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Will Consolidation Play a Role in Creating the “New” Agency Model?

27 Aug

Consolidation 2It was a simpler time when advertising agencies began to “unbundle” in the 1980’s, separating media planning and placement from creative. This, along with the shift from remuneration systems predicated on commissions to direct labor-based fees, formed the basis for today’s advertising agency model.

While there were certainly variations on the aforementioned theme, this approach served both advertisers and agencies well for the next thirty years. However, as the advertising business became increasingly more nuanced and fragmented, the industry saw a rise in the level of specialization resulting in an increased number of agencies with highly concentrated service offerings. In turn, agency holding companies went on an aggressive acquisition binge gobbling up traditional and specialized agency brands. While there were some efficiencies gained by the holding companies in consolidating back-office functions, the acquired shops were allowed to continue to operate under their individual identities. In so doing, there was little to no cultural acclimation across the holding companies’ agency brand portfolios.

One of the notable consequences of this movement was that marketers saw an expansion in the number of roster agencies, which swelled beyond their ability to effectively manage their now far-flung agency networks. According to Manta Media, in 2020 over 57,000 agencies were operating in the U.S. alone, creating a highly fragmented and competitive marketplace for marketing services providers.

Concurrently, a once stable and manageable business sector was now having to deal with increased levels of complexity stemming from an expansion in the number of media types and outlets, the rapid adoption of changing technologies, the emergence of “Big Data” and an ever-evolving set of consumer media consumption behaviors.

Fast forward to the present and it is easy to understand the position shared by many who feel that the “agency model” is no longer effective and needs to either be fine-tuned or perhaps completely overhauled. These pundits believe that talent constraints, eroding margins, expanding scopes of work, a shift from retained to project-based relationships and the emergence of management consulting firms as viable competitors in the marketing services space have led to the demise of the traditional agency model.

While there have been numerous questions raised, there has been little progress made on client-agency relationship improvements, compensation schema and or agency positioning, let alone ideation around creating a new marketing services delivery model.

There clearly is no “silver bullet” and while we don’t portend to have the answer to remedy all of the challenges facing the industry, we predict that the ultimate solution may involve some of the following actions:

  • Advertisers will streamline their marketing services agency networks with a goal toward eliminating redundant resources/competencies, clarifying agency roles and deliverables, establishing a “lead” agency and providing a framework for long-term, collaborative relationships.
  • In-housing will continue as advertisers seek to improve their controls, gain line-of-sight into the disposition of their spend at each stage of the marketing investment cycle, better assess their return-on-marketing-investment and to drive working dollars. This will involve managed service models where the client takes ownership of the technology and data and engages the agency to plan and execute select components of their communication programs.
  • Compensation programs will blend a balance of direct-labor and or project-based fee methodologies with gainshare and painshare components that link a portion of an agency’s remuneration to the advertiser’s in-market performance.
  • Agency holding companies will “right-size” their brand portfolios, combining and or shedding redundant service providers, consolidating agency brands and developing “centers of excellence” to gain scale efficiencies and improve client delivery within key functions (i.e. broadcast production, digital production, programmatic trading, trafficking, etc.).
  • Agency service delivery models will evolve to simplify advertiser access to the range of agency holding company resources through dedicated relationship management teams that can tap the entirety of a holding company’s offering.
  • Management consulting firms and advertising agency holding companies will co-exist, and in fact, will be called upon to collaborate in providing their clients with integrated end-to-end solutions focused on both building brand and driving in-market performance.

Experience suggests that the best way to solve complex professional services challenges is to focus on the common denominator and craft solutions that ease the burden of the client organization in accessing those services. Thus, consolidation will play a key role for all stakeholders (advertiser, agency, intermediary, publisher) as the advertising industry considers how to evolve its current business models.

The more you drive positive change, the more enhanced your business model.”

                                                                                                          ~ Anand Mahindra

 

The Cost of Feedback is Nominal, the Value Significant.

