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.

Marketing Procurement Delivers Value

31 May

Value IA decade ago, agencies and marketers winced at the idea of procurements involvement in their space. The relationships between stakeholders were often contentious. Stakeholders on both sides felt that procurement was singularly focused on cost reduction, did not understand the marketing space and was unable to comprehend, if not measure the quality of outputs delivered by high performing marketing/agency teams.

Have these sentiments changed? Yes, for the better. Have advertisers and their agency partners fully embraced marketing procurement? Yes, in many organizations. That said C-Suite executives at most marketing organizations are comfortable with and comforted by procurement and its role in providing oversight for and optimizing marketing spend.

The good news is that marketing procurement teams have done an excellent job evolving their subject matter expertise and furthering their understanding of the needs of marketing teams and their agency partners. Coupled with procurement’s expertise in all facets of supplier management including sourcing, onboarding, contracting, negotiation and risk management, procurement teams deliver significant value to their marketing peers.

Out of necessity, marketers are increasingly focused on brand building and demand generation. For those fortunate enough to have access to a developed marketing procurement team, the opportunity to drive efficiencies while strengthening relationships across their agency network is significant.

According to the Association of National Advertisers (ANA) better than 80% of marketers utilize procurement to review agency compensation. However, that is just scratching the surface of successfully deploying marketing procurement.

In our agency contract compliance practice, we have seen the benefits to marketers of collaborating with procurement. These include support in the following areas:

  • Supplier sourcing, RFP management and on-boarding
  • Supplier diversity management support
  • Agency performance monitoring and financial management support
  • Contracting and annual statement of work support
  • Deduping of agency roles and overlap across agency network members
  • Agency service consolidation including digital asset management and studio
  • Decoupling of production
  • Fostering enhanced collaboration between network agencies and in-house resources

From our perspective, the success realized by marketers and their peers in procurement is greatly enhanced when the procurement team has direct interaction with agency finance personnel. This must go beyond contract, SOW, and fee negotiations to include ongoing interactions regarding monthly fee and budget tracking reporting and the preparation for quarterly business reviews (QBRs).

In the end, all stakeholders desire the same outcome, attainment of the organization’s marketing goals with the greatest efficiency. Achieving this aim is best done through open, transparent supplier relationships, which the successful marketing procurement teams recognize. As American businessman Harvey Mackay once said, “A smart manager will establish a culture of gratitude. Expand the appreciative attitude to suppliers, vendors, delivery people, and of course, customers.”

Advertisers: Did You Get What You Paid For?

2 May

Role QuestionPlans are approved, purchase orders are issued by the advertiser to their agencies who then invoice the advertiser on an estimated basis for the approved activity. Reconciling invoices are then submitted by the agency once jobs and campaigns are closed out are submitted. However, these invoices come sans any third-party vendor invoice detail.

So, how is it an advertiser can state with confidence that it received what it paid for?

The simple fact is that unless an advertiser conducts financial audits of its agency partners or it pays on a final billing basis (which is rare), they don’t know if value commensurate to its payments was received.

Think about that. Advertising spend is a material expense and there is little, or no billing support documentation provided by agencies to their clients to substantiate that expense. Given this approach it is fair to ask; “How comfortable should agency CFOs be that their organizations got what they paid for?” Typically, the only window into an advertiser’s approved expenses is agency invoice totals relative to approved purchase orders… not reconciled final billing support from agency affiliates and third-party vendors to the agency.

Along the way, marketing may receive agency reporting in the form of time-of-staff tracking and fee burn reports or job status summaries, but these are best used to generally track spend levels, not to verify purchases. The only way to vouch for the accuracy of an agency’s billing to a client is to conduct a financial management audit.

Unfortunately, the time lag between an agency’s initial billing to a client and final reconciled billing, where estimates are trued up to reflect actual costs can be several months – or sometimes not at all. That is a long time for an advertiser not to have a direct line of sight into the disposition of their funds.

This is the reason that Client/ Agency agreements contain guidelines governing agency financial reporting, time tracking, job and campaign reconciliation and acceptable billing practices (e.g., cost to be billed on a pass-through basis, net of any mark-up). As importantly, it is also why all such agreements contain record retention and audit rights clauses that provide advertisers with the ability to conduct contract compliance and financial management audits.

Based on experience, client-side CFOs should not place a blind level of trust in agency partner billings and financial reporting. Verifying actual costs and time-keeping relative to estimate, and independently vouching agency support is a sound practice – yielding solid learning that forms the basis of process improvements, enhance reporting, and improved controls. This in addition to financial true ups in the form of historical recoveries that more than cover the cost of the audits themselves.

As the saying goes: “In God we trust, all others we audit.”

Are You Paying Competitive Rates for Agency Studio Services?

