Funding Accountability Initiatives

26 Aug

Accountability FinalThe desire on the part of many advertisers to extend their organization’s accountability initiative to marketing is high. This is due to the fact that marketing is both one of the largest indirect expense categories within an organization and, for those that believe in its ability to drive strategic outcomes, critical in driving brand value and demand generation.

One of the key challenges for Internal Audit and Procurement professionals in implementing accountability programs is that they typically do not have a budget to fund the projects. Rather, they are reliant on their peers in Marketing to “buy in” to the concept and to underwrite the investment associated with analyzing contract compliance, financial management and in-market performance across their agency networks. This dynamic can create a loggerhead that delays or prevents corporate scrutiny into marketing and advertising spending and its resulting business impact.

The irony is that relative to the millions of dollars invested in marketing, the cost of implementing an accountability program for this corporate function is much less than one-percent of total spend. As we know, applying the skills and capabilities of audit and procurement teams and outside consultants typically results in improved controls that mitigate financial and legal risks to the organization. Further, these efforts often uncover historical errors and overbillings, and always generate future savings and improved marketing return-on-investment opportunities that more than offset the cost of the program.

It has always been a mystery as to why more advertisers simply don’t formalize and legislate the marketing accountability program and establish the requisite budget to be administered by the CFO / Finance organization. A minority of our clients operate in this manner, but clearly a “win, win” situation is created where internal audit and procurement provide their support and apply their resources pro-actively and marketing doesn’t feel as though funding is coming at the expense of critical business building programs within their budgets.

From our perspective, the source of funding for extending a corporate accountability initiative to marketing is the last hurdle. The reason is that we have seen marketing’s appreciation for accountability support grow along with their respect for the audit and procurement functions and a recognition that such programs can improve the efficiency and efficacy of the organization’s marketing spend.

The advertising industry is a complex; rapidly changing, technology-driven sector fraught with opacity challenges and risks such as digital media fraud and non-transparent revenue practices employed by agencies, ad tech providers, ad exchanges and media sellers. In light of these dynamics, organizations truly understand the benefit of monitoring the disposition of their marketing investment and the performance of their advertising agencies and third-party vendors.

It has been over 140 years since Philadelphia merchant John Wanamaker offered the following perspective on his ad spend:

Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”

Yet, with the passage of time it would be difficult for the industry to suggest that much has changed with regard to a marketers ability to accurately assess the efficacy of their advertising spend.

There is no time like the present to proactively develop; implement and fund transformative accountability programs that can optimize planned business outcomes, while safeguarding marketing spend at every level of the advertising investment cycle.

Interested in learning more about marketing accountability programs? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management| AARM at ccampeau@aarmusa.com for a complimentary consultation on the topic.

Video: “The Truth Crisis: Marketing’s Biggest Challenge”

16 Aug

Interesting video from Campaign magazine … Click Here to watch.

transparency

Key to Media ROI: Chief Media Officer or Compliance Auditing Support?

14 Aug

AccountabilityIn the wake of this spring’s Association of National Advertisers (ANA) “Media Transparency” study, conducted by K2, many in the industry have suggested that advertisers add a Chief Media Officer to staff to assist them in navigating what is clearly a complex, rapidly changing industry. For those advertisers that have the financial wherewithal to support such a position, the benefits could be significant when it comes to strategy development, planning and stewardship of their media agencies and extended supplier base.

That said, the dynamics which impact media return-on-investment require resources that go well beyond the reach, and sometimes knowledge, of a Chief Media Officer and create an entirely different set of challenges even for those organization’s that do have the luxury of adding a seasoned, media executive to their staff.

The findings of the ANA/K2 study dealt with non-transparent media agency practices effecting advertisers such as: rebates taken at the agency holding company level and not passed through to advertisers, media arbitrage, value banks, related party transactions and inappropriate mark-up on both media and non-media expenses. The economic and relationship impact of these practices, and the continued adverse effects of digital ad fraud and viewability challenges besetting the industry, all serve to greatly reduce the efficacy of an advertiser’s media investment.

Experience suggests that the key to resolving these issues is more likely rooted in the development of a sound, broad reaching media accountability program. One which focuses on improving client/agency contract language, client/ agency focused communications, financial and legal controls and enhancing advertiser transparency rights that allow clarity into the disposition of their funds at each stage of the media investment cycle.

