If Your Media Buy Dictates the Media Plan, Do You Have a Plan?

26 Feb

Flying BlindA recent “Global Media Trading Report” released by ID Comms found that 38% of those surveyed believe “the media buy dictates the plan.” Further, many respondents suggested that “channel and or vendor biases” dictate buying decisions, rather than strategic planning.

Regardless of the context of the survey questions and or media type (i.e. traditional, digital, programmatic, connected, etc.) these findings are startling to say the least.

Call us traditionalists, but we cannot think of a sound rationale for investing one’s media dollars, absent a plan that is linked directly to the organization’s marketing goals and business objectives.

However, given the number of folks that believe media buys drive planning decisions mindset, one must assume that this practice is occurring on an all too frequent basis. A reality that is difficult to fathom in light of the complex, highly fragmented nature of the media marketplace.

The notion that resource-allocation decisions would be made on the basis of channel bias rather than sound analysis such as holistic media mix review, target audience media consumption patterns, coverage/reach/frequency modeling, competitive activity and editorial environment is concerning.

In our advertising assurance practice, we sometimes come across examples of inadequate media planning processes or insufficient resources being deployed in the execution of a plan. The tip-off almost always being when the “Plan” more closely represents an Excel worksheet recapping a proposed media schedule, rather than a formal media plan document with the requisite components. But never have we encountered an advertiser that would accept the premise of media buys or channel biases driving planning decisions.

Far be it for us to challenge such widely held beliefs.

The question to be posed to advertisers is simply, “Which approach do you espouse?” For our money, when it comes to media resource allocation decisions channel biases be damned, we would follow the guidance of 19th century scientist and inventor Alexander Graham Bell: “Before anything else, preparation is the key to success.”

Risks Related to Ad Agency Staff Reductions

23 Feb

LayoffsAdvertisers cut budgets; ad agencies reduce headcount. This is a causal relationship and always has been.

No one can fault an ad agency for making prudent fiscal decisions when revenues decrease.

That said, advertisers need to take precautions in this situation to mitigate their risks, particularly when there are significant downsizings as there were in 2020.

It was recently announced that Omnicom and Interpublic had eliminated “10,000 roles” between the two organizations in 2020, citing the pandemic as the primary reason. This represented an 8.4% reduction in staff for Omnicom and 7.6% for Interpublic. Significant by any measure… and they will not be alone, the other holding companies simply haven’t yet disclosed annual headcount data.

Like with most professional fee-for-service providers, involuntary staff reductions tend to have a disproportionate impact on longer-term, more highly compensated individuals and personnel working in shared services functions such as finance, human resources, legal, procurement, traffic, etc.

Advertisers that have reduced their budgets obviously need to collaborate with their agency partners on revised scopes of work and remuneration programs that reflect new spend levels. Clients that have maintained or increased spending will need to implement safeguards to ensure that their accounts are adequately staffed and supported.

This includes making sure that the mix of agency personnel working on their business is reflective of the need for strategic insights, breakthrough creative and executional excellence in all facets of the business.

Items such as tightening up creative and media briefing and approval processes, specifying media planning procedures and desired outputs, identifying media management guidelines for in-flight stewardship and post-campaign performance reporting and being overt about financial management expectations and reporting (i.e. project tracking, job closure and reconciliation, third-party vendor payments, etc.) are necessary steps for advertisers to take.

In our experience, as long as both client and agency are aligned, working through these situations to mitigate the risks associated with involuntary staff reductions can be effectively addressed.

As Josh Billings, the 19th century writer and humorist advised: “Caution, though very often wasted is a good risk to take.”

How and When Might the Remote Work Model Impact Agency Fees

29 Jan

costIt has been one year since the onset of the coronavirus and the rapid shift to remote work as stay-at-home orders were implemented on a global basis.

Companies in multiple industries, including advertising and media, moved quickly to adapt to this new reality. According to a 2020 study of knowledge workers sponsored by Slack and fielded by GlobalWebIndex, 44% of U.S. workers were “primarily working from home” by the end of the summer.