5 Apr

Low RatesFlexibility, responsiveness, and competitive rates were once the hallmarks of ad agency studio services.

Over the last several years many agencies have expanded their resource offering as the demand for content development, repurposing and sizing has increased in the multi-billion-dollar production sector. Today, agency capabilities include traditional studio services, broadcast production, video, and digital editing. No one can argue the convenience of being able to tap an agency partner to assist in this important area.

The question for advertisers is “How do the rates being charged by agencies truly compare to the market?”

In our experience conducting agency contract compliance audits, advertisers that do not employ the services of a production consultant likely cannot answer this important question. The reason for this assertion is twofold. First, most agencies do not competitively bid these services on a regular basis. Secondly, the agency is typically the one overseeing the bidding process, which could potentially skew the objectivity of the process. Further, most advertisers have not taken the step of centralizing production services with one agency partner. Accessing studio services through multiple agency partners makes it difficult to truly optimize efficiencies and limits their ability to monitor agency adherence to bid protocols… assuming such guidelines have been developed and communicated.

The best place to start is for advertisers to review their client-agency agreements to make sure that certain safeguards have been incorporated. Below are some examples:

  • Requirement for the agency to competitively bid production services at pre-determined intervals (i.e., quarterly, annually, job by job).
  • Language requiring prior, written client approval for waiving any competitive bidding requirement.
  • Incorporating studio “rate sheets” containing hourly bill rates by position and or piece rates for certain outputs (e.g., color proofs) into the agreement and or annual statements of work.
  • Listing of each agency department and or related entities providing studio services.
  • Language requiring agency to secure written client pre-approval for cost over runs.
  • Requirement for the agency to separate studio fees and hard costs on both estimates and invoices.
  • Staffing plans, with estimated hours by position/ person should be required for all projects over a pre-determined spend level (e.g., $25,000).
  • Establish bid protocols and append them to the agreement and annual statements of work.
  • To avoid any doubt, require the studio to maintain support for billings accessible for review (timekeeping and actual output records) to substantiate costs/ activity.

As with any agency service, advertisers would benefit from conducting periodic compliance and financial reviews to ensure that bid guidelines and resource commitments are being followed and applied. These precautions will allow advertisers full transparency into the costs of their agency partners studio offerings.

Building a Foundation for Trust in Client/ Agency Relationships

27 Feb

dreamstime_s_38659968Perhaps I was fortunate. Perhaps it was a sign of the times. When I began my career at J. Walter Thompson, we took great pride as an organization in the number of client relationships that we had, which were measured in decades. Clients such as Ford Motor Company, Unilever, Kellogg’s, Kimberly-Clark, Kraft Foods, and others were celebrated, revered, and nurtured.

Not unlike today, there were challenges to be faced and pressures to be dealt with, whether market-driven or internal.  So, what allowed those relationships to flourish through good times and bad?

The answer was simple. Trust and a mutual commitment to the partnership combined with alignment on business objectives.

Today it is believed that the average length of client-agency relationships is around 3½ years. Is this reduction in longevity correlated with the fact that there has been a slow, but steady erosion in the level of trust between advertisers and their agencies? Consider that a couple of years back, the Association of National Advertisers (ANA) conducted a survey and found that only 29% of its member marketers ranked the “current level of trust between client-side marketers and ad agencies as high.”

A waning level of trust can inhibit communication between stakeholders leading to difficulties that throttle the productivity of the partnership. Conversely, as Stephen Covey once said:

When the trust account is high, communication is easy, instant, and effective.”

Thus, if you believe that stable, long-term strategic partnerships are more conducive to achieving an organization’s business and marketing objectives, then the obvious question is “How can we establish client-agency relationships that endure the test of time?” The answer seems obvious… addressing the issue of trust.

In our experience, there are three fundamental steps that can be taken to build and maintain trust between advertisers and their agency partners.

  1. Contractual agreement predicated on a “Principal-Agent” model – Simply put, in this type of relationship the agency is charged with acting on the client’s behalf and in their best interest. This legally binds the agency to always put the client’s interests first and eliminates their ability to benefit from the relationship at the client’s expense. One of the beneficial outcomes of this type of model is that the client can take solace in knowing that the advice and recommendations of the “Agent” is more likely to be unbiased. In the event that an agency recommends the consideration of principal-based or inventory media buys or the use of or procurement of services/products from a related party of the agency, then the agreement language should require full-disclosure and prior written client approval.
  2. Periodic agency contract compliance and financial management reviews – Having a sound contract in place is a positive step in the right direction. However, if an agency’s compliance with contract terms and conditions is uncertain then achieving the desired level of trust may be elusive. Given industry concerns regarding transparency, all stakeholders will benefit from an independent evaluation of compliance and performance. Further, knowing that there will be an additional layer of oversight inspires stakeholders on both sides of the partnership to uphold the client organization’s desired levels of governance and transparency established within the agreement. This is not a sign of mistrust, but a signal of an advertiser’s commitment to the principle of “assurance.” As the saying goes: “In God we trust, all others we audit.”
  3. Establishing a fair and compelling agency remuneration program – Properly compensating agency partners is fundamental to securing the requisite level of support and bolstering an agency’s commitment to its fiduciary role. Additionally, a well-paid agency is less likely to engage in practices such as the pursuit of vendor kickbacks, the application of non-transparent mark-ups, profiting from the use of client funds, or the unauthorized use of sub-contractors and related parties. Contractual language capping agency revenue to that which is authorized within the agreement and subsequent statements of work will also protect the advertiser from these tactics and help curtail agency temptation to inappropriately supplement its income at the expense of its fiduciary obligations to its clients.