This is not an easy task in an industry still largely reliant on an estimated billing model, with inordinately long campaign closing/reconciliation processes and multiple third-party vendors and middlemen, which all serve to negatively impact working media ratios.

Add to this the fact that the C-Suite within many advertiser organizations simply doesn’t pay much attention to media, in spite of the materiality of spend in this important area. Consider the results from a July ANA study, conducted by Advertiser Perceptions, following the release of the ANA/ K2 study:

Only one-quarter (25%) of advertisers surveyed were aware of the ANA’s media transparency study.

We believe that advertisers do care about how their media funds are being managed. However, we also know that very few organizations know what happens to their money, once an agency invoice has been paid.

It is for this reason that we believe strongly in the vast benefits that a structured, agency compliance and financial management auditing program. One that can also assist advertisers by providing a context for understanding the scope of the risks they face when it comes to building mitigating controls to optimize their media investment.

At present, few advertisers undertake such testing and even fewer have the requisite industry experience and specific media-based accounting, auditing and fraud examination experience represented in-house. Additionally, we have yet to evidence a client organization that has implemented the requisite software in their media function capable of processing and catching media billing discrepancies and performing other detailed financial analysis on their media investment.

We have learned over the years that the implementation of such controls yields tangible value far in excess of the cost to support such efforts.

The combination of financial loss related to approved but unspent media funds, earned but unprocessed credits and rebates, billing errors, unreconciled pass-through expenses and related party transparency issues can range between 2.0% and 5.0% of total agency billings. Once aware of the causes, savings are realized year-over-year by implementing improved process changes and treasury management.

With this as a backdrop, imagine an organization investing tens of millions or hundreds of millions of dollars on media. The resulting financial benefits, combined with improved controls, enhanced risk mitigation and transparency most assuredly will secure the attention of the C-Suite and their support for media agency compliance auditing.

Interested in learning how to start improving your media transparency today? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for your complimentary consultation.

Advertiser Audit Rights: Define & Exercise Them

2 Aug

dreamstime_xs_7828625There is a new trend developing within the marketing agency community when it comes to negotiating client contract language – and that is a fairly aggressive attempt to limit the advertiser (client) audit rights and scope. In other words, limiting what the agency is required to have available as “proof” and support for agency billings to the client and agency use of client funds.

At a time when there is much talk about the need for transparency and its role in helping to bolster trust and strengthen client-agency relationships, this trend is highly antithetical.

The most common examples of agencies trying to dictate and limit the client’s “Audit Rights” are:

  1. Limiting the window of time in which an advertiser can conduct the audit. For example, 12 months from date of service or invoice, as opposed to a 3 year window.
  2. Limiting access to agency financial data and or records, as opposed to full access to information that support agency billings, financial management and performance. This can include denying access to data such as employee time keeping records, agency overhead or holding company allocations to client, freelance records, prices paid for certain media and agency affiliate company costs.
  3. Limiting the amount of time the agency is required to retain data and records.
  4. Limiting the type of audit firm that an advertiser can engage to perform the testing – and or including language that seeks to secure agency approval of advertiser’s auditor selection.

In order to ensure full-transparency into the financial stewardship of funds by the agency and third-party vendors, experience suggests that advertisers must secure client-centric contractual audit terms and conditions. It is our belief that this is an advertiser’s unassailable right. After all, it is the advertiser who bears the risk of non-compliance and sub-standard performance when it comes to the investment and management of their marketing funds. And it is the advertiser who is providing the funding to the agent.

Contract language dealing with Audit Rights should grant advertisers the ability to establish the scope of the audit, deploy an audit team of its choice and to have unfettered access to information necessary to validate agency compliance and or performance (i.e. contract compliance, media performance, etc.). To ensure full transparency, advertiser Audit Rights should extend to the agency holding company and affiliates in any full-disclosure relationship.

As important as securing solid Audit Rights language, within a Client-Agency agreement, is the need for advertisers to exercise those rights on a regular basis. Whether through the deployment of internal audit personnel, engaging independent contract compliance or financial auditors or the use of a media performance audit firm, it is imperative that advertisers monitor and vet agency performance in these areas.

The frequency of such oversight actions can range from annual reviews to quarterly reconciliations to the implementation of continuous monitoring programs to assess the disposition and performance of advertiser funds, while under the control of their agency partners.

