, and client sign-off requirements before using agency affiliates or Inventory Media buys.

Too much time has elapsed since these issues originally surfaced. And while there has been much talk about corrective measures, these trends have continued unabated. It feels as though now is the time for action, not indifference. What do you think?

If a Tree Falls in the Forest…

3 Jan

OversightThis past December the former COO/ CEO of global PR firm Weber Shandwick was sentenced to prison after pleading guilty to embezzling $16 million from the firm and ultimately its holding company, Interpublic Group, over a 9-year time frame. The fraud was perpetrated in part through the generation of “false and misleading invoices.”

This news should raise concerns for clients of the firm aside from the character of the individual. The lack of solid agency (and holding company) internal controls over a prolonged period raises an obvious question; “How do these lax controls impact our business and were any of these erroneous charges billed back to us?” Moreover, if it happened at one agency, could this be occurring elsewhere?

Given the nature of the marketing/ advertising industry’s use of estimated billing and the submission of invoices to clients, without accompanying third-party vendor invoices, it makes sense for marketers to conduct periodic contract compliance and financial management audits of their agency service providers to assess those providers financial stewardship practices, mitigate financial risks and allay potential concerns.

In the words of Norman MacDonald, author of Maxims and Moral Reflections: “Though we may not desire to detect fraud, we must not, on that account, endeavor to be insensible of it, for, as cunning is a crime, so is duplicity a fault…”

Offsetting Marketing Budget Reductions

30 Dec

budget cut“Price is what you pay. Value is what you get.” ~  Warren Buffett

If you’re like many marketers, 2023 budgets have either been frozen at last year’s level or reduced in light of what many organizations believe will be a soft economy in the coming year. That said, company expectations relating to brand development, customer acquisition and revenue generation goals can seem daunting.

The good news is that there are five key steps that can be taken to offset budget reductions and refuel marketing budgets:

  1. Review and revise annual Scopes of Work – Working in conjunction with your agency partners, representatives from the marketing and procurement teams should reassess project deliverables relative to approved spend levels and make the requisite adjustments. Focusing the extended team’s efforts on strategies and tactics that are critical to the attainment of the organization’s core business goals are the top priority. Out-of-scope work should be prohibited and or at a minimum, tightly controlled and non-essential programs shelved until business conditions improve and or additional marketing funds are allocated.
  2. Evaluate and improve Client/ Agency work processes – The opportunity for efficiency gains in this area are numerous, particularly in longer term relationships where too often bad habits, that drive costs up or limit market timing opportunities have become status quo. Key areas to review include the creative and media briefing and client-side approval processes. Ineffective and or inefficient approaches to these basic tasks waste time and increase project costs. Conversely, tightening brief development and streamlining the approval process can reduce fees associated with agency rework costs and decrease the time required to execute certain tasks.
  3. Right size your agency network – Over time, an organization’s roster of agency partners can swell to unwieldly levels, leading to management challenges, overlapping resources and duplicative costs. Internally reviewing each agencies roles and responsibilities to identify opportunities for focusing each agencies resource offering and reducing overlap. Longer term, consider the creation of broadcast and digital production and content curation and production centers of excellence, consolidating activities in this area to generate scale economies and reduce agency fee outlays. Additionally, work with your agency partners to identify opportunities to remove links from the marketing/ advertising supply chain. In short, reduce the number of intermediaries involved in the production, placement, and trafficking of your advertising to reduce unnecessary fees and costs.
  4. Review agency financial management practices and contract compliance – Auditing agency compliance and financial stewardship can lead to the identification of billing errors, earned but unprocessed credits, unbilled media balances that should be returned, the application of unauthorized mark-ups and agency time-of-staff under deliveries that could result in financial recoveries. Additionally, the independent review of project management, job initiation and reconciliation processes can lead to cost avoidance strategies that result in meaningful savings.
  5. Reconsider the “Estimated Billing” process – As interest rates have increased, so too has a company’s cost-of-capital. One key tenet of any organization’s treasury management practice is to retain control of its money for as long as possible. However, when it comes to advertising outlays, the industry tends to work on an “estimated billing” process where each agency bills for work to be done, services to be procured or media to be purchased upon approval, with the pledge to reconcile estimated costs to actual once a job has closed or a campaign completed. Unfortunately, this results in an advertiser’s funds being held and managed by others, with no economic benefit (e.g., interest income) and some level of financial risk. Consider moving to a “final billing” process whereby invoices are submitted by the agency for payment once services have been rendered and third-party costs validated. In turn, advertisers should be prepared to tender payment upon receipt of these invoices, so that none of its agency partners is required to go out-of-pocket to compensate third-party vendors.

