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How is Your Media Agency Making Money in 2022?

17 Feb

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

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

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

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

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

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

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

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

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 Incremental services outside of Scope of Work – These are often the result of out-of-date contracts, and can commonly comprise things an advertiser might expect to be included in the contract, such as Quarterly Business Reviews, competitive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

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

Here’s our checklist for advertisers:

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

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

Time & Material: The Best Mode of Agency Remuneration?

30 Jan

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

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

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

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

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

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

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

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

How Will Post-Pandemic Employee Compensation Impact Your Agency Fees?

26 Aug

Virtual OfficeWith COVID-19 vaccination rates increasing, organizations across the globe are evaluating whether and or when their employees will be required to return to the office. As part of the consideration process, many are deliberating on whether to allow all or select employees to continue to work remotely.

The question being assessed by employers considering extending remote work privileges is, “How will this decision impact employee compensation?”

Many organizations are weighing different pay scales for remote workers. As an example, Google is planning to adjust employee compensation based upon the local market wages where an employee works from. Which certainly seems like a reasonable trade-off.

By way of example, in a recent article by Reuters, which had seen Google’s “salary calculator,” an employee living in Stamford, CT, which is an hour from New York, would earn 15% less if they opted to work from home, rather than commuting into New York City. Of note, Google is but one Silicon Valley company that has implemented location specific compensation models for employees living and working in less expensive areas.

As advertising agencies evaluate their post-pandemic approach to the use of flexible staffing and or remote workers, it stands to reason that while some will opt for location agnostic pay models, others may implement location specific remuneration programs for remote workers. In the case of the latter, the obvious question is, “How will cost-of-employment adjustments impact the fees charged to advertisers?”

Will those on commission-based fees adjust rates downward? Will those employing direct-labor-based compensation programs reduce bill rates?

It is certainly reasonable to assume that if an agency reduces its salary and overhead expenses, that the fees charged to advertisers should be reduced accordingly. That said, it is likely that any adjustment to agency bill rates will need to be the result of collaborative discussions, initiated by the advertiser, between themselves and their respective agency partners.

At a minimum, location-based employee compensation adds an interesting dimension to the ongoing quest for a fair and balanced agency remuneration system.

What Is the Basis for Variable Commission Rates?

15 May

dreamstime_m_35343815Until the late 1980s, agency remuneration models that were based upon commissions charged on ad spend were typically universally applied across media types. As alternative media channels began to expand, agencies began to charge variable commission rates, based upon media type.

The question to be asked is “Why?” and, is this approach still appropriate?

Presumably, planning, buying, and monitoring certain types of media required more time on the part of agency personnel and or certain experience levels, thus the higher rates. It is fair to question whether or not that premise still holds true. The most obvious area to question is the higher commission rates charged for programmatic advertising, which utilizes automated technology to execute and monitor media buys as opposed to traditional, manual buying methods.

Unfortunately, advertisers that employ a commission-based agency pay-model typically don’t see agency staffing plans or time-of-staff reporting. Thus, the ability for an advertiser to assess the resource level required to plan and place its media mix is limited at best.

Another concern regarding the variable commission rate pay-model is the potential for the higher rates charged for certain media types to bias an agency’s media mix recommendations. The possibility that an agency would approach the allocation process with the goal of optimizing its revenue, rather than the advertiser’s media investment certainly exists.

So, what should advertisers do? The answer is straightforward. Require their media agency partners to submit formal staffing plans, with an estimate of hours and utilization rates by employee/ position along with their annual commission rate schedule… just as they would with a retainer or labor-based fee compensation method. Further, advertisers should require agencies to provide monthly time-of-staff reporting, so that both parties can assess the resource levels, staff seniority and experience required to execute the scope of work.

With clear insights into an agency’s staff investment, advertisers can now knowledgeably adjust their remuneration programs, if needed. The goal, as always, is to equitably compensate media agency partners to effectively plan and execute an advertiser’s media program, while eliminating bias and optimizing working media levels.

Advertisers would be wise to heed the words of Oliver Markus Malloy, the German American novelist and to analyze the impact and efficiency of their variable commission rate compensation programs more closely:

“We live in this bubble of ignorance. Most people know nothing about history, or the historical context of the traditions they still follow today. People do things without knowing why they’re doing them.” 

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

Agency Compensation: The “More for Less” Trap

31 Aug

More for LessFor many marketers, cutting agency fees is an obvious target when it comes to meeting budget reduction goals. The reasons are understandable given the need to balance achieving in-market results and preserving or improving working media levels, while achieving the desired savings target.