Sharing audit findings with both advertiser and agency is highly recommended so that both parties, if necessary, can adjust practices going forward. After all, the goal of an accountability program is to provide improved transparency, assurance, improved process, and stronger client-agency relationships. In the words of Thomas Huxley, the noted 19th century scientist:

“Learn what is true, in order to do what is right.”

If you would like to receive a complimentary review of your organization’s “Audit Rights” contract language please contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com.

 

“Our Agency Contract has Expired…”

22 Jul

ExpiredThis along with feedback such as; “We can’t find a copy of the agreement,” “We don’t have an executed copy of the contract” and “Hadn’t seen that version before” are common responses from advertisers when asked for copies of their Client/ Agency agreements when undertaking an inaugural agency contract compliance audit.

While alarming at a certain level, perhaps no more concerning than the dated, evergreen and largely inadequate agency-centric contractual instruments that represent a majority of the agreements that many advertisers have entered into.

Concerning? To be sure. Perhaps these organizations aren’t familiar with the words of legendary investor, Warren Buffett, who once said:

Risk comes from not knowing what you’re doing.

In an industry grappling with issues such as fraud, transparency, relationship stability, trust and the fairness of agency compensation systems the risks posed by non-existent or inadequate contracts are significant and include, legal, financial and intellectual property exposure.

The reasons for this dilemma are many and common across many client organizations:

  1. No central contract repository within the organization
  2. Limited cross-functional agency relationship oversight
  3. No strategic supplier management system
  4. Contracts negotiated by one function, not shared with relationship owners
  5. No enterprise wide accountability initiative

By now, most are aware of the Association of National Advertisers (ANA) study on “Media Transparency” that was prepared in conjunction with K2 and released in June of this year. If there is one takeaway from the findings of that study, which all advertisers should pay heed to its the fact that a solid Client/ Agency contract is an advertisers best defense when it comes to protecting their advertising investment.

One side benefit of the ANA/ K2 study is that C-Suite members within many advertiser organizations are asking the questions; “How susceptible is our firm?” and “What level of control and transparency do we currently have when it comes to our marketing investment?”

Addressing these questions is an excellent place to begin, because it necessarily involves securing and reviewing current copies of the contractual agreements that are in place with each of the organization’s marketing vendors. Perhaps the next best place to turn is to engage either outside counsel or an independent agency contract compliance specialists, with deep knowledge of the marketing/ advertising industry and some of the advancements and best practices which are in place to safeguard an advertisers investment.

Once an updated agreement is put in place, the easiest way to manage these contracts, amendments and ongoing statement’s of work is to schedule (and contractually mandate) annual reviews of the agreement and all legal documents governing your agencies staffing plans and compensation.

For those seeking an added layer of protection, engaging an agency contract compliance specialist to monitor each agencies adherence to the terms and conditions of the agreements that govern these important relationships is an excellent idea.

Interested in assessing your organization’s legal and financial risks? Contact us for a complimentary agency contract risk assessment by emailing Cliff Campeau, Principal, Advertising Audit & Risk Management at ccampeau@aarmusa.com today.

Here We Go Again…

5 Jul

mobilityIs the ad industry about to make the same mistake with mobile as it did with digital? Early on in the platform’s development, it would appear so.

On a positive note, according to new figures from eMarketer, mobile ad spending will surpass $100 billion in spending in 2016, accounting for more than 50% of all digital ad expenditures.

However, there are challenges that need to be addressed. Chiefly, there are a lack of uniform viewability and audience measurement standards in place to validate publisher performance. Today, different publishers utilize a variety of different methods for counting impressions. The key point of contention with mobile is whether or not the publisher delivers on ads rendered or fully loaded as opposed to ad calls.

According to the Media Rating Council, which issued their “mobile viewable ad impression measurement guidelines” this past spring “Each valid viewable impression originates from a valid rendered mobile served impression. In no case should viewable impressions exceed render mobile served impressions counted on a campaign.”

When you look at the numbers, the waste factor in mobile advertising is alarming. In a recent article by Allison Schiff on Adexchanger, entitled; “The Buy Side Doesn’t Want Impressions Counted Before They Hatch” mobile ad server, Medialets, suggested that in a review of “2.7 billion impressions across its mobile ad server” that it found that “roughly 20% of ad calls on the mobile web were “wasted,” aka they don’t ever fully render on a device.”