Taking some or all of these actions can offset the impact of budget reductions or freezes. As importantly, an open-minded review of a marketer’s partners and processes will generate financial recoveries and future savings that will help refuel and improve their marketing investment.

Ad Industry: Lack of Transparency Limits Trust

5 Dec

dreamstime_s_38659968“Trust is the glue of life. It’s the most essential ingredient in effective communication. It’s the foundational principle that holds all relationships.” ~ Stephen Covey

The question often asked of senior marketers by their C-suite peers and in turn by marketers of their agency partners is: “Are we getting optimal value in return for our marketing investment?” A simple question, but one that is not easily answered given the breadth and intricacies of an advertisers marketing communications investment.

Let’s face it, with the pervasiveness of non-transparent fees and AVBs throughout the supply chain along with the number of intermediaries involved in service delivery (often without the advertiser’s knowledge) the strains on working ad dollars are many and can be profound. Combine this with the industry’s “estimated billing” methodology where few if any agencies ever provide third-party vendor invoices to support their billing to clients and it is easy to understand the difficulty advertisers have addressing the question of “did we get what we paid for?”

While the challenges to building trust between advertisers and the myriad of suppliers that touch their business are real, the means of addressing this issue is clear… the industry needs to commit itself to providing full transparency at every level.

Marketers will need to take the first step, reviewing all marketing services agency agreements to ensure that there is adequate language granting them audit rights, establishing record retention criteria and extending these guidelines to not just their agencies, but to third and fourth-party vendors. Further language regulating the appointment and monitoring of “interested parties” by their agency partners and limits to the use of principal-based buys must be incorporated into all agreements. Also, clear reporting and invoicing guidelines must be established with each agency partner to provide advertisers with a clear line of sight into the disposition of their marketing spend at each stage of the investment cycle.

Importantly, marketers will need to invoke their audit rights to conduct periodic reviews of agency compliance with these contract terms as well as each agency’s support of their billings to the client. This is a cost of entry for marketers if they’re truly interested in evaluating the efficacy of their marketing investment.

Consider but one aspect of advertising spend, digital media.

  • Digital media represents more than 50% of client ad spend.
  • Programmatic buying represents better than 90% of all digital display ad buying.
  • Publishers only receive 51% of advertiser programmatic ad spend.
  • Costs such as DSP fees, SSP fees and technology costs represent between 15% and 35% of advertisers spend in this area.
  • An “unknown delta” of one-third* of programmatic supply chain costs could not be identified.

*Source: Incorporated Society of British Advertisers (ISBA), Association of Online Publishers (AOP) and PwC “Programmatic Supply Chain Transparency Study.” 

While alarming, these statistics may represent a “best case” scenario when one considers the poor visibility that exists into the layers of intermediaries between advertisers and publishers, including but not limited to agencies, DSPs, SSPs, Ad Exchanges and data verification vendors… each charging a fee for their involvement. The Association of National Advertisers (ANA), which earlier this year commissioned a study on programmatic transparency, estimates that of the $200 billion plus in programmatic digital media spend “70% doesn’t reach the end consumer.” Where does it go? According to the ANA “it goes to fraudulent or non-viewable impressions, non-brand-safe placements and unknown allocations, as well as being spent on ad fees.”

Take SSP’s for example, they typically bundle fees with media costs once an auction is won and an impression purchased. Thus, advertiser visibility into SSP take rates, revenue share deals with publishers, margin realization rates and the number of hops is obscured.