In the months that have followed, many organizations have announced plans to implement the remote work model for employees on a go-forward basis. Part of this transformation includes reconfiguring operations, consolidating locations, renegotiating office leases and embracing flexible employee schedules and distanced living arrangements.

An obvious bi-product of these moves is the potential for organizations to lower their expense base, whether in the context of reduced direct labor costs related to distanced living policies or the reduction in overhead costs related to items such as:

  • Indirect labor
  • Space and facilities management
  • Property taxes
  • Office equipment
  • Office supplies
  • Corporate insurance
  • Non-billable travel
  • Non-billable new business expenses
  • Professional fees

Given that direct and overhead costs are components of calculating marketing service agency fees, one would reasonably expect that as agencies reduce their cost base, the fees charged to their clients would also be reduced.

The operative question for a client to ask of their agencies is, “How and when will our rates be adjusted to reflect the savings related to your remote work model?” To be fair, even though a large percentage of agency personnel may be working remotely, the timing as to when and how much rates will be reduced will partially depend upon how quickly the renegotiation of certain financial commitments (e.g. office lease obligations) can occur.

Whether any reductions have been fairly calculated will be difficult to assess. The vast majority of client-agency agreements limit a client’s ability to audit agency payroll and overhead costs. True cost-plus remuneration plans, while quite rare, sometimes allow for an advertiser’s independent accounting and or financial audit firm to verify an agency’s actual overhead or require the agency to provide a letter of attestation from its CFO or audit firm.

Either way, establishing guidelines and maintaining an open dialog about the impact of a remote work model are an excellent way to shape expectations and maintain the requisite level of transparency.

Agency Audits: An Advertiser “Right” Not Yet a Standard Practice

26 Jan

dreamstime_xs_7828625For most organizations, the “Right-to-Audit” is a staple in their advertising agency agreements. Worded properly, this important contract language provides the company an opportunity to periodically check ad agency compliance with contract terms, review financial support that should agree to agency billings and to otherwise evaluate various performance metrics.

Yet despite the inclusion of this vital risk management clause and the rights that it confers, far too few organizations actually follow through to perform the testing which would otherwise provide stakeholders with comfort that agency billings are accurate and true.

So, why don’t advertisers audit their agency partners?

One might logically deduce that all clients would periodically review agency compliance, financial management and performance given:

  • The materiality of spend levels.
  • Limited insight to whether agencies are accurately reconciling estimated invoices to actual costs.
  • The complex, multi-layered supply chains, especially in digital media.
  • The well-publicized news of the ad industry’s ongoing challenges with transparency and fraud.

Aside from mitigating financial risk that could be eroding marketing expense effectiveness, another benefit of agency compliance testing is that it can help allay client-side stakeholder (marketing, finance, internal audit, procurement) concern and further build trust. Trust is crucial, particularly clients are relying on agency partners to fulfill their fiduciary and legal responsibilities in stewarding their advertising funds.

In addition, the level of trust between advertisers and their agency partners has been under siege. Consider ID Comms 2018 Global Media Transparency Survey where only one in ten respondents indicated that their “relationship with their agency or advertising client was trusting.” Further, 40% of respondents believed that trust levels were “average” compared to 52% in ID Comms 2016 survey.

We see first-hand where contract compliance and financial management audits identify and address gaps in understanding, controls and reporting that negatively affect client spend effectiveness and erode agency margins. Whether financial definitions, billing basis, fee calculations, project briefing, the approval process, rework levels, custom reporting requests, and or payment timing issues, audits can provide a prescriptive for positive change to benefit all stakeholders.

In our practice we see three principal reasons why the right-to-audit is not employed often enough – and therefore has become much less effective as a control than necessary:

  1. No clear ownership who is responsible for the Audit function in the context of marketing.
  2. Lack of a formal budget allocation process for assurance and risk mitigation for marketing and advertising spend.
  3. Limited organizational understanding of risks related to the advertising category.

As a result, clients continue to invest billions of dollars annually through their agency partners in spite of never verifying whether there are proper controls and regulations to safeguard those funds and optimize the efficacy of their investment. The need is real. Building effective verification and monitoring tools into client-agency relationships cannot be viewed as an option, but rather a prerequisite.

Fortunately, if the will is there on the part of client organizations, the solution is relatively straight-forward.