Concerns over ad delivery and measurement issues related to mobile sound all to familiar to the growing pains suffered by advertisers with online display advertising served to desktop devices. Add in the newness and complexity of the segment, and advertisers would be foolish not to be mindful about their investment in this area.

In the near-term, the best path forward for advertisers to take is to enforce an ad rendered versus ad called verification approach, establish minimum viewability thresholds and utilize only MRC accredited vendors that are willing to adhere to industry standards. It should be noted that while the Interactive Advertising Bureau (IAB) established a 70% viewability threshold for measured impressions in 2015 many mobile platforms are “guaranteeing” viewability levels as high as 100%.

When you consider that according to eMarketer, over 31 million U.S. internet users will only go online using a mobile device in 2016, it is clear that the segments potential is high. Let’s hope that the learning curve is not as steep as the adoption path.

 

 

Decision Time for Advertisers in Wake of ANA Study on Media Rebates

5 Jul

time to decideU.S. advertisers have long suspected their presence and agencies have steadfastly denied accepting rebates in the U.S. market. Depending on which side of the ledger one fell on, the ANA/ K2 study on media transparency may not have swayed your perspective on the topic one iota.

If such is the case, that is too bad. As the noted Irish playwright, George Bernard Shaw once said:

“Progress is impossible without change, and those who cannot change their mind cannot change anything.”

The study was thorough, insightful and shed light on some of the non-transparent sources of revenue available to agencies. These range from AVBs or rebates and value banks consisting of no-charge media weight to the spread earned by agency trading desks from the practice of media arbitrage or “principle buying” as it is often called. The source of these findings were agency, ad tech and publisher personnel that participated in the study in exchange for the ANA and K2 protecting their anonymity. Of note, not one representative from an agency holding company or ad agency was willing to go on the record and participate in this study.

We believe that the study should serve as a wake-up call for advertisers and agencies alike to engage in serious discussions regarding the level of disclosure desired by clients when it comes to the stewardship of their media investment. In the wake of the 4A’s shortsighted, premature withdrawal from the joint task force dealing with this topic and their subsequent challenges of the ANA/ K2 study methodology and findings, these discussions will have to occur on a one-on-one basis. Which, candidly, is the best means of affecting near-term change.

In most instances, it is not illegal for agencies to generate non-transparent revenue and is likely not even a violation of the agreements, which have been signed with their clients. Why? The contracts are lacking in the requisite control language to protect advertisers and agencies are masters at interpreting “gray areas” within those agreements and bending the rules in their favor. This coupled with the fact that only a small percentage of advertisers audit their agency partners and it is easy to see how such practices could exist.

Thus, as an industry we should not cast blame for the emergence of non-transparent revenue as an important element in agency remuneration programs… even if not sanctioned by advertisers. Nor should we accept the agencies excuse that client’s driving fees down somehow makes it acceptable for agencies to pursue non-transparent revenue to counter remuneration agreements, which agencies have knowingly signed on for.

Agencies are not suffering financially. Consider that in the first-quarter of 2016 the “Big 4” holding companies all saw increases in revenue ranging between 0.9% – 10.5%. WPP achieved a 10.5% increase on an 8.5% increase in billings, OMG saw net income per diluted share increase 8.4% and IPG achieved operating margins of 33.8%. Between these performances and media inflation outstripping GDP growth or increases in CPI and PPI it is easy to see how advertiser investments are fueling the trend of continued acquisition by these holding companies as they snatch up ad tech firms, content firms, digital agencies and traditional ad shops. Not to mention the fact that WPP’s chairman has an annual compensation package, which tops $100 million per year.

The focus of clients and agencies should be on returning to a principal/agent relationship predicated on full-disclosure. This is the surest path to rebuilding trust and establishing solid relationships focused on objectivity, transparency and a mutual focus on maximizing advertiser return-on-media-investment. Secondarily, both parties need to evaluate how to minimize the number of middlemen in the media buying loop, particularly for digital media, rethinking the role of ad tech firms, exchanges and publishers and the cut that each takes, lowering the advertisers working media ratios.