We do not want to belabor the point, but similar examples of limited transparency exist across the entirety of the marketing communications supply chain.

In closing, we believe that the notion of trust is certainly attainable, but not until transparency reform becomes a reality for advertisers. Near-term, advertisers have another reason to push for transparency and audit the financial management practices of their agencies… stagnant and or reduced budget are putting pressure on marketers to do more, with less. The knowledge gained, historical dollars recovered and future savings realized from a formal accountability program can help to refuel marketing budgets.

Ad Industry Trends Pose Real Risks to Advertisers

26 Oct

Risks

“There are risks and costs to action. But they are far less than the long-range risks of comfortable inaction.” ~ John F. Kennedy

The advertising industry is an important, dynamic, complex, and rapidly evolving part of the global economy. As such, it is susceptible to the same challenges facing other business sectors… inflation, rising interest rates, recessionary pressures and geopolitical uncertainty.

However, there are unique aspects of this industry that pose challenges to advertisers, agencies, media owners and AdTech companies alike. If you’re a marketer and have not conducted a compliance and financial management audit of your ad agency partners, consider the following:

  • The global economic climate is uncertain for the coming year with economic growth projected to slow from 6.1% in 2021 to 2.7% in 2023 (Source: International Monetary Fund).
  • The economic slowdown is causing advertisers to reconsider and often curtail advertising budgets for the coming year, with ad spend growth projected to slow from 8.3% in 2022 to 2.6% in 2023 (Source: WARC “Ad Spend Outlook 2022-23” Study).
  • Media inflation is anticipated to grow by 6.2% or more in 2023 (Source: ECI Media Management).
  • Marketing and advertising expenditures are a material SG&A expense, with organizations spending between 7 – 8% of gross revenue in this area (Source: Deloitte CMO Survey – 2017)
  • The advertising industry works on an “Estimated Billing” basis, with advertisers paying their agencies in advance of expenses being incurred, with the understanding that estimated costs will be reconciled to actual outlays at the time jobs are closed.
  • Agencies can take months to close and reconcile production jobs and media campaigns, which delays the identification and issuance of credits to advertisers, impacting the accuracy of budgets and subsequent planning.
  • Final Invoicing from ad agencies that reconcile advance billings to actual costs incurred rarely, if ever, include copies of third-party vendor or affiliate invoices. Without documentation to support actual expenditures, your Finance and Marketing departments can only compare final billed amounts to an estimate.
  • Almost one-half of advertisers listed “Transparency” as their leading concern when it comes to their marketing investment (Source: WFA survey, 2017).
  • Digital will represent 61% of U.S. advertising spend in 2023 (Source: Statista).
  • In 2022, 90% of all U.S. digital display advertising ($123 billion) was placed programmatically (Source: eMarketer).
  • Marc Pritchard, Chief Brand Officer of Procter & Gamble referred to the digital supply chain as “murky at best, fraudulent at worst.”
  • In 2021 over 20% of programmatically served ad impressions in the U.S. were “fraudulent” (Source: Statista).
  • Digital ad fraud in the U.S. is forecast to be over $80 billion in 2022, representing 15% of U.S. digital media spend (Source: Statista).
  • Between 35% – 60% of U.S. marketers’ digital ad spend goes toward the “AdTech Tax” or the fees spent on each vendor or intermediary down the supply chain (Source: ANA Study)
  • The Association of National Advertisers (ANA) study on AdTech Transparency being conducted by PwC and Kroll, originally scheduled to be released this month, has been delayed until 2023. Digiday reporting cited “conflicted reporting methodologies,” vested interests,” a lack of full participation (i.e., Google and The Trade Desk are not participating in the study) and the complexity of tracking payments between “relevant parties” as contributing factors.
  • The annual agency employee turnover rate is estimated to be around 30% (Source: Association of National Advertisers and Forbes).
  • 96% of consumers “don’t trust ads” (Source: 4A’s 2019 study).