  • Responsibility for the checking agency financial compliance cannot rest solely with the marketing team. Finance, internal audit and procurement each have a role to play in the process.
  • Setting up a rotational audit program for each of the organization’s audit partners is paramount. Funding the effort through marketing, finance or internal audit budgets can ensure that the program will be executed as designed.
  • Establishing direct relationships between client-side finance and agency finance personnel greatly enhances an advertiser’s line-of-sight into the disposition of their funds at each phase of the advertising investment cycle.
  • Develop a relationship with a co-source supplier with deep marketing audit expertise.

Enhancing an advertisers control framework to include the regular review of their agency partners’ client accounting practices and controls along with their contract compliance to contract terms will inevitably mitigate risks and lead to better management of this important investment. In the words of Simon Mainwaring, brand futurist and businessman:

“The keys to brand success are self-definition, transparency, authenticity and accountability.”

2021 Resolution for Advertisers: Drop Estimated Billing Approach

30 Dec marketing accountability resolution

It is time for marketers’ treasury management teams to turn their attention and scrutiny to the ad industry practice of “estimated” billing. 

Why now?  The long-standing practice of “estimated billing” is a relic of a bygone era and one that EDI technology has rendered as obsolete. 

Toward what end? Simply put, to improve the management of marketing funds, a material expense, to mitigate financial risks and improve controls in and around the disbursement of cash to marketing vendors.

The fact of the matter is that most client organizations do not have a clear line of sight into the disposition of their funds at each stage of the advertising investment cycle. With estimated billing, once marketing budgets are approved, purchase orders issued, agency billing generated and those invoices paid, advertiser controls are insufficient to monitor their funds once the agency has been paid.  This is largely because advertiser funds are now under the control of “other” parties (i.e. ad agencies, media sellers, production resources, etc.) who take the responsibility for closing jobs and trueing up estimated costs to “actual” in a timely manner. 

Unfortunately, the process for reconciling media campaigns, production jobs and agency fees can extend weeks and months after the attendant activities and or timelines have lapsed. Sadly, there is little incentive for agencies to expedite this process and issue the requisite credit adjustments, discounts and rebates. This is largely because they are in possession of client funds and as long as job/ campaign costs have not exceeded client-issued P.O.’s clients aren’t clamoring for a final accounting of advertising activity.

Billing based upon “final” costs provides an incentive to agencies and third-party vendors alike to quickly and accurately reconcile activities and process invoices for payment. The other to advertiser accounts payable teams is the reduction of paperwork in the form of multiple adjusting invoices associated with the estimated billing approach.

In our advertising assurance consulting and audit practice we have observed first-hand the efficiency of actual (in-arrears) versus estimated (in advance) billing methodologies. One of the key commitments required of advertisers to make this work is to establish accounts payable guidelines for its agency partners that ensure the timely disbursement of the funds necessary to settle third-party vendor obligations in a timely manner. Fundamentally, advertising agencies are not banks and should never be asked to settle vendor obligations made on behalf of clients, with their own funds. Conversely, they should not be earning profit from floating client funds either.

That said, many clients and agencies have cash neutrality clauses in their agreements, which prohibit this type of activity. For those agreements that don’t address this issue, we believe that it is simply not appropriate for an agency to make money on the use of client funds. Period. Disallowing estimate billings and requiring the agency to bill only after expenses have been incurred and actual costs known, is a proven way to minimize non-transparent agency profits. After all, allowing the agency to unfairly benefit was never the intent of the estimated billing process to begin with.

For marketers, transitioning to an “actual billing” process in 2021 makes good sense from both a risk mitigation and control perspective. Further, it is more efficient, can reduce payment processing costs and can potentially improve days payable outstanding performance for the agencies and third-party vendors. In the words of the 20th century American poet, Richard Armour: “That money talks, I’ll not deny, I heard it once: It said, ‘Goodbye’.”

Client-Side CFOs Should Take Note… Your Ad Investment is Being Held Hostage

18 Dec

The news of this past week should be of concern to CFOs of companies that have invested in National TV over the course of the last two years.