From our perspective there are four steps, which advertisers can take to address these issues:

  1. Revisit client/ agency Master Services Agreements to tighten terms and conditions, which deal with disclosure, financial stewardship and audit rights.
  2. Undertake constructive conversations regarding agency remuneration, with the goal of ensuring that your agency partners are fairly compensated, removing any incentive for non-transparent revenue generating behaviors.
  3. Pay more attention to the proper construction of statements of work (SOWs), establishing clear deliverables and review/ approval processes against which your agency partners can assess the resource investment required to achieve such deliverables. This will assist both client and agency in aligning remuneration, resources and expectations.
  4. Monitor agency performance, resource investment levels vis-à-vis the staffing plan and audit contract compliance to ensure that contractual controls and the resulting levels of protection and transparency are being met.

The ANA/ K2 study can and should serve as a platform for advertisers and their agency partners to work through any concerns or expectations regarding media transparency, both in the U.S. and across the globe. Experience suggests that progressive organizations will use the insights gleaned from the study as a launch pad for improving contractual controls, working media ratios and client/ agency relations.

For the industry, it is important to dispatch with concerns regarding media transparency quickly. This will allow all stakeholders to focus on tackling the myriad of issues that dramatically impact media effectiveness including ad fraud, cross channel audience delivery measurement, viewability and attribution modeling.

 

The Real Cost of Agency Employee Turnover

31 May

talentTalent. Whether viewed in the context of attracting, developing and or retaining ambitious, gifted employees, talent management is a major challenge for all professional service providers, perhaps none more so than for advertising agencies.

As the industry has evolved over time, the ability to attract entry-level talent has become more difficult. Agencies have reduced their on-campus recruiting presence, starting pay levels are not as competitive as other professional services firms, such as management consultants and agencies are viewed by many candidates as “sweat shops” with low pay, long hours and little loyalty.

Sadly, once a young graduate joins an agency, some of these perceptions too often mirror reality. This is often compounded by limited opportunities for training and development, in favor of a “baptism by fire” on-boarding process marked by immediate deployment onto client accounts with high expectations and demanding, results oriented environments.

The end result for advertising agencies has been an increased level of employee turnover. In turn, this lack of stability has led to higher operational costs ranging from increases in time-on-task to higher recruiting and training costs. The impact of increased agency employee turnover rates negatively impact clients. This often takes the form of higher re-work rates and the need for greater staff coverage to cover of employee inexperience and a lack of direct knowledge of the client’s business.

More significantly, many would argue that these talent issues have negatively impacted client/ agency partnerships, resulting in shorter tenures and more shallow relationships between personnel on both sides of the aisle.

For its part, the industry has acknowledged that “talent management” is a challenge that must be addressed. Given the rapidly changing marketing landscape, driven in part by a seemingly never ending stream of technology advancements, there is a clear need to expand not only the depth of the agency talent pool, but the breadth as well. The need for application developers, coders, data scientists, user-experience architects, social community managers and content curators and creators is now just as important as attracting account managers, copywriters, art directors, media planners and buyers.

By comparison, management consulting firms have been able to more successfully manage their talent pipelines, attracting the best and brightest of our university graduates, developing that talent, retaining their personnel and achieving billable rates that are much higher than their agency counterparts (or should we say competitors).

The irony is that management consulting firms have quickly morphed their business models, competing directly with traditional ad agencies. Firms like Accenture and Deloitte now provide a full suite of marketing and advertising services involving branding, attribution modeling, digital management, graphic design, social and experiential marketing to provide clients with end-to-end customer engagement support. Importantly, these firms also have the ability to readily deploy personnel within these functions on a global basis.

With an expanding set of competition including other professional services firms, technology firms, media sellers and advertisers migrating select functions ranging from their agencies to in-house solutions the challenges for agencies looking to address their talent needs will likely remain steep in the near-term. That said, given the importance professional staff play in establishing trust and credibility with clients, the growing pressure from advertisers for full-disclosure remuneration systems and the resulting need to build out agency teams and the pool of billable hours will be critical to driving top-line success.

If agency holding companies want to avoid becoming temporary staffing firms, one important element in the talent acquisition cycle is to build strong agency brands with compelling cultures that appeal to college graduates, young professionals and mid-level managers. With the multitude of agency’s within their networks, holding companies may ultimately have to consider consolidating and integrating some of their agency brands to create scale, introduce a broader range of services and to provide meaningful career development opportunities for their associates.

Beyond building compelling brands/ cultures, agencies will likely have to rethink their staff compensation programs, which over time have become very polarized, with top managers earning significant salaries and more junior personnel laboring at lower salary levels with few perks. Unfortunately, the easiest way for these folks to advance their economic status is to jump ship and go to another agency for a loftier title and a bigger paycheck. Too often this pattern is then repeated every two to three years.

This will require ad agencies to begin with rethinking entry level pay, which pales in comparison to what a college graduate can earn by going to work for another professional services or technology development firm. There is no sense in ratcheting up the on-campus recruitment effort, if an organization is not willing to back that up with a competitive compensation program.

According to a 2014 4A’s report, average ad agency starting salaries of $25,000 paled when compared to the $70,000 paid at management consulting and technology firms and $125,000 for 1st year law associates. Sir Martin Sorrell called it right in 2011 when he called the agency talent situation “criminal.” In the past, agencies were able to leverage the industry’s reputation as an energetic, forward thinking, collaborative, fun sector and the agencies themselves were thought to have engaging cultures that helped candidates look beyond compensation. Today, it is the technology companies that are viewed as having employee friendly cultures, while agencies are viewed as having more competitive, more cutthroat culture, which does not appeal to millennials.

Earlier this spring, Digiday published an article suggesting that as challenging as the competition for entry-level personnel might be, the real talent crisis was in middle management, individuals with 3 – 5 years of experience. These are the frontline troops, the doers and problem solvers. While compensation is a concern for this group, they are also looking for “more challenges” and “leadership experience.” Often times, they cannot satisfy their desires in this area at their agency and when they leave, many don’t stay within the industry.

In our experience, addressing the challenges of attracting top talent and reducing turnover in the ad business is an important component in reinvigorating client/ agency relationships, boosting the levels of trust and confidence… and the caliber of the work. We hope that agencies can make meaningful progress in this area and once again become desirable, highly coveted career alternatives for talented young people.

 

 

Is the Ad Industry on the Verge of a Revolution?

25 May

White clock with words Time for Action on its face

“It was the best of times, it was the worst of times…” Charles Dickens evocative opening to his book; “A Tale of Two Cities” described the period leading up to the French revolution. It may also be an apt description of where the ad industry and advertisers stand on the topics of transparency, fraud and trust.

As an industry, all stakeholders, including advertisers, agencies, ad tech firms, media sellers and the various associations, which serve these constituencies have long been talking about the need to implement corrective measures. Joint task forces have been formed, initiatives launched and guidelines published, yet little progress has been made in addressing these issues. As evidence of the quagmire, one need look no further than the 2016 Association of National Advertisers (ANA) and White Ops report on digital ad fraud, which saw the estimated level of thievery increase by $1 billion in 2015 to an estimated $7 billion annually. This led Bob Liodice, CEO of the ANA to boldly and rightfully tell attendees at this year’s ANA “Agency Financial Management” conference that; “marketers are getting their money stolen.”

The ANA’s message has resonated with the C-Suite within advertiser organizations the world over as CEOs, CFOs CIAs and CPO’s are working with their chief marketing officers to both assess the risks to their organizations and in fashioning solutions to safeguard their advertising investments. From this pundit’s perspective, it was refreshing to see the ANA take such a strong stance and a welcomed leadership position on remedying these blights on our industry.

Some may view the ANA’s recent stance on fraud and transparency and the upcoming release of its study with K2 on the use of agency volume bonuses (AVBs) or rebates as incendiary. However, in light of the scope of the economic losses, financial and legal risks to advertisers and the havoc which transparency concerns have wreaked on advertiser/ agency relationships we view the ANA’s approach as a rational, measured and necessary stake in the ground.

Mr. Liodice was not casting blame when he suggested that the K2 survey would “be a black and white report that for us (ANA) will be unassailable documentation of what the truth is.” It is refreshing to see an industry association elevate dialog around the need for full-disclosure, moving from disparate opinions to establishing a fact-based perspective on the scope of this practice. To the ANA’s credit, this will be followed by a second report, authored by Ebiquity/ Firm Decisions, introducing guidelines for the industry to proactively address the issue.

To be clear, it is not a level playing field for advertisers. There are many forces at play as a variety of entities look to siphon off portions of an advertisers media investment for their own financial gain. Thus, we’re hopeful that the ANA’s message to marketers to “take responsibility” for their financial and contractual affairs when it comes to protecting their advertising investment takes hold.

In our experience, the path forward for advertisers is clear. It begins with re-evaluating their marketing service agency contracts to integrate “best practice” language that provides the requisite legal and financial safeguards. Additionally, this document should clearly establish performance expectations for each of their agency partners, introducing guidelines to minimize the impact of fraud, including mandating the use of fraud prevention and traffic validation technology, banning the use of publisher sites that employ traffic sourcing and establishing a full-disclosure, principal-agent relationship with their agency partners.

Experience suggests that another key element of a well-rounded accountability initiative should include the ongoing, systematic monitoring of agency contract compliance and financial management performance to evaluate progress. Of note, wherever possible, these controls and practices should extend to direct non-agency vendors and third-party vendors involved with the planning, creation and distribution of and advertisers messaging.

The advertising industry is on the verge of a revolution and for the sake of advertisers we hope so. One that can usher in positive change and allow all legitimate stakeholders to refocus their collective energies on building productive relationships predicated on trust. It is our belief that knowledge and transparency are critical cornerstones in this process:

“I believe in innovation – and that the way you get innovation is you learn the basic facts.”

                                                                                                                                                  ~ Bill Gates

Principal-Based Buying: A Wolf in Sheep’s Clothing?

29 Apr

dreamstime_xs_36536323Recently, Ad Age ran an article entitled: “Risky Business: Why Media Agencies are Betting on Principal-Based Buying.” To be honest, my first reaction was, what in the world is principal-based buying? It didn’t take long to figure out that it was simply a new descriptor for media arbitrage.

Clever, principal-based buying sounds so much more appealing and less subversive than media arbitrage. However, arbitrage is arbitrage, regardless of what moniker that is placed on the act of purchasing media and reselling said media to advertisers. According to Merriam-Webster, the definition of arbitrage is clear:

The nearly simultaneous purchase and sale of something in one place and selling it in another in order to profit from price discrepancies.”

We certainly understand the primary allure of media arbitrage to agencies; the potential for higher margins than what traditional remuneration models would allow for. Let’s face it agency holding companies are publicly traded entities with a fiduciary obligation to drive shareowner profitability.

Simply, “principal-based” buying is a practice that is in clear violation of the principal- agent relationship, which has long been the driving concept behind client/ agency relations.

Forget the opacity, which is a hallmark of this buying tactic and the potential risks to advertisers seeking to optimize media value and boost working media ratios. The main issue with agency ownership of media is the potential impact on the objectivity of the advice, which it offers its clients.

Media time and space is a perishable product. It is also speculative in nature when it comes to projecting future value from a relevancy and audience delivery perspective. So what happens in the event an agency, indulging in arbitrage, has a significant ownership position in distressed, dated inventory? Could such a position create internal pressure on the agency’s media staff to move that inventory? In turn, might such pressure result in agency media team’s pushing that inventory off on clients, whether it represents the best fit at the best price?

Assuming that an advertiser knowingly engages their agency partner’s trading desk and believes that this relationship will yield a price advantage over traditional buying practices there are a few questions to consider; “How will you know? What methodology will you apply to vet the quality of the inventory and the price paid? Who will conduct that analysis for you?” In short, is this a proposition whose economic benefit to the advertiser can ever be accurately evaluated?

Sadly, while the agency community may shrug off the notion of ever having committed to a principal-agent relationship with its clients too often we find that agencies, which have embraced media arbitrage, have not disclosed this fact to their clientele… in spite of the position often taken in the trade publications.

In our agency contract compliance practice we find that in most instances there is not a separate letter of agreement between the agency’s trading desk operation and the advertiser, that the language dealing with “related parties” within the contract is inadequate to cover such a scenario and that there are no limitations in place regarding the percentage of an advertiser’s media buy that can be run through the trading desk.

Hopefully, those agencies that intend to engage in and or extend their use of principal-based buying will also commit to fully disclosing this practice and its application to each of their clients, well in advance of implementing this buying approach on those clients’ behalf.

From an advertisers perspective, it is imperative to assess the type of relationship that you desire with your media agency. If a principal-agent relationship predicated on full-disclosure and the fiduciary obligations, which underlie such relationships, are important to your organization, the client/ agency agreement will need to reflect that position. On the other hand, if there is interest in exploring principal-based buying consider contracting directly with the agency trading desk and establishing caps on the percentage of the budget, which can be invested through that operation.

                                   

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