The preceding stats are alarming to both an organization’s stakeholders and shareholders. A marketers’ ultimate leverage and truth lever is the “Right to Audit” clause contained within the client/ agency agreement. Enacting that right, conducting a formal compliance and financial management review of your agency partners to validate actual costs and time-of-staff along with assessing third-party billings makes good business sense. Such reviews result in financial recoveries, future savings, stronger controls, improved supplier alignment, and enhanced levels of trust in a marketers agency network.

Best of all, each of these outcomes has a positive impact when it comes to optimizing your organization’s advertising investment.

Super Bowl Advertising: Much Has Changed Since 1967

1 Oct

dreamstime_xs_74069813Fox Broadcasting recently announced that it had sold 95% of its inventory for the 2023 Superbowl. The average rate for a 30-second spot will likely top $7 million.

The growth in the appeal of the Super Bowl to advertisers and the price they are willing to pay is remarkable when you consider that the cost of a 30-second spot in Super Bowl I in 1967 went for $42,000.

Equally as compelling is the unique impact of the Super Bowl broadcast, with the game being broadcast on over 225 different television stations in approximately 180 countries garnering over 110 million viewers.

Interestingly, if we go back just 10 years and adjust the price paid by advertisers using the annual CPI increase the rate for the 2023 broadcast would be $4.8 million for a 30-second spot…  much less than the $7 million per spot achieved by Fox Broadcasting.

The reason for the rate differential is very simple, supply and demand. Demand is driven by the strength of the NFL “brand,” the cultural impact of both the game and the broadcast and the showcase that the broadcast represents for advertisers.

After all, not many other programs attract viewers that are as keen to see the advertising as they are the game itself. It is for this reason, that according to Fox Broadcasting the 2023 event will feature more than twenty “new” sponsors representing over $100 million in ad revenue.

No doubt advertisers investing to run their commercials during the Super Bowl are hoping that their ads can go beyond simply elevating brand awareness and appeal to attain the cultural impact that past iconic Super Bowl ads achieved:

  • Coca Cola – “Mean” Joe Greene
  • Apple – Macintosh (1984)
  • Anheuser Busch – “Bud” “weis” er” Frogs
  • Pepsi – Cindy Crawford
  • Wendy’s – Where’s the Beef?
  • Snickers – Betty White

Already looking forward the Super Bowl LVII broadcast and this year’s commercial offering.

Can Your Agency Support Its Billings to You?

25 Aug

estimated billing processOnce ad budgets have been approved and purchased orders issued, your ad agency generates an invoice based upon estimated costs. Theoretically, this estimated billing is reconciled to actual costs once a job is closed or a campaign has run its course.

Do you know if the process is occurring in an accurate manner, on a timely basis?

Why the question? Firstly, ad agency invoices are not accompanied by third-party vendor invoices that support the billed amount. Secondly, those invoices are often submitted directly to an advertiser’s accounts payable department that is simply checking to make sure the “billed” amount does not exceed the approved purchase order amount.

Thus, the only way a marketer can vouch for the accuracy of the agency’s billing is to periodically request and review agency financial support. This can be done through internal audit or by an independent contract compliance and financial management auditor.

If your organization is not testing the accuracy of its agency billings, corrective action should be taken.

The good news is that client/ agency agreements require an ad agency to retain documentation to support its billings and entitles the advertiser to review that support to assess the accuracy and completeness of the financial detail.

Thus, if you haven’t already taken such actions the path forward is clear… inform your agency partner of your desire to enact your contractual audit rights and issued a request for the requisite files to conduct an historical review of agency billings. This would include third-party vendor costs and payments to those vendors along with agency time-of-staff detail to support its fee billings.

Such reviews are designed to identify potential billing errors, overbillings, aged media credits, earned credits, rebates and discounts that have been earned, but not yet returned, the status of approved but unused funds and the time that it takes the agency to close jobs and process payments to third-party vendors. Given the material nature of advertising spend, fact-based reviews of agency billings are a sound practice that is consistent with an organization’s governance and accountability standards and controls.