On December 18th, MediaPost reported that “TV season-to-date” ratings declined between “20% to 30%,” which in turn created a “probable make-good inventory shortage and possible rare TV network cash-back payments to marketers.” Similarly, Digiday reported that “TV networks are overdue on their bills to advertisers” and that some advertisers “are still owed for ad buys placed one to two years ago.”

In short, TV viewing declines have resulted in guaranteed audience delivery shortfalls by the networks. Thus, the networks owe advertisers compensatory media weight or cash-back to make up for that underdelivery. Unfortunately, many of the networks don’t have inventory available to make good on their obligations to advertisers. Complicating matters is the fact that advertiser demand has driven up scatter market CPMs, which makes it less attractive for the networks to offer make-good weight, when they can sell their inventory at a premium, rather than honor upfront market commitments.

Okay. We understand. Audience delivery shortfalls are a fact of life. That said, we cannot think of a good reason why an advertiser would allow a network to take them out one to two years on their guarantees or why their media agency partners would not take a more aggressive stance with regard to securing ADUs (make-good weight) or cash-back.

A guarantee is a guarantee… period. If a media seller cannot deliver on its commitment within the contract parameters, then restitution should be tendered immediately.

So what’s the problem? The answer, and what should alarm CFOs, was the perspective shared by both publications that network and media agency personnel believe that advertisers weren’t “all that interested” in cash-back offers because they “have nowhere to put it.”

Too bad that advertiser CFOs weren’t interviewed by these publications for their point-of-view. From our experience, we have never met a CFO that would rather cede control of any portion of their organization’s ad investment to an agency or a media seller, rather than manage those funds themselves. Who would? If the networks can’t or won’t provide make-good inventory, most CFOs would prefer a check to cover the dollar value of the audience delivery guarantee shortfall. This scenario eliminates any uncertainty regarding the disposition of their funds and reduces the risks of leaving their organization’s pre-paid media funds in the hands of third-parties and perhaps losing track of them altogether.

Advertiser concerns should not be limited to the networks. Media agency National TV buyers have a responsibility to monitor audience delivery, while a campaign is running and to secure in-flight ADUs to cover rating shortfalls when possible. Daypart specific underdelivery is supposed to be tracked by quarter, with make-good weight secured and applied per the terms of the upfront guarantee, which they negotiated on the advertiser’s behalf. Given declining viewership trends, agencies should understand the importance of this aspect of their media stewardship responsibilities and take extra precautions to safeguard their clients’ National TV investments.

The irony… while waiting for their clients to be made whole on prior-year upfront guarantees, media agencies, more often than not, continue to invest additional advertiser funds with the same networks that owe those clients make-good weight and or cash-back refunds.

Our auditing experience repeatedly shows that few CFOs are aware of the important benefits that can be gained by meeting with their marketing team to undertake a formal review of their organization’s National TV media buying and performance monitoring controls including, but not limited to:

  • National TV Upfront Guarantee Letters/Terms
  • Media Authorization Form Language
  • National TV Media Buying Guidelines
  • Agency Weekly Audience Delivery Tracking Reports
  • Agency Quarterly Post-Buy Performance Reporting
  • Agency Quarterly ADU Tracking Reports

The situation described by MediaPost and Digiday poses financial risks for advertisers in general and specifically for those organizations that are not actively managing their National TV media investments.

One Thing Marketers Can Do to Mitigate Advertising Risk

26 Nov

Chances are, in 2020 your advertising budgets were slashed in response to your organization’s fiscal response to COVID-19.

Further, if you’re like most, those budgets aren’t likely to bounce back in the near-term. According to WARC Data’s latest study on global advertising trends, even if the ad market rises by the expected 6.7% in 2021, it will only “recoup 59% of 2020 losses.”

Downward pressure on ad budgets certainly is creating a need for organizations to optimize marketing resource allocation decisions. Yet, given the nature of the ad industry and its complex, layered, often non-transparent supply chain, advertisers may not have ready access to information needed to support these efforts.

As a corollary, in our contract compliance and assurance practice, we have found that those advertisers who do receive timely, detailed, and accurate financial reporting from advertising agency partners benefit greatly – however, most client/agency financial reporting relationships often do not meet this standard.