30 Jun

do advertisers get what they pay for“I think it’s very important to have a feedback loop, where you’re constantly thinking about what you’ve done and how you could be doing it better.” ~ Elon Musk

Chances are, most will agree with Mr. Musk’s sentiments regarding feedback and its link to driving improvements.

What organization wouldn’t aspire to successes achieved by one of the 21st century’s most prolific thinkers? Consider the fact that Tesla, with a market cap of $160 billion, is larger than GM, Ford and Fiat Chrysler combined. Or that his fledgling SpaceX organization has been valued at $36 billion after its first successful manned space flight.

As such, it was somewhat of a surprise to read the results of a recent World Federation of Advertisers (WFA) study. Conducted by Decideware, the study surveyed 60 global agency leaders on client-agency performance evaluation practices. Below are some key findings:

  • 7 out of 10 advertisers provide their agencies with feedback on at least an annual basis
  • Only 4 out of 10 advertisers allow for agency feedback as part of the evaluation process
  • 3 out of 10 clients conduct face-to-face meetings to discuss evaluation results
  • Agencies aren’t comfortable providing “honest feedback”
  • 43% cited the lack of honest feedback as the “biggest barrier” to effective evaluations

That so few marketers would invite their ad agencies to provide formal feedback on topics dealing with team performance, workflow, process and the overall relationship is a bit of a mystery; particularly given that anecdotally it has long been believed that strong client-agency relationships yield superior performance.

In our experience, we have found numerous examples of successful marketers that believe in and are utilizing a 360-degree evaluation process with their agency partners. Importantly, that process  incorporates candid, two-way dialog, which serves as a fundamental building block for their agency relationship management efforts.

It would be helpful to understand “why” some marketers have chosen not to invite agency feedback or to review performance evaluation results in face-to-face meetings. Are they simply not interested in what their agencies have to say? Are they too understaffed and time strapped to invest in a robust evaluation process? Are they of the belief that if their agency partners had a point-of-view that they would share their insights, without prompting?

Regardless of the reasons for eschewing this fundamental practice, there are compelling benefits to be gained for marketers by course correcting in this area by implementing two-way evaluation frameworks. At a minimum, eliciting agency feedback on day-to-day workflows, briefings and approval processes, in market results and client-agency relationship management can yield efficiencies that are beneficial to stakeholders on both sides.

Beyond near-term improvements in operations and performance, established communications programs, that encourage ongoing candid feedback, help to build trust and strengthen relationships. It is incumbent upon CMOs and agency CEOs to collaborate on putting the appropriate protocols in place to encourage, understand and act upon the perspective each party generates throughout the year.

 

Budget Reductions Create Opportunity to Fine-Tune Agency Network

28 May

 

Advertising concept: Ad Agency on digital background

For marketers seeking to generate efficiency gains, looking internally to rethink the processes used to manage planning and creative development workflows can yield significant benefit.

As importantly, looking externally at “how” and “where” work is being performed across an organization’s network of marketing services agencies is extremely important. This involves an objective assessment of the current network of agency partners, their resource offerings, capabilities, performance, and the roles and responsibilities assigned to each.

Without periodic assessment, agency networks can become bloated beyond a marketing team’s ability to effectively manage these vital resources. This risk can be compounded in companies where marketing positions are vacant or have been eliminated as a result of a budget reduction decisions – leaving fewer client-side personnel to manage dispersed agency activities.

Reviewing and creating an inventory of roster agency capabilities and the roles assigned is never a bad thing when it comes to identifying unnecessary expenses or opportunities to consolidate resources and protect against redundancy. Amongst other benefits, since the work necessitates a review of each agency agreement and remuneration program tenets, output should include a comparison of agreement terms, conditions, requirements, and bill rates to ensure consistency (where applicable) and reasonableness of agency bill rates and other costs.

This practice is even more apt when marketing budgets are being cut and agency scopes of work reduced. Such assessments form the objective basis for eliminating duplicative activities and or resources, paring specialty agencies that are not being fully utilized, and eliminating unnecessary fees that are putting downward pressure on working dollars.