Unfortunately, when it comes to auditing this important area protestations from client-side marketing personnel regarding the need for or timing of such reviews or the potential impact on a preferred relationship can scuttle an organization’s efforts in this area. While we appreciate this perspective, we have found such views to be unfounded. In the words of Indian Prime Minister Jawaharlal Nehru: “Facts are facts and will not disappear on account of your likes.” After all, outside of marketing/ advertising spend, how many other suppliers invoices are paid without supporting documentation or a review of such detail?

Experience dictates that periodic financial reviews help to improve processes and tighten agency reporting, providing advertisers with a clear line of sight into the disposition of its funds at each stage of the advertising investment cycle.

Advertising agencies for their part are accustomed to these reviews and have the personnel and processes in place to comply with their clients’ contract compliance and financial management audit requests. In the end, all stakeholders benefit from such reviews. The learnings, financial recoveries and future savings related to identified process improvements identified as part of the audit are important, but no less so than the peace-of-mind that advertisers acquire, knowing that their advertising funds are being properly managed.

Can Treading Water Be Considered Progress?

31 Jul

Treading WaterThis is certainly one question that could be asked after reviewing the Association of National Advertisers (ANA) 2022 report,Procurement: The Good, The Bad, and The Ugly.”

After twelve years since the ANA’s initial report on this topic, marketer and agency perceptions of the role, performance and acceptance of procurement have shown little improvement. While there is a grudging sense of “we’re in this together,” according to this report, client-side and agency stakeholders have not fully coalesced around a common set of goals. Thus, it is no surprise that success for this triumvirate remains elusive:

“Coming together is a beginning. Keeping together is progress. Working together is success.” ~ Henry Ford

Even within client organizations, while most of the marketing and procurement respondents felt that their relationship was “extremely” or “very” healthy, the perception gaps between these two groups when it comes to procurement’s role and performance relative to both its responsibilities and within key disciplines was alarming. Contrasting views in these areas would suggest that the “relationship” between the two functions is more superficial than meaningful. If there was objective, candid communication on these key variables, one would expect a more unified view of procurement’s contributions among team members.

The other striking observation was the continued negative pre-disposition toward procurement held by agency respondents. Most notably, while 54% of procurement respondents characterized their relationships with agencies as “extremely” or “very” healthy, only 15% of agency respondents felt the same. Further, while half of the procurement respondents expressed satisfaction with their marketing and advertising knowledge, no agency respondents shared that point of view. While this perspective may have been justified twelve years ago, it seems unexpectedly harsh and unfair today given the 51% increase in years of “marketing procurement experience” among procurement respondents or that agency personnel are not engaging in meaningful dialog.

Justified or not, agency attitudes in this area will need to be addressed if the relationship between procurement and agency personnel is going to improve. By way of example, commentary offered by select agency representatives and by the American Association of Advertising Agencies (4As) ascribed to the stilted view that to remedy their current perspective, procurement personnel should focus their efforts on “value optimization” versus “cost reduction.”

Newsflash, cost reductions are both an element of an organization’s value optimization efforts and a necessary action during difficult economic times or when performance doesn’t meet expectations. Thus, it is unfair to attribute blame to procurement for an enterprise’s expense management initiatives. This is no different than from the approach taken by agency holding companies and independent agencies when dealing with their suppliers, employees, advisors, and landlords during times when fiscal tightening is required.

Based on our experience, assuming marketing is motivated, we believe marketing is perfectly positioned to take the lead in breaking through the current malaise. Given their P&L responsibilities and attendant responsibility for effectively stewarding their organization’s marketing and advertising investment, they are uniquely qualified to drive stakeholder understanding and respect for procurement’s role and responsibilities.

To this end, the ANA report offers several meaningful recommendations for progress, which are centered on the need for all parties to work together in a more collaborative and productive manner. Importantly, the ANA rightly suggests that this begins with a focus on the relationship between marketing and procurement to gain alignment and present a “unified front” to their organization’s agency partners.

There is much at stake for each of the parties and mutual success is achievable. However, this will require an attitude reset and a renewed commitment to respecting one another’s unique roles and contributions.

“We may have all come on different ships, but we’re in the same boat now.” ~ Martin Luther King, Jr.