A factor which clouds this issue, is the general level of uncertainty among marketers as it relates to the overall competitiveness of the fees being paid to their agency partners. Are we paying our agencies too much? Or are we already at a competitive remuneration rate? Without being able to objectively address this item, there will likely be internal pressure brought to bear from finance and or procurement to reduce agency fees as part of the budget right-sizing initiative.

It should be noted that we believe in regularly reviewing agency fees, assessing their competitiveness vis-à-vis the market and in looking for ways to optimize a marketers return on its agency fee investment. That said, we also firmly believe in compensating agency partners fairly and in proportion to both the agreed upon scope of services and the agency’s ability to contribute to the attainment of an organization’s marketing and business goals.

Experience has taught us that organizations which focus solely on reducing agency fees, without adjusting the scope of work and or the agency staffing plan upon which those fees were based, can negatively impact agency relations and jeopardize the quality of the work generated by the agency. Further, we have found that when an advertiser involves its agency partners in the budget reduction process there is a greater likelihood of successfully addressing the near-term goal, with the least risk of negatively impacting brand sales.

While it should go without saying, we will say it any way, advertisers must adjust their expectations downward with regard to key agency deliverables in the wake of a budget reduction. It is not an agency’s responsibility to fund the advertiser’s savings goal. As it is, budget reductions create financial challenges for agencies in the form of reduced levels of revenue, which in turn create staffing and resource constraints that they must deal with. Thus, asking an agency to reduce its negotiated overhead rate or to lower its profit percentage to preserve planned deliverables (e.g. do more for less) is simply not appropriate.

There are specific areas that an advertiser might consider, in addition to right-sizing the scope of work to align with the revised marketing budget, which can reduce agency time-of-staff requirements and therefore fees:

  • Review the creative briefing and approval processes. Streamlining and reforming current practices in these areas can reduce the number of steps and therefore the number of agency personnel involved in the creative development process. This in turn can lower the level of “re-work” required, yielding meaningful time savings.
  • Extend current campaigns, rather than developing new approaches, leveraging current creative assets and forgoing the investment in both hard costs and agency fees required to conceive of and launch new creative campaigns.
  • When it comes to the creation of regional versions of creative or the production of collateral materials, embrace an “adapt” versus an “origination” mindset, optimizing existing content, rather than spending time and money to re-create the wheel. The age old acid test of “nice” or “necessary” is the best filter to apply in this area.
  • Reduce the number of media plan revisions over the course of a year. Establish clear goals, implement compelling and relevant strategies and tactics and “work the plan,” rather than revising and re-selling plans.
  • Assess the number of meetings, their frequency and the number of agency personnel required to attend. Attendance, travel time and expense and meeting prep time reductions can yield meaningful savings for both client and agency.
  • Work with the agency to adjust its staffing plan, evaluating both the number and level (e.g. experience) of personnel required to deliver against the revised scope of work.

Finally, once the planned reductions have been identified, consider adding or enhancing the agency’s performance bonus, with a large portion of the incentive compensation tied to in-market results. This is an excellent way to let the agency know that your organization understands both sides of the “share the pain, share the gain” partnership mantra. Taking this approach will deliver on the budget reduction mandated by the organization, without negatively impacting relationships with the organization’s agency network.

 

It’s Only Money…

5 Jun

digital mediaThere was one particularly startling revelation that came from the ANA’s recent Agency Financial Management conference in San Diego. During the presentation of this year’s “Agency Compensation Trends” survey results it was noted that the ANA found that almost half of the members it surveyed had not reviewed the findings of the ANA’s 2016 Transparency study.

Think about that. If an organization did not review the Transparency study’s findings, that means that there must not have been any resulting internal dialog with or among marketing’s C-Suite peers, no direct interaction with their agency network partners, no review of existing Client/Agency contracts, no improvements in reporting and controls in which to illuminate how an advertiser’s funds are being managed.

This, in spite of the level of trade media coverage regarding transparency issues ranging from rebates, discounts and media arbitrage, to the Department of Justice investigation into potential ad agency bid rigging practices or the level of ad fraud, traffic sourcing or non-disclosed programmatic fees on both the demand and sell side of the ledger.