What is the “one thing” that marketers can do to improve the effectiveness of their advertising investment and to simultaneously mitigate risk? Implement a structured and consistent agency financial reporting (AFR) and monitoring program.

The AFR program’s core element is a finance (client) to finance (agency) relationship and a set of standardized templates to be completed quarterly by each agency partner. AFR submissions include both detailed and summary quarterly and year-to-date activities, and includes at a minimum:

  • Aged work-in-process summary
  • Billings by job and summary, including associated client purchase order, SOW or MSA
  • Out-of-pocket expense & travel by job and summary
  • Budget status by job (approved, spent, balance remaining, job close date)
  • Actual agency hours incurred vs. planned (tied to each staffing plan) for each retainer and out-of-scope fee jobs, including the reasoning for variances
  • Agency fee projection (trend vs. plan)
  • Unbilled media summary

Reporting templates and submission deadlines should be standardized across agencies, managed by client finance (non-Marketing) personnel, and shared cross-functionally within the client organization. AFR details can also serve as inputs to formal, broad-based “Quarterly Business Review” meetings that should routinely take place between client and agency.

The client finance team should take the lead in administering the AFR process, review agency submissions, and have a direct line of communication and relationship with agency finance personnel.

When assisting in implementing these programs, our experience has shown that once an AFR program is pushed out to an agency network and client stakeholders have been through the cycle for two or three quarters (receive agency reporting, review for completeness and reasonableness, perform variance analysis and engage agency finance personnel in Q&A) then ongoing maintenance of the program becomes more routine, engrained, and time commitments decline.

More importantly, advertising ARF monitoring and oversight will mitigate risk, will boost agency reporting accuracy, and will increase shared confidence between client and agency when it comes to financial management and future resource allocation decisions.

Agency Model Transformation Was Already Afoot

31 Oct

One sad reality of 2020 was the negative impact of COVID-19 on U.S. employment. Simply stated, the loss of jobs resulting from shelter in-place regulations negatively impacted business sectors ranging from travel and hospitality to retail and yes, advertising. 

According to a recent report from Forrester, 35,000 U.S. ad agency jobs were cut this year. The principal reason for this contraction, agency expense reduction moves tied to drops in revenue related to marketing spend reductions by advertisers. 

However, the loss of ad agency jobs, which accelerated in 2Q20 was actually part of a broader trend tied to the ad industries adoption of technology. This according to Jay Pattisal and J.P. Gownder of Forrester Research, authors of a blog post entitled; “The Smaller, Smarter Future of Agencies.”

According to the authors, the application of artificial intelligence (AI) and intelligent automation (IA) to agency workflows “will yield a long-term reduction in the size of agencies as measured by the number of human employees.” By their estimation, creative and media agencies will lose 11% of their jobs to automation by 2023. Their recommendation to agencies is to embrace this change and accelerate their transformations, becoming more “streamlined, intelligent providers” by harnessing the power of “intelligent creativity.” 

Many within the industry have prognosticated on how the ad industry model might evolve and the perspective advanced by Forrester certainly has merit. However, for an industry with over 57,000 ad agencies operating in the U.S. alone (source: Manta Media), there is no “size nine shoe” solution that can be applied to each individual agency’s quest to remain relevant. 

One thing is certain, many of the jobs lost in 2020 will not return, regardless of the course of the pandemic or the resumption of client marketing spend. Process innovation, automation and consolidation will have rendered many of those positions as obsolete.

Time for Advertisers to Reach Out to the Regulators

26 Oct

Like many business segments, the ad industry has never been one to welcome government involvement when it comes to policing itself, and perhaps rightly so. That said, now may be the time to embrace the regulators.

Why? Simply put, digital advertising fraud is out-of-control. In a recent article in Campaign U.S. author Alison Weissbrot shared the results of a recent study by ad verification company Cheq and Professor Roberto Cavazos of the University of Baltimore suggesting that U.S. advertisers will lose $35.0 billion to ad fraud in 2020. In a sector that represents $333.0 billion in annual spend this means that ten cents of every dollar spent by digital advertisers is siphoned off the top by fraudsters. For perspective, the author cites the fact that this level of fraud is greater than that impacting the $3.32 trillion credit card industry. And the problem is not limited to the U.S. alone. Consider the finding from Juniper Research’s 2019 report on advertising fraud, which indicated that globally lost $42.0 billion to digital ad fraud last year.