Consider; How many agencies do you have that are managing influencers? Involved with social media or content production? How many different agencies are being utilized for studio services or broadcast production? How many agency trading desks are being utilized for the placement of programmatic media? Are you utilizing specialist firms that may no longer be required based on changes to the marketing budget (e.g. event management)? It is highly likely that there are opportunities to consolidate work among fewer partners to simplify workflows, improve communications and reduce costs.

If you are utilizing a “lead” agency to coordinate activities, briefings, production and trafficking across your agency network, it may be worthwhile to solicit their input on potential agency roster moves. Further, once a plan is formulated, collaborating with the lead agency’s account team to affect transitions can be critical to the success of consolidations and the reshuffling of assignments. If you do not employ a lead agency model, the time may be right to consider this approach.

Streamlining external agency networks will improve communication between marketer and agency, enhance business alignment and instill clarity on success metrics. In the wake of current crisis driven budgetary adjustments and uncertainty, companies may want to give serious consideration to such an approach.

“Whatever the dangers of the action we take, the dangers of inaction are far, far greater.”

                                                                                                                   ~ Tony Blair

Adjusting Marketing Budgets is Multi-Dimensional

5 May

budget cutAs we began 2020 no one could have predicted the level of upheaval the economy would experience as a result of the COVID-19 pandemic. The changes forced on businesses as a result of government mandated shelter in-place policies, while critical for curtailing the spread of the virus, have been devastating. According to consulting firm, Brand Finance “America’s Top 500 Brands could lose up to $400 billion” due to COVID-19’s impact on the economy.  

Organizations have sprung into action, many slashing advertising spend, along with other expenses as they seek to offset dramatic reductions in revenue and to deal with mounting cash flow challenges.

As marketers approach the mid-point of the second quarter it is clear that the changes to their fiscal budgets will be significant and potentially lasting. In a recent poll of marketing and advertising executives, by Advertiser Perceptions, 77% of those surveyed expect ad spend to be soft through the first-quarter of 2021.

Thus far, many companies have taken a wait and see attitude with some of their advertising and marketing commitments as they rightly weigh options related to modifying, rescheduling or cancelling advertising commitments. Moving forward, decisive action will be required to safeguard and recall funds pre-paid to agencies, production resources, events management companies and media sellers for creative that will never come to fruition, media that will never run and sponsorships that will be postponed or cancelled.

Equally as important is the need to review and likely revise annual agency scopes of work, staffing plans and remuneration programs that have been impacted by the reduction in marketing spend.

These can be challenging and complex conversations to have with your agency partners and in turn, with third-party vendors, particularly because their organizations are dealing with comparable business and financial issues. For the purposes of this article, we want to focus on the client/ agency portion of the ledger, rather than external commitment and resource reallocation reviews that are likely currently underway.

A disciplined approach, focused on contractual terms and current financial facts, will yield the greatest return as you seek to right size your marketing budget in a fair, responsible and expeditious manner. This approach also recognizes that in addition to the goal of reducing costs, companies are seeking to improve financial flexibility and limit risks and exposures. Stephen Covey wisely suggested, it is best to; “Begin with the end in mind.” Same applies now, it is best to begin with a review of current governing documents between advertiser and agency, and any year to date agency financial reporting, in order to answer this handful of straightforward questions:

  1. Does the Agency Agreement afford you the right to modify your Scope of Work and or retainer fee? If so, what is the notification requirement in your agreement?
  2. What Scope deliverables have been completed to date?
  3. Where is the Agency on their Staffing Plan commitments?
  4. What P.O.s have been issued to the agency? For open P.O.’s what is the open balance on each P.O.?
  5. Do you have a detailed Job History Report, that provides financial details for all jobs, open or closed? Can you identify which jobs have been completed? Of those that remain open what are your options to postpone, modify or cancel any of them?

Answers to questions such as these will assist in facilitating productive interactions with all stakeholders, across multiple fronts ranging from informing budget reduction and reallocation decisions to the potential impact of internal or agency-side staff reductions on financial management processes and controls and the corresponding risks.

One area that must be addressed is agency remuneration. Reductions in overall spend, scaled back Scopes of Work and revised agency Staffing Plans necessarily impact agency compensation, whether commission or fee based.