There is only one conclusion that can be drawn from this remarkable revelation…many marketers simply don’t care how their organization’s advertising investment is being allocated or safeguarded. Unfortunately, we regularly see the ramifications of this attitude of indifference in our contract compliance audit practice:

  • Client / Agency agreements that haven’t been reviewed or updated in years
  • Failure among clients to enact their contractual audit rights with key agency partners
  • Limited controls regarding an agency’s use and or disclosure of its use of affiliates
  • No requirement for agency partners to competitively bid third-party and affiliate vendors
  • Lack of communication to media sellers regarding ad viewability standards
  • Failure to assert an advertiser’s position on not paying for fraudulent and non-human traffic
  • No requirement for publishers to disclose the use of sourced-traffic
  • Incomplete instructions on buy authorizations to media vendors, minimizing or blocking restitution opportunities
  • Poorly constructed media post-buy reconciliation formats that lack comprehensive information and insights

Interestingly, there have been many positive developments from key industry associations such as the ANA, 4A’s, IAB and public assertions from leading marketers such as P&G and L’Oréal to further inform and motivate marketers on the topic of transparency accountability. Yet, given the materiality of an organization’s marketing spend and the publicized risks to the optimization of its advertising investment, many organizations have not yet taken action, tolerating the risks associated with the status quo. As the noted British playwright, W. Somerset Maugham once said:

Tolerance is another word for indifference.”

The failure to proactively embrace transparency accountability can pose perilous risks to an organization’s marketing budget which in turn directly impacts its company’s revenue. Many would rightly suggest needlessly.

In these instances, the fault for the increased level of attendant financial risk, fraud and working media inefficiencies lies squarely with those companies that have adopted an attitude of indifference toward these very real proven threats. One cannot blame an ad agency, production house, tech provider, publisher or media re-seller for taking advantage of the status quo and acting in manners that, while not in the best interest of the advertiser, are not expressly contractually prohibited.

The good news is that advertisers can address these issues head-on in a quick and efficient manner, mitigating the risks posed by transparency deficiencies. It all begins with a review of existing Client/Agency contracts and engaging one’s agency partners in dialog regarding the adoption of industry best practice contract language to facilitate an open, principal-agent relationship. The Association of National Advertisers (ANA) has a wealth of information on this topic and can also recommend external specialists to assist an advertiser with agency contract development and or compliance auditing.

Interested in safeguarding your marketing investment? Contact Cliff Campeau, Principal at AARM | Advertising Audit & Risk Management at [email protected] for a no-obligation consultation on this topic.

How Well is Your Agency Compensated?

30 Jan

do advertisers get what they pay forThe answer to this oft discussed question is easy; “If you’re an agency CFO, not well enough. If you’re a client-side finance executive the answer is likely too well.” Thus it is no surprise that agency remuneration remains a hot topic as we enter 2017.

Make no mistake, both agencies and advertisers alike want to address this topic in a manner that works for both sides. So why is this such a difficult item to resolve? There are three reasons:

  1. There are no industry norms in this area and haven’t been since the days of a standard 15% commission. The net result of this is that there are few benchmarks for advertisers when establishing remuneration guidelines. No standard commission rate ranges by media type, no normative data on agency overhead rates and no clear standards for assessing agency direct labor rates by position and little insight into agency direct margins. This makes it difficult for advertisers to gain a comfort level into the relevance and competitiveness of the rates that they are paying their agency partners.
  2. While agencies want to be compensated fairly, they remain hesitant to fully disclose the financial dynamics that drive their businesses and impact account profitability. This may have something to do with the contribution of non-transparent revenue sources and or the fact that actual direct labor and overhead costs simply don’t allow agencies to optimize their fee income.
  3. Agencies generate revenue by selling time-of-staff. Assembling a team, calculating utilization rates and full-time equivalent standards and applying a multiplier to direct labor costs to cover overhead and a desired profit margin. Whether these variables are transparent to a client or not, this is the basic approach for the pricing of agency services. It is important to understand this dynamic, because very few, if any, client/ agency relationships are able to directly link remuneration to SOW outputs or deliverables.

As an aside, the one collaborated piece of information that we do have specific to compensation relates to acceptable profit margin ranges. The 4A’s and ANA’s compensation surveys have suggested that an acceptable profit margin range to both clients and agencies is between 14% – 17%.

So, without an industry guideline to follow, advertisers and agencies will likely continue to negotiate remuneration schema the same way that they have over the years. Both parties will look at the relevancy of the prior year’s billable rates and SOWs, fine tune those items and adjust the overall fee up or down accordingly.