We have seen firsthand the benefits of this proven formula in promoting transparency and bolstering an organization’s trust in its agency partners. Thus, marketers and their agency counterparts should consider embracing this approach to strengthen and reinforce long-term agency-client relationships by ensuring a solid footing.

How is Your Media Agency Making Money in 2022?

17 Feb

agency holding company profitsWritten by Oli Orchard, Partner – Fuel Media & Marketinga specialist communications consulting company focused on advising clients in media communications. 

With Publicis and OMG in the news this week (February 2022) with significant revenue increases year-over-year, now would seem a pertinent time to look ‘under the hood’ of the different revenue streams agencies have available to them.

Using the traditional commission method, still prevalent today, it is often thought that a media agency has a disincentive to save clients’ money or indeed manage lower budgets.

Because most media agencies are compensated on a percentage of media spend, if they negotiate the prices down, and potentially reduce total spend, they will earn less money.

In practice, the traditional ATL percentages involved stop this being much of a disincentive.

  • A buy of $10,000 at 3% commission provides the agency with just $300 income.
  • If the agency negotiates 25% discount on the media, the agency will only lose $75.

Obviously, the agencies are doing this at scale, and those $75 discounts start to add up, as a result the agencies have long looked elsewhere to bolster their incomes. So, in 2022, what other revenue streams are open to the agencies?

Agency income takes many forms, and too many to go through here, so we’ll stick to the top ten.

  1. Fees & Commissions – Whether Time and Materials based, or a percentage commission on media spend these should need no introduction to advertisers. At Fuel we hold data on innumerable best practice contracts, and always work with clients and agencies to come to the most appropriate basic remuneration package
  2. Bonus/Malus schemes – These programmes have become synonymous with best-in-class-advertisers, looking to reward their agency beyond the basic remuneration for exemplary work. The Malus scheme has gained more traction in recent years, as agencies look to differentiate themselves from the competition by having some ‘skin-in-the-game’, often putting part of their profit margin at risk
  3. Incremental services outside of Scope of Work – These are often the result of out-of-date contracts, and can commonly comprise things an advertiser might expect to be included in the contract, such as Quarterly Business Reviews, competitive monitoring, dashboards, post-campaign reporting and even out-of-home planning
  4. Deposit Interest on bank accounts – Historically agencies have taken advantage of bank interest rates and been fast to invoice and slow to pay. With rates on the increase again, albeit slowly, advertisers will need to become increasingly aware of this. Agencies deal in vast sums of money, and this revenue stream should not be overlooked
  5. Kickbacks from vendors – AVBs, rebates, Specialist Agency Commissions, the list goes on; kickbacks have many names, and they don’t always take the form of cash. Free Space that can be given to advertisers to bring the CPM down to hit bonus targets, or alternatively sold on to other clients is another common form these shapeshifting kickbacks can take. It is also imperative that the contract encompasses as much of the agency holding group as possible, often kickbacks can be routed through other parts of the group
  6. Unbilled media – It is not uncommon for a media vendor to forget, unintentionally or intentionally, to bill an agency for a media placement that the agency has already billed the client for. The agency should be reporting and returning unbilled media on a regular basis, though clients should be aware of the fiscal statute of limitations, meaning the vendor could invoice the agency within a specified period of time (it is currently 6 years in the UK) and demand payment, which will then be passed on to the client
  7. Agencies acting as the principal (rather than agent) – This is commonly known as inventory media, the agency takes a position on, or buys, a quantity of media directly from a vendor, with no specific client lined up for it. There will be NDAs in place with the vendor preventing the agency from disclosing the actual price paid to clients or auditors. This allows them to mark-up prices, generally by a very significant percentage when selling this space on to clients. The flip side of this is that an advertiser can get a great rate on something they may have bought anyway, though they may also be pushed into a buy that is sub-optimal for their strategy just to meet the agency’s internal need to offload inventory
  8. Subcontracting to related 3rd Parties – Agency holding groups are vast and have many complimentary disciplines. It is not uncommon for a specific task to be subcontracted (attracting an additional fee) within the holding group
  9. OOH commissions – It is worth listing these separately to those above because OOH often has a unique commission structure where both the advertiser and vendor routinely pay the poster buying specialist for placing the media. This is frequently dealt with in agency contracts as an additional ‘Disclosed Commission’ tucked away in a schedule at the back of the document as Specialist Agency Commission
  10. DSP usage – Programmatic has long been the poster child of non-disclosed fee structures further down the digital value chain but there is one significant agency revenue stream that crops up near the top of the chain in non-disclosed White Label mark-ups. The DSPs allow their clients (in this case the agency, not the advertiser) to add an additional CPM into the net media cost, meaning that it doesn’t show up in any of the auditable invoicing trails, and is passed back to the agency
  11. As you can see from above, agencies constantly evolve income streams, seeking out new ways to profit, and let’s not get the intent of this piece wrong, agencies should be able to profit from their great work for clients. However, many advertiser clients are becoming cash cows, based on the agencies’ opaque trading practices.