 

3 Reasons Advertisers Should Audit Their Advertising Spend

29 Jun

auditsketch.102447

Virtually all client-agency agreements contain both an “audit” and “record retention” clause. The purpose of this language is to afford advertisers the ability to answer the question, “Are we getting what we paid for? Yet, few advertisers ever implement contract compliance, financial management or performance reviews of their agency partners.

There are multiple reasons why the marketing budget, a material expense, and the stakeholders responsible for stewarding those funds (e.g., advertising agencies) have not undergone more scrutiny. Few of those reasons make much sense when compared to the risks and costs faced by advertisers choosing not to periodically assess how effectively their funds are being managed.

Below are three key reasons why we believe that advertisers should exercise their audit rights:

  1. Flaws Tied to Estimated Billing Process – The ad industry operates primarily on an “Estimated” billing basis. Plans are approved by the client, purchase orders issued, and the agency then bills the advertiser in advance for the approved amount. In theory, estimated fees and third-party costs are reconciled to actual costs once a job is closed. However, this does not always occur in a timely or accurate manner. Experience shows that perils abound such as, approved but unspent funds are accumulated by the agency, unused funds are rolled over to other brands/ jobs/time periods for future use, unapproved and non-transparent mark-ups are applied, unbilled media balances are retained for inordinately long periods of time and aged credits are not always returned to the advertiser in a timely manner. In the end, left unchecked, agencies can hold and direct how and when client funds get applied to a greater extent than most client-side CFOs or Internal Audit directors would approve of.
  2. Review of Support for Agency Billings to Client – Because clients are typically billed in advance by their agencies on an estimated basis, and agency final invoicing almost never contains third-party or fourth-party invoice support, the only way an advertiser can evaluate whether agency billings are accurately supported is to conduct a financial review of all underlying billings being passed through from the agency to the advertiser. At a minimum, this includes validating billing costs from vendors to the agency and payments from the agency to the vendors. Further, for direct labor-based remuneration programs, which rely on the accurate entry and tracking of time by agency personnel, advertisers should independently review agency timekeeping system data and processes to validate any time tracking reports being provided. Such reviews should also include assessing the types of personnel logging time (i.e., full-time employees, temporary employees, freelancers, interns, etc.), the staffing mix relative to the approved staffing plan and agency employee turn-over rates on their business… data not always shared with clients.
  3. Performance Validation – Results matter. Whether in the context of compliance with contract terms, attainment of agreed upon goals and KPIs or delivery against planned spend levels advertisers stand to benefit from independent reviews of their agency partners’ performance. Given the increased pressure on CMOs to achieve results, it is imperative they have confidence in the outcomes associated with their and their agency’s stewardship of marketing funds. As importantly, their C-Suite peers routinely question the efficacy of an organization’s marketing investment and to what extent that expense is contributing to the attainment of company goals and objectives.

Audit is not a four-letter word. We have witnessed first-hand the positive impact that an independent review of an organization’s marketing investment can have on both safeguarding and optimizing those funds. These reviews yield solid learning as it relates to improved controls, risk mitigation and efficiencies tied to process improvements. Further, the identification and recovery of funds tied to billing errors, compliance violations, aged credits, rebates, and under-delivery (i.e., agency resources, media, etc.), when combined with the identification of cost avoidance strategies for the future, far exceed the cost of an audit.

Importantly, advertising agencies also benefit from these projects when client-side instructions, process inefficiencies and timing issues (i.e., ineffective briefing processes, disorderly client approval process, short project lead times, the timing of the release of funds, etc.) are brought to light and addressed.  As well, it’s always a great result when the clarification of the intent of certain terms included in client-agency contracts aligns with everyone’s future expectations.

In short, properly structured audit programs, which deal with both client and agency stakeholders in a candid and collaborative manner identify solutions and help to lay the groundwork for implementing the changes necessary to improve the client’s return-on-marketing-investment. As such, Chief Financial Officers and Chief Audit Officers should require marketing to allocate funds in their annual plan to cover this important transparency and accountability program. The cost? Tenths of a percentage of an organization’s annual spend, with financial returns that dwarf the outlay for implementing a formal audit initiative.

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