If both parties are looking for a better balanced, more transparent approach to establishing a remuneration program, we would suggest the following steps:

  • Negotiate a tight, descriptive statement-of-work (SOW) which clearly identifies client expected agency deliverables. An obvious, but oft overlooked component to crafting a fair and balanced remuneration program.
  • Allow the agency to establish a staffing plan, reflecting the resources required to execute the SOW. Review, discuss resource levels in the context of hours by department/ function and the level of experience necessary (junior vs. senior level staffer) based upon the deliverables.
  • Independently review and validate the agency’s direct labor costs for the agreed upon staffing plan. This will give clients confidence in the accuracy of the agency’s labor expense, without divulging employee salaries.
  • Negotiate a definition of overhead and those items that should be included as part of these indirect costs/ charges.
  • On a periodic basis, have the agency’s financial accounting firm verify the overhead charges specifically attributable to the management of the client’s account.
  • Negotiate a profit margin to be applied to the sum of the agency’s direct labor costs plus overhead assessment.
  • Negotiate a bonus/ malus incentive compensation program if desired. The goal should be to maintain a simple, straight forward set of criteria that allows both parties to efficiently track progress against goal attainment.
  • Reconcile fees based upon actual agency direct labor costs at the end of each contract year.

In this context, we believe that advertisers should focus on operating agency account level costs and profitability and not focus on agency holding company financials.

Why? Because at a holding company level, profit represents the difference between agency client revenues (from media commissions, mark-ups, fees or other forms of client compensation) and holding company operating expenses. As we know, the level of centralized support provided to each operating agency will vary from one agency group to another, from one year to the next. Further, agency holding company expenses include items ranging from merger and acquisition expenses to re-branding costs, technology development and business development… categories that don’t directly benefit a client.

In so doing, while it may be difficult for advertisers to assess how “competitive” their agency compensation program is relative to the market, they will have the peace of mind in knowing that they have secured a fair and transparent remuneration program that works for their organization and for their agency partners. As American educator, Michael Pollan once said:

“I think perfect objectivity is an unrealistic goal; fairness, however, is not.”

Did You Trust the Banker When You Played Monopoly?

26 Jan

Monopoly

If you were a “gamer” (in the days when board games were the norm) that implicitly trusted both the banker and the individual who controlled the distribution of the real estate properties when playing Monopoly, than this article isn’t for you.

On the other hand, if you are one who turns a wary eye toward those in control of assets, particularly your assets, then we would like to pose one question: “Do you know what happens to your company’s marketing funds once checks have been distributed to your agency partners?

In our experience, few if any individuals within an advertiser organization have a clear perspective on the disposition of approved funds once an agency invoice has been paid. The primary reason for this is that the industry still operates largely on the concept of “estimated” billing and the pre-payment of funds from the advertiser to the agency. Over the years the resulting transparency gap has been compounded by the fact that few if any advertisers require their agencies to provide copies of all third-party vendor invoices with their final project or campaign billing. Most advertisers have document retention and audit rights clauses in their agreements, but few act upon these contractual rights.

As contract compliance auditors, we review thousands of agency bill-to-client invoices as part of our hard copy vouching and testing process. In general, the lack of specificity contained on these invoices, particularly when one recognizes that there is often little accompanying back-up can be startling. For example, imagine coming across an invoice for the production of television commercials for a major seasonal advertising campaign that simply stated; “Holiday Campaign TV Production – $785,000.” Was that for one commercial or six? Were these :15 second spots or :60’s? Is this for a U.S. campaign or a global effort? Apparently, answers to those types of questions aren’t always required to process payment for that invoice… as long as the invoice amount doesn’t exceed the approved purchase order, if there is an approved purchase order.

Do you know if your agencies are abiding by the contractual guidelines for competitively bidding jobs? Do you know whether or not the agreements with the agencies in your network even requires three bids or at what spending threshold? More broadly, do you know which of your third-party vendors are actually related to your ad agency partners (i.e. shared financial interests, investors or corporate lineage)? If so, was this disclosed in advance of work being awarded to those related parties?

If you’re like most advertisers, you are billed in advance of production or media commitments being made on your behalf, or at least prior to the activity occurring. Likely, your company pays that invoice within 45 days of receipt. Any idea how much time elapses prior to your third-party vendors being paid or whether their billing to the agencies is scrutinized for accuracy? Let’s assume there are credits issued by third-party vendors or approved funds that are not spent by the agencies, how long does it take for the agencies to identify and return those funds to you? Who is involved in determining the disposition of those funds? Marketing? Or are checks cut and sent to finance?

Do you compensate one of more of your agency partners based upon a direct labor model, with estimated monthly fees tied to a contractual staffing plan predicated on the hourly time investment of specific individuals? How often to you see time-of-staff reporting from the agencies? Monthly, quarterly, annually, ever? Have those fees ever been reconciled to each agencies actual time investment? Have you ever tested your agencies time-keeping systems to assess the accuracy of the reports that may be shared with your team?

We have good news for you, news that can provide answers to each and every one of these questions. There is a proven means of closing this transparency gap and providing your organization with the processes and controls necessary to assess the disposition of marketing funds at each step of the advertising investment cycle.