For their part, agencies have rightly taken steps to address the impact of client ad spend reductions. To date, each of the major holding companies have announced plans to reduce expenses. These reductions include; employees being furloughed or laid-off, involuntary salary reductions, the waiver of bonuses and 401k contributions, executive management taking massive pay reductions and a freeze on non-billable expenses… all designed to lower their cost base.

If your agency is on a direct labor-based remuneration program, the reduction in the agency’s direct labor and overhead costs means that the fees which you pay should be reduced accordingly. With this compensation schema, even a modest change in an agency’s cost structure can have a meaningful impact on the fee calculation.

It should be noted that the goal of the compensation review is not to wring out savings at the expense of the agency, but to adjust the fees to reflect the reality of the revised 2020 marketing and advertising budget and corresponding changes to the Scope of Work.

Marketers have a fiduciary obligation to their organizations to account for, safeguard and recall funds targeted for reduction. This can best be done working in collaboration with their agency partners, while affording those partners a high level of respect and empathy. Once the budget right sizing process has been successfully completed, all stakeholders can refocus their attention on the future, perhaps drawing motivation from retired 4-star U.S. Army General, Colin Powell who once said: “Always focus on the front windshield and not the review mirror.” 

 

 

Optimizing Client Relationships: Collaborating Effectively with Procurement

30 Apr

procurementThe “Procurement Phenomenon” at the dawn of the new millennium has morphed squarely into the Procurement Era for Marketing and Communications Services. Agency executives can no longer ignore this new marketplace reality and must now embrace, educate, and in some instances, emulate this very influential Client stakeholder.

Join J. Francisco Escobar, President & Founder of JFE International Consultants for an engaging, complimentary webinar that will take you through the evolution, definition, current trends, and best practices that will guide you and your team in optimizing relationships with client procurement teamsClick Here

Pandemic Impact on Marketing: Prudent Action Required by Advertisers

17 Mar

Action

Ad revenues are projected to contract by $20 billion this year alone, with no clear insight into the lasting impact of COVID-19 on the $690 billion global ad industry (source: eMarketer).

Setting aside the human costs of the pandemic, businesses in general and, advertisers in particular, face some startling decisions as the world implements various forms of social distancing in an effort to stem the spread of the virus.

In the U.S. alone, the NBA and NHL have suspended their seasons, the NCAA Basketball Tournament has been cancelled, Major League Baseball has delayed the start of its regular season and The Master’s Golf Tournament has been postponed. We reference sports for one simple reason, the level of 2020 marketing sponsorships. Advertising and promotional dollars invested by advertisers in these properties alone was estimated by Kantar Media to be $2 billion.

In the U.S. alone, the NBA and NHL have suspended their seasons, the NCAA Basketball Tournament has been cancelled, Major League Baseball has delayed the start of its regular season and The Master’s Golf Tournament and Kentucky Derby have been postponed. Sports is but one example and we reference it for one simple reason, 2020 marketing spend levels. Advertising and promotional dollars invested by advertisers in these properties alone was estimated by Kantar Media to be $2 billion.

Undoubtedly, advertisers will be seeking answers to the following questions as they begin their contingency planning efforts this week:

  1. Of the marketing and advertising commitments we’ve made, what can be cancelled outright?
  2. For those commitments that we’ve made in events, sponsorships or programs that have been suspended or postponed, can we recoup the impacted pro-rated investment amounts?
  3. How will media owners/sellers address upfront or volume-based commitments when it comes to media valuations in the context of advertiser rebates and or cancellations?
  4. If we pull-back on our marketing and advertising activities, what will the impact be on our annual statement of work, agency deliverables and associated fees?

Complicating this assessment for advertisers is the fact that so much of the industry operates on an estimated billing basis. Unfortunately, the advertiser’s line of sight is limited as to what percentage of estimated and pre-paid costs have been spent versus that which remains in the hands of their agents and intermediaries.