Renowned fraud investigator, Dr. Augustine Fou once commented that, “ad fraud is more lucrative than tax fraud, counterfeiting goods or being a Somali pirate.” Adding credence to the increasing role of organized crime and criminal nation states in digital ad fraud, The World Federation of Advertisers (WFA) recently stated that “fraudulent internet advertising schemes will become the second-largest market for criminal organizations.”

For all of its well-intended efforts, the advertising industry has been unable to effectively counter this growing threat. Thus, it may be time for The World Federation of Advertisers, the Association of National Advertisers, the 4A’s, the IAB and their members to reach out to lawmakers and regulators to join in a coordinated effort to uncover ad fraud at its root and to develop more effective means of enforcement to both deter and punish the criminal organizations perpetrating the fraud. The 18thcentury French social commentator, Montesquieu once said that; “there are means to prevent crime – its punishment.” Combining the expertise of the ad industry with the regulatory and enforcement capabilities of lawmakers makes good sense.

The problem of ad fraud is not abating. With the expanded use of technologies such as programmatic buying and artificial intelligence and the complex, often non-transparent nature of the advertising supply chain, the risk of fraud remains high, threatening not only digital ad spend but emerging media sectors such as mobile and connected television as well. 

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Marketers That Don’t Have Formal Assurance Programs Are At Risk

27 Sep iceberg risk

For most companies, marketing spend can be considered a material expense, often running at 5% or more of annual revenue. Yet, a majority of these organizations have not included marketing in their corporate governance and risk mitigation efforts, conducting limited or no supplier compliance, financial management and performance testing.

Given the complex nature of the marketing and advertising space, the less than ideal levels of transparency and the murkiness of advertiser supply chains, this creates a precarious situation.

It must be noted that this is an industry which is largely predicated on the concept of “estimated billing,” where advertisers are invoiced in advance for approved activity by their agency partners. These funds are then disbursed over time by the agency to third-party vendors or realized as agency revenue in accordance with remuneration agreement terms. An underlying tenet of this billing model is  that estimated costs are “trued up” to reflect actual costs incurred once a job is closed, supplier invoices tallied, and an agency’s time-of-staff investment is fully posted. However, reconciliation efforts do not always occur and approved but unused funds, for which advertisers have been billed, are not always returned in a timely manner or at all.

Many Client/ Agency contracts contain solid control language to protect the advertiser and to provide explicit financial management and reporting guidelines to their agency partners. That said, many agreements are outdated and do not contain the requisite terms and conditions necessary to adequately safeguard an advertiser’s marketing spend. Ironically, good contract or not, too few organizations review supplier compliance with agreement terms or conduct financial and performance reviews of their agency partners… even though most agreements provide advertisers with the right to audit the agency to review the financial documentation that supports the agency’s billings.

In our experience, advertising agencies expect their clients to conduct periodic compliance and performance testing. The fact that more companies are not following through on their audit rights is a mystery. Why should testing be performed? Because periodic compliance reviews drive accountability and improve transparency, addressing questions such as:

  • Did we get what we paid for?
  • Were we charged the appropriate rates for the work performed?
  • Were third-party expenses billed on a pass-through basis, net of any mark-up?
  • Did the agency reconcile fees to reflect its actual time-of-staff investment?
  • Were third-party vendors paid in a fair and timely manner?
  • Were agency and third-party vendor billings accurate?
  • Are future projects being estimated and approved using accurate historical information?

Beyond providing financial management assurance and recoveries, compliance testing identifies gaps in control, yields recommendations for improving contract language and reporting and can drive process enhancements that result in future savings.

In the end, sound Client/ Agency agreements backed by a formal risk mitigation program can protect a company’s marketing investment, converting risk control measures into business growth opportunities. This, while driving accountability and providing company stakeholders with a sense of trust and confidence that its marketing team, agency partners and third-party suppliers are properly stewarding the funds entrusted to them.

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