It is called agency contract compliance auditing, it is an industry best practice and it will provide insights, answers and recommendations that will benefit an advertiser’s agency stewardship efforts and their agency partners’ financial management performance.

If you still have some apprehension about this complex ecosystem called marketing, consider the words of former Supreme Court Justice, Oliver Wendell Holmes when weighing the pros and cons of a contract compliance audit; “When in doubt, do it.”

Interested in learning more about safeguarding your firm’s marketing investment? Contact Cliff Campeau, Principal with AARM | Advertising Audit & Risk Management at [email protected] for a complimentary consultation on how to implement or enhance your organization’s marketing accountability initiative.

 

 

 

Clients Paying Too Much, Agencies Too Little

13 Oct

agency compensationAs one who has experience on both the agency and client side, it was with great interest that I read Shareen Pathalk’s article; “Anatomy of an Agency Talent Crisis” on Digiday.  

Before we examine the talent challenges identified by the author, let’s take a look at the current agency compensation landscape.  As advertisers and agency practitioners know, agency remuneration practices have clearly migrated from a commission based system to a fee based model, which is now employed in approximately three out of every four client-agency relationships (source: ANA Agency Compensation Survey, 2013). 

Further, a majority of those relationships utilize a labor-based rather than output based or fixed fee approach.  Thus, one way for agencies to optimize revenues involves deploying more experienced, personnel with higher bill rates on client assignments… at the expense of less experienced individuals compensated at a lower rate.  In labor-based remuneration systems, higher bill rates are directly correlated with higher compensation levels.

This dynamic, which emphasizes “experience” is at least partially responsible for one of the advertising industry’s challenges… attracting fresh talent.  Why?  Entry level agency salaries, which have always been low relative to other potential career endeavors, are failing to entice new graduates to pursue a career in advertising, even though there is much about the industry which appeals to them.  As support, the author references the ANA’s 2014 Employee Compensation survey which found that “most entry level salaries” were between “$25,000 – $35,000.  Further, the author suggests that much of the work available is “either too temporary or too high-level for the applicant pool.” 

For an industry which relies so heavily on people, it is imperative that agencies find a way to address this dynamic in order to attract their fair share of intelligent, energetic college graduates looking for meaningful career opportunities.  So what’s stopping agencies from paying better wages for entry-level talent?  According to Nancy Hill, President, CEO of the 4A’s; “The benchmarks are in a place where we can’t raise our salaries.”   While it is not entirely clear which “benchmarks” Ms. Hill is referring to, one potential concern is likely the agency communities desire to maintain their cost competitiveness in the eyes of the advertisers. 

While this has some merit, direct labor cost is but one component of an agency fee and the corresponding bill rates which it charges advertisers.  Overhead rates for example can vary greatly from one agency to another often running between .85 and 1.25 times an agency’s direct labor cost.  Additionally, profit margins used to calculate base fees also differ from one shop to the next.  

For the sake of example, let’s look at two hypothetical scenarios.  Agency #1 is offering entry level media planners $28,000 per year in salary and presently uses an overhead multiplier of 1.25 x direct labor and a profit margin of fifteen percent applied to the combination of direct labor and overhead.  Based upon an eighteen-hundred hour annual full-time equivalent level, this would result in a fully-loaded hourly rate of $40.25 for that media planner.  Agency #2 is offering entry level media planners $35,000 per annum, uses an overhead multiplier of .85 and a profit margin of seventeen percent.  In this latter example, the fully-loaded hourly rate would be $39.27. 

In our experience as agency contract compliance auditors, working with several of the world’s leading advertisers, we have a breadth of experience in reviewing agency remuneration practices.  As such, there are two things which we can share.  First and foremost, in our opinion the difference in bill rates in the aforementioned example is imperceptible from an advertiser’s perspective.  This is largely because most labor based compensation agreements utilize functional or departmental billing rates, rather than actual direct salary costs as a base for calculating fees.  Ask any advertiser when they saw a billable hourly rate of less than $55 for an assistant media planner, which is still significantly higher than either of the fully-loaded rates referenced above.  Secondly, there is a great deal of subjectivity utilized by agencies in establishing overhead rates and much of the methodology employed to calculate those rates is not transparent to the advertiser or subject to independent review.   

The net take away… agency’s have a choice when it comes to talent recruitment, development and retention.  The fact is, there are no advertiser imposed constraints or industry benchmarks which restrict an agency’s ability to rethink entry level salaries or in limiting what an agency spends on training and development of their new hires.  Perhaps the only impediment is the lack of creativity currently being demonstrated by many in the agency community when it comes to talent management.

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