It would clearly be ideal to make go-forward decisions with a solid financial understanding when it comes to exactly how much budget can be pulled back and or quickly re-allocated. The risk of a bad decision in this area can often outweigh the costs of a delayed response. To assist in this area, marketers may want to consider conducting billing and agency fee reconciliations to help clarify where on the annual spending continuum they’re at when determining how best to approach potential budgetary reallocation decisions.

The time and cost required to conduct mid-year status checks and financial reconciliation work is nominal versus the inherent risk of making decisions without a complete picture. Importantly, engaging an independent firm to undertake these endeavors allows the marketing team members and their agency partners to focus their collective efforts on reviewing plan commitments, escape clauses and assessing resource re-allocation decisions.

Prudent, measured action in this scenario is a win-win for all parties.

Prudence is foresight and far-sightedness. It’s the ability to make immediate decisions on the basis of their longer-range effects.” ~ John Ortberg

 

 

 

 

 

Are You Overpaying for Convenience?

30 Dec

sign with the words Stop Over PayingMarketers are under a lot of stress with increasing demands on their time, constant pressure to deliver results and the seemingly never-ending challenge to accomplish more with restrained budgets.

In this context, what marketing team wouldn’t be open to turnkey solutions provided by existing agency partners, including the ability to easily access specialized skills and secure additional resources for quick-turn projects – rather than onboarding a new agency partner?

Put yourself in this situation… your external agency roster is already too broad, budgets are locked, and expanding current agency scopes of work is a challenge. Even if a new agency/ vendor might be desired it is disruptive and time consuming to work through procurement, vet possible candidates, on-board a newly selected vendor, negotiate a new statement of work, and move forward. Sound familiar?

Therefore, out of necessity Marketers in this situation often turn to a current agency partner and seeking to shift dollars from one project to another or increase staffing in order to alleviating pressure. In the process, it wouldn’t be unusual if the agency suggested engaging the services of an in-house studio/ department or an affiliate agency. The suggestion may come with the enticing proposition of being able to self-fund incremental work through savings generated by the affiliate’s involvement, or via the affiliate’s mode of remuneration (e.g. principal based media buying). Best of all, the agency may offer to handle billing for the related party and will offer to treat related party billings as though they were coming from a third-party vendor (as pass-through costs).

Problem solved. Right? Be wary.

“What is right is often forgotten by what is convenient.” ~ Bodie Thoene

Having your agency partner(s) tap an in-house resource or affiliate on your behalf, knowingly or unknowingly, as easy as it may seem, comes with serious financial risk and control issues. What is the mode of remuneration? How much is the affiliate being compensated and by whom? What mix of staff is actually being deploying on your behalf? How many hours or value is being delivered for the fees? What level of transparency do you really have into “actual” versus “estimated” affiliate fees and expenses?

If you cannot readily provide answers to these questions, your organization runs the risk of overpaying for services, and or not understanding “what you are actually buying and receiving.”

As it is, few client/ agency agreements have adequate controls to govern the appointment and utilization by an agency of an in-house, affiliated, or holding-company-owned resource. The lack of contractual guidelines leaves marketers open to negative financial impact that can weigh heavily on working dollars and expectations.

Common risk areas associated with agency use of a related party include:

  • Lack of a formal client notification/ approval requirement
  • No competitive bidding requirement
  • No rate sheet or billable hourly rate detail
  • No time-of-staff reporting
  • No job reconciliations
  • Non-transparent pricing/ margins
  • Application of unauthorized mark-ups

We certainly understand the desire by the agency community to engage their affiliates on client work and appreciate the potential benefits to the advertiser when it comes to tapping these diverse resources.

That said, experience suggests that the practice should be regulated and carefully monitored. Importantly, rules and requirements must be clearly documented in the client/ agency agreement when it comes to agency use of an in-house studio or any other related party or agency. Further, the affiliate must understand that they are subject to the same terms and conditions documented in the agreement.

Once full transparency is guaranteed, remuneration and billing rules are documented and understood, appropriate authorization practices are put in place, then tapping an agency partner’s extended resource network makes good sense.

 

 

Navigating Marketing’s Turbulent Waters

26 Oct

waypointHaving choices can certainly be a good thing. But an overabundance of options carries its own set of challenges. Thom Browne, the American designer once said that: “When people have too many choices, they make bad choices.” 

While an apt description of the $560 billion global advertising industry or not, the expansion and fragmentation of the advertising sector, fueled by rapid advances in technology has complicated things for many of the industry’s stakeholders. Consider the following:

  • In addition to traditional TV, there are over 100 streaming services available in the U.S.
  • According to Internet Live Stats, there are 1.7 billion websites on the worldwide web
  • Fast Company estimates that there are over 525,000 active podcast shows
  • Author Scott Brinker identified 7,040 MarTech solutions in his 2019 Marketing Tech Landscape
  • Agency Spotter indicates that there are 120,000 ad agencies in the U.S., 500,000+ worldwide
  • Inc. Magazine has identified 700,000 consulting firms across business functions globally

As the plethora of options have grown, so has the level of angst and uncertainty among marketing practitioners and suppliers alike. For an industry that has always prided itself on its ability to adapt to change, the current environment is somewhat unsettling.

Complicating things is the consumers growing disdain for advertising, which the New York Times profiled in a recent article entitled: “The Advertising Industry Has a Problem. People Hate Ads” in which it chronicles some of the attitudes and behaviors being exhibited by consumers that could have a profound impact on the industry. In the article, the Times referenced a recent report from Group M, which put forth the proposition that these are “dangerous days for advertisers.”

Let’s face it, there are few “tried and true” approaches that marketers can fall back on to guide their strategic and resource allocation decisions in this environment. Further, given the rate and rapidity of change from a legislative and technology perspective there are simply not that many industry guideposts to assist marketers in effectively charting a course forward or in evaluating progress.

While we believe that there will be a contraction in the supply chain, marked by a consolidation of agency brands, consulting firms, martech solutions providers and media outlets, we don’t believe that this suggests a return to simpler times.

To reduce the level of dissonance, marketers will likely seek to streamline their “world” by rightsizing their agency networks, clarifying roles and responsibilities among their suppliers, transitioning certain work in-house and taking a more considered and cautious approach to the adoption of “shiny new objects” whether related to technology or messaging options.

Given the continued focus by their C-Suite peers on marketing performance, CMOs will maintain a dual focus on driving revenues, while achieving efficiencies across their supply chain to boost working dollars as a percentage of total marketing spend. This is not an either/ or option. Recognizing this “reality” an advertiser’s agency and consulting partners can provide critical support by focusing on the identification of waypoints on the path to performance, rather than pursuing a grandiose focus on future-think outcomes. In the words of 17thcentury Japanese shogun leyasu Tokugawa:

“Let thy step be slow and steady, that thou stumble not.”

 

 

Clean Up in Aisle 12. Sponsored by…

28 May

Asian grocery noodle aisleSome of the world’s largest retailers have their sights set on garnering a larger share of the ad market. And why not. Amazon is expected to generate $11 billion in advertising revenue this year, growing to $15 billion in 2020 (source: eMarketer).

So it comes as no surprise to learn that other retailers have taken steps to shore up their ad platforms. In April, Walmart acquired Silicon Valley-based Polymorph Labs and their content sensitive digital ad serving and analytical capabilities to help strengthen its Walmart Media Group and Target is rumored to be interested in acquiring WPP’s Triad Retail Media unit to support its Roundel media division. All three retailers are actively courting advertisers and their agency partners to pitch the media and product sales benefits of their data driven advertising offerings.

On one hand, one might question why is this even newsworthy? Traditional retailers have long been in the ad business, selling advertising to the brands that they carry on in-store media, in weekly ad circulars, in price-item television and radio spots and in OOH. Thus the expanded focus on sophisticated, data-driven digital advertising solutions should come as no surprise.

That said, the potential to integrate target audience information with web browsing data, shopper data and location data to serve up relevant ads in an environment where consumers can immediately click-to-buy and receive their merchandise in a day or two has the potential to revolutionize the retail ad industry.

As retailers refine their offering and simplify platform use, they will quickly cannibalize traditional search and digital display advertising activity. Factor in the ability to tap retailers omnichannel databases, with the goal of refining ad targeting to drive digital media efficiency and the appeal of retailer digital ad platforms increases exponentially.

Consider Walmart Media Group’s pitch to advertisers; with “90% of Americans shopping at Walmart every year” and “160 million visitors” in-store and online every week, Walmart Media Group helps brands to “reach more customers at scale and measure advertising effectiveness across the entire shopping journey.” 

On the surface this evolution of retail advertising certainly appears to be a win-win for the industry. Retailers benefit from a new, high margin revenue stream that is largely technology driven, relying on automated platforms. For the agency community, specialist agencies are already coming to the fore that focus exclusively on assisting brands in assessing and realizing opportunities associated with these retailer digital ad platforms. And, from a brand perspective, serving up targeted ads in a brand safe, fraud free environment with the potential to immediately convert consumer interest to sales is a compelling value proposition.

Perhaps the greatest challenge for manufacturers as more retailers join the fray, will be to balance the ongoing need to strengthen their brands and for some, to build their own direct-to-consumer offerings, while funding their participation in retailer digital ad platforms. Make no mistake, while a brand may be able to build a solid business case for investing with their retail partners, retailer leverage over brands to influence whether or not they buy-in and at what level will be real as the balance of power pendulum continues to swing in favor of omnichannel retailers.

 

 

 

 

4 Appropriate Limitations On Agency Remuneration

12 May

fourIt is our belief that agencies, consulting firms, contractors, employees and yes, even auditors, are entitled to earn as much money as they can in return for services rendered. Further, we are agnostic when it comes to the mode of remuneration, whether those fees are predicated on a resource based, outcome-based or value-based pricing model.

We also recognize that client organizations have the intelligence and wherewithal to negotiate professional services agreements that satisfactorily address both their needs and their budgets.

That said, experience has taught us that sound Client/Agency agreements should also place limitations on the revenue earned by an advertiser’s agency partners. In short, agency revenue should be limited explicitly to those forms and amounts of revenue that are intended and accordingly defined within the agreement, or otherwise agreed to in writing by the client. Period. The end.

Unfortunately, in our contract compliance audit practice, it is too often that we find agreements which don’t effectively restrict agency revenue to that which has been negotiated and memorialized in the contract between the parties. This can lead to misunderstandings and in rare cases bad behavior on the part of professional services providers seeking to unjustly optimize their revenue yield.

Below are four examples of appropriate contract limitations for advertisers to place on agency revenue, once the remuneration program has been negotiated:

  1. An agency should not be allowed to earn money on the handling or holding of client funds. Examples of this could include the earning of interest or “float” income and rebates or bonuses earned from the use of corporate credit or purchase cards to pay third-party vendors for purchases made on behalf of a client.
  2. All expenses, including those for third-party commitments and out-of-pocket expenses, should be billed on a net basis, at the agency’s cost, with no mark-up allowed.
  3. Discounts, rebates or any other benefits earned by the agency, its holding company and or related parties tied to the investment of client funds and or prompt payment to third-party vendors should be remitted back to the client upon receipt of such benefit.
  4. For direct labor based fees, the agency should not be allowed to charge for employee hours in excess of the full-time equivalent (FTE) standard (e.g. 1,800 hours per annum). Quite simply, once the FTE threshold has been met, the agency has fully recouped employee direct labor and overhead costs and realized the agreed upon profit margin.

One further measure of protection for advertisers is the addition of contract language requiring the agency to be transparent, to fully disclose all transactions and the flow of client funds along with the presence of any rebates or incentives received by the agency directly or indirectly.

Please note, that the “limitations” listed above are not meant to restrict an agency’s ability to earn a fee that is reflective of their delivered value. The intent is simply to limit agency revenue to those sources agreed to by both parties, thus providing the requisite protection to the advertiser.

“Confidence… thrives on honesty, on honor, on the sacredness of obligations, on faithful protection and on unselfish performance.” ~ Franklin D. Roosevelt

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