Ad Industry: Lack of Transparency Limits Trust

5 Dec

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

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

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

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

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

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

Consider but one aspect of advertising spend, digital media.

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

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

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

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

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

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

Ad Industry Trends Pose Real Risks to Advertisers

26 Oct

Risks

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

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

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

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

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

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

Super Bowl Advertising: Much Has Changed Since 1967

1 Oct

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

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

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

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

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

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

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

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

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

Can Your Agency Support Its Billings to You?

25 Aug

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

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

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

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

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

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

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

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

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

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

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

Can Treading Water Be Considered Progress?

31 Jul

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

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

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

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

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

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

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

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

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

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

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

 

3 Reasons Advertisers Should Audit Their Advertising Spend

29 Jun

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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.

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