At Fuel, we work with the agency and advertiser to produce the optimum contract for the situation, one where transparency around agency income is openly discussed, and the advertiser can make an informed, supported decision about the relationships they forge with their agency partners.

Here’s our checklist for advertisers:

  • Check that your contract is up to date – does it cover the entire scope of business transacted between you and your agency? The very best contracts are reviewed and revised annually to take landscape shifts and revised media strategies into account
  • Make sure that your agency is obliged to ‘call out’ and seek approval for inventory media and use of subsidiaries/sister companies
  • Have a frank discussion with your agency about the non-disclosed White Label mark-up that the DSPs allow them to add into the platform costs, and consider requesting to be part of the conversation around DSP selection
  • Undertake regular audits of performance vs. pitch or year-over-year guarantees, and tie the buying results to a bonus/malus scheme in tandem with service scores and achievement of business objective KPIs 

To find out more on how Fuel can help, contact Oli on +44(0) 7534 129 097 or email [email protected].

Time & Material: The Best Mode of Agency Remuneration?

30 Jan

punch clockWhat is the best method for compensating advertising agency partners?

This has been a spirited topic of conversation ever since the “old standard” of a 15% commission went by the wayside. To this day, there is no standard in the industry and no consensus on either the mode of compensation or the amount.

Should we utilize a commission model? Straight commission or a variable rate? A hybrid of a fee + commission? Fixed retainer fees? Project-based pricing? Performance-based pricing? Or time and material? Ask a dozen industry professionals from either the client and or agency side and you will likely get 12 different answers.

According to the last ANA’s last triennial study on agency compensation, advertisers still rely primarily on labor-based fees while continuing their search for a means to simplify agency compensation practices. Getting to a compelling and efficient remuneration model that fairly compensates one’s agency partners, while challenging, remains the goal of most advertisers.

With the rise in project-based work versus traditional retainer relationships and the dramatic expansion technology enabled support, including programmatic media buying, we believe that the most effective means of compensating advertising agencies is time-and-material. Direct labor-based fees (direct labor costs + overhead + profit) tied to hourly bill rates by function and estimated utilization levels laid out in a staffing plan should form the basis of this approach. All third-party cost (including technology and data fees) would be billed on a pass-through basis, net of any mark-up. For those advertisers and agencies that desire, overlaying a performance bonus tied in part to agency performance and the advertiser’s attainment of business objectives provides a nice incentive to align both partners’ interests. Bill rates would then be reviewed annually.

The key to protecting both parties’ interests in this model is linking scopes of work to agency staffing models and reporting on agency time-of-staff investment monthly to avoid any surprises. Advertisers seeking to avoid “surprises” when it comes to their agency fee investment can cap hours and fees requiring their agency partners to notify them when that bank of hours is at risk of being depleted and securing the client’s permission to bill additional hours if necessary. This also protects the agency from scope creep, which often occurs over the course of a project and or work year. In turn, minimum fee thresholds can be established that allow the agency to lock-in key personnel, providing their clients with the requisite level of coverage.

Historically, the challenge related to value-based or fixed retainer fee compensation models has been the inability to accurately track time on task to better align agency staff utilization with client scopes of work. Add in the complexities related to rapid response turnarounds and the need to develop multiple creative units to support an advertiser’s digital media placements and these models have become even more difficult to administer.

Long a standard in the professional fee-for-services area, time and material-based compensation models are easier to implement and clear to all stakeholders. Properly structured, they serve the interests of both advertisers and agencies more effectively than output or performance-based models, lowering variability and minimizing risks tied to changes in scope or marketplace occurrences. In the words of Edsger Dijkstra, the 20th century Dutch scientist: “Simplicity is a prerequisite for reliability.”

%d bloggers like this: