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4 Keys for Optimizing Direct Labor Based Remuneration Systems

9 Jul

punch clockAttorneys do it. So do accountants, consultants, architects and engineers.

What are these firms doing? Tracking billable hours. Why? Because time and material based compensation remains the predominant method of billing for professional services firms and this includes advertising agencies. In fact, according to the Association of National Advertisers’ 2017 “Trends in Agency Compensation” study, labor-based fees remained the “most used” method of remuneration for marketers of their ad agency partners.

There are many inherent benefits to direct labor based compensation systems from both an agency and advertiser perspective including simplicity and clarity, particularly for marketers utilizing multiple agency partners that may be collaborating on overarching campaigns or playing specific roles on comprehensive, integrated projects.

We believe there are four key steps to successfully implementing and managing direct labor based remuneration systems:

  1. Establishment of a clear, concise Statement of Work (SOW), with specific deliverables and estimated timelines.
  2. An agency Staffing Plan that identifies the individuals that will be assigned to the client’s business along with information detailing their department, title, bill rate and utilization rate.
  3. Build-up detail supporting the agency’s suggested billable hourly rate (i.e. direct labor, overhead, profit margin) to accompany the agency’s annual fee proposal.
  4. Timely, accurate time-of-staff reporting to facilitate the monitoring of burn rates and to support the fee reconciliation process.

While there are contractual language considerations that will also help to insure transparency and establish client and agency expectations, including limiting agency revenue to that which is agreed upon as part of the remuneration program, we want to focus our thoughts and recommendations on tracking billable hours.

Aligning advertiser expectations with agency resource requirements is the basis for any compensation system. Thus collaborating on an annual Statement of Work, complete with detailed deliverables and timelines is a critical first step in the process. The resulting document will inform the agency’s efforts to construct its Staffing Plan, which in turn will form the basis for its fee proposal.

Experience suggests that conversations should be had in advance of the agency’s development of its Staffing Plan. Specifically, the parties will need to agree upon the basis for the annual full-time equivalent (FTE) calculation and the rules related to the application of agency employee time in excess of the FTE standard for fully-utilized employees and how utilization rates are impacted by an employee’s “total” annual recorded time. As it relates to FTE standard, there is no normative data for the advertising industry. That said, an 1,800 to 1,875-hour standard (35 hours per week, multiplied by 50 weeks per year) represents a typical FTE range.

Once the SOW and Staffing Plan have been agreed to, reviewing and coming to agreement on the basis for the proposed billable rates is the next step in the fee negotiation process. The basic formula for calculating a billable hourly rate is as follows:

Billable Rate = (Direct Labor Costs + Overhead + Profit) / Total Projected Annual Hours

Ideally, billable hourly rates would be calculated by employee or by function, without revealing specific employee salary detail. As a fall back, calculating billable hourly rates by department are clearly preferable to a blended hourly rate for the agency as a whole. Thus for an agency associate with direct labor costs (salary + benefits) of $100,000 per year, an overhead factor of 1.0 x direct laborpunch clock, a target profit percentage of 15% and an 1,875 FTE standard, the billable hourly rate calculation would look as follows:

Billable Rate of $114.67 = ($100,000 + $100,000 + $15,000) / 1,875 hours                                                                                                                                             

From a reporting perspective, monthly time-of-staff reports detailing “actual” versus “planned” hours by individual are ideal to serve as the basis for regular discussions between client and agency on burn rates and what, if any, course corrections are required. The goal of the reporting and resulting conversations are to ensure that there are “no surprises” that would adversely impact either party. A formal time-of-staff reconciliation should be conducted annually, preferably by an independent third-party to validate that the time reported by the agency is consistent with the time in the agency’s time-keeping system.

Following the aforementioned steps will help protect the interests of both client and agency and will lead to a compensation program that is both transparent and fair.

Media Agency Estimated Billing Should Be Eliminated

24 Oct

accountspayableLet me start by saying that Advertising Agencies are not banks and should never be asked to settle vendor obligations, made on behalf of clients, with their own funds. That said, the long-standing practice of “estimated billing” is a relic of a bygone era and one which should be abandoned.

In a day and age where the electronic transfer of funds is commonplace and where most media owners invoice agencies based upon “actual” activity, following the month of service, the notion of an advertiser being billed upfront on an estimated basis is no longer necessary for the vast majority of media being purchased. From an advertiser’s perspective, this antiquated system results in burdensome levels of paperwork, drives up accounts payable processing costs, needlessly extends the invoice reconciliation process, restricts client use of funds, results in lost interest income opportunities for the advertiser and perhaps one of the less apparent benefits, eliminating the apprehension/reliance on an agency to accurately track and timely reconcile such estimated billing.

Can anyone cite a single benefit that accrues to an advertiser from this approach? If an advertiser were to purchase inventory directly from the media seller they would pay based upon actual costs, so why should it be any different when purchasing media via a client-agent relationship?

The move to final billing has but one drawback, to one stakeholder… the loss of agency float income on pre-billed activity. While conceptually we don’t believe that it is appropriate for an agent to make money on the use of client funds, we do understand that eliminating this non-transparent source of revenue would have a negative impact on an agency’s bottom-line. This, however, should not be the concern of the advertiser community, as this was never the intent of the estimated billing process to begin with. After all, it is the advertiser’s money and as such, they should be the only stakeholder to benefit from access to and the use of those funds.

Transitioning to actual billing makes good sense from both a treasury management and a transparency accountability perspective. It is more efficient, can reduce payment processing costs and can potentially improve days payable outstanding performance for the media seller.

As it is, advertisers generally have little to no insight into the time gap between remittance of their funds to their agency and in turn the time it takes for the agency to reconcile media activity and remit payment to an advertiser’s third-party media vendors. If client-side CFO’s were aware, there would certainly be significant interest in reforming the estimated billing system and the stewardship of an advertiser’s media advertising investment.

When it comes to financial management within the advertising sector, we have always been cognizant of the words of Robert Sarnoff, past president of NBC and RCA in the mid-twentieth century:

“Finance is the art of passing currency from hand to hand until it finally disappears.” 

Interested in learning more about improved financial management practices across your marketing agency network? Contact Cliff Campeau, Principal at AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on this topic.

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 ccampeau@aarmusa.com for a no-obligation consultation on this topic.

Improving Analysis With Analytics

28 Mar

digital trading deskBy Rich Lanza

In Marketing, with thousands or millions of transactions (especially in digital) occurring each year, analysts have an inherent need to select population samples to draw conclusions and make decisions, or do they? Sampling is performed because it often appears impossible to gather data from the entire population, but what if you the analyst could gather 100% of the requisite data for a given business process?

A good point of reference is evidenced in the movie, Imitation Game. The actors were trying to stop a device named Enigma that changed its code every 20 minutes. There were 159 million, million, million possible Enigma settings, and each one needed to be tried. If 10 people checked one setting a minute for 24 hours, every day, how many days do you think it would take to check each of the settings? Well, it’s not days, its years. 20 million years. To stop Enigma, the team would have had to check 20 million years worth of settings in 20 minutes.

It is mathematically impossible to manually test and provide assurance for every marketing transaction or media buy. Understandably, it may seem easier to simply pick a small sample and rely on statistics to extrapolate trends, ROI and error rates. However as analysts, as in the movie, we measure activity and outcomes and we rely on ongoing computerized assistance. In our current age of “Big Data” and advancement of digital and social marketing, too many still rely on antiquated approaches, sampling and manual reviews. It is almost as if we use sampling as a more simplistic means of testing a business process, even if a better solution is staring us right in the face.

That solution is to analyze as much of the business process data with analytics. This methodology can be generally referred to as 100% auditing (or data mining). Data mining allows the analyst to visualize and understand financial accounts. It is not a far stretch to imagine at least half of the current procedures where sampling is applied could be turned into an analytic. Please note that many times a business process may not have computer readable data but isn’t that an issue unto itself?

100% auditing is utilized by AARM in working with large advertisers and their agency partners. When a client engages a 100% sampling methodology to continually monitor marketing expenditures, the investment pays dividends in all future years.

Once established, analytic-enabled testing is completed in seconds and can be scheduled to run on a recurring basis. This is much faster than any sampling approach and, as in the Imitation Game, requires very little human resource requirement. Rather, the analyst can be focused on the exceptions and interpreting of results to help improve the marketing process. At AARM, years ago this systematic capability was developed, and named AArmor AnalyticsTM. Our clients have embraced 100% auditing to monitor efficiency and effectiveness of their vast array of marketing expenditures and the financial practices.

Interested in learning more about the use of AArmor AnalyticsTM at your company? Contact Don Parsons, Principal at AARM | Advertising Audit & Risk Management at dparsons@aarmusa.com for more information.

Two Words That Represent Accountability’s Biggest Obstacle; “Who’s Budget?”

24 Feb

Accountability FinalMany organizations want to implement an accountability program. Virtually all Internal Audit directors would like to extend that accountability initiative across the enterprise and most certainly want to provide coverage for categories with a significant spend, such as marketing.

Yet, in spite of the good intentions, U.S. companies have been slow to embrace independent compliance and performance auditing of their marketing supply chain partners. Ironically, the reason emanates from the answer to a very simple question, “Which departmental budget will be tapped to fund the initiative?” More often than not the answer to that question, in the context of a marketing and advertising spending review, is “Marketing.”

Given this dynamic, it is often a challenge for companies to implement an “unbudgeted” audit project once the fiscal year planning process has been completed, even if results dwarf its cost. Additionally, while many CMO’s have come to value the feedback and insights provided from the independent testing of supplier contract compliance and performance, there are others that still do not embrace audit or accountability initiatives. As a result, unless mandated by the C-Suite, independent accountability testing may never make its way into the budget, causing a huge assurance gap governing that company’s multi-million marketing investment.

There is good news however for procurement, finance and audit executives seeking to remove these obstacles and manage associated risks. Namely, that in addition to the opportunity for process improvements, performance monitoring, contract language enhancements and better controls, these engagements yield hard dollar returns resulting from various financial true-ups and future savings opportunities; far exceeding the fees necessary to conduct the review.

Positive financial returns aside, the costs associated with an audit of an advertiser’s agency network partners is miniscule when compared to the tens of millions or hundreds of millions of dollars being expended in this area.

Perhaps best of all, independent assessments of marketing agency compliance and third-party vendor billings sets a tone of the desired financial stewardship and accountability behavior that the client would like to see employed across its marketing supplier base. In turn, the very act of performing an independent audit, provides a powerful incentive for an agency to diligently self-police itself by tightly adhering to the processes and guidelines agreed to and memorialized in the Client/ Agency Master Services Agreement. In the words of the noted English author and speaker, Simon Sinek:

Actions speak louder than words. All companies say they care, right? But few actually exercise that care.

Interested in learning more about fielding a marketing agency network accountability initiative at your company? Contact Cliff Campeau, Principal at AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com to for a complimentary consultation on the topic today.

 

 

 

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 ccampeau@aarmusa.com for a complimentary consultation on how to implement or enhance your organization’s marketing accountability initiative.

 

 

 

Advertisers, Did You Get What You Paid For?

2 Dec

contract compliance auditingGiven the complexity and opacity of the advertising ecosystem, at least from a billing and reconciliation perspective, it can be very difficult for an advertiser to assess if their organization received full value for their advertising investment.

Consider that most agency billing to clients is done on an estimated basis, that supporting invoice detail is often limited and that seldom is 3rd party vendor invoice documentation contained with an agency’s billing to the advertiser. Not to mention the fact that production jobs can take several months to close, that media post-buy analyses typically occur three to six months after a campaign’s initial month-of-service billing or that agency time-of-staff summaries may only be provided semi-annually or at year end… if at all. 

Many advertiser/ agency agreements provide guidelines to help mitigate some of the concerns that may arise with regard to the notion of receiving full budgetary value.  Document retention clauses, expense billing detail requirements, accounts payable timing parameters and audit rights language are examples of the terms and conditions which are negotiated into agreements to safeguard advertisers. Ironically, very few advertisers take advantage of these contractual protections to conduct detailed reviews of the billing and financial stewardship portion of their respective agency partners’ performance.

However, pressure has begun to mount from stakeholder groups within client organizations that are not directly involved in the agency relationship management loop to provide a higher level of accountability when it comes to the disposition of their marketing funds.  Further, functions such as finance, internal audit and procurement have even stepped up to provide funding and or personnel support to help their counterparts in marketing implement billing, financial management and contract compliance reviews of their agency networks.

This type of testing and analysis should be welcomed with open arms by both the Marketing Team and an advertiser’s agency partners. Let’s face it, marketing teams, which are often resource constrained, have their hands full with their primary responsibility… demand generation. Further, some of the competencies and experience which best lend themselves to conducting financial testing may not be represented on staff within the marketing group. Similarly, agency finance teams have become both accustomed to and quite adept at entertaining advertisers and or their audit partners in conducting billing reconciliations and contract compliance reviews.

If such support is not forthcoming, marketers may want to actively solicit the involvement of their corporate services peers to implement a marketing accountability initiative. Inviting this type of internal scrutiny has more benefits than negatives. Consider the words of Edward Coke, the noted English barrister, judge and politician:

“Certainty is the mother of quiet and repose, and uncertainty the cause of variance and contentions.”

Removing any uncertainty regarding the organization’s advertising investment and the efficacy of each agencies billing and reconciliation processes has asset value for marketers which extends well beyond answering the basic question; “Did we get what we paid for?”

 

 

Transparency is the Key to Agency Financial Accountability

17 Jul

agency financial management

A job estimate is generated. A purchase order is issued.  An invoice based upon the estimated job cost is generated by the agency and sent to the client.  This part of the advertiser/ advertising agency billing cycle is visible and clear. 

However, what happens with client funds once that invoice is paid is often anything but transparent.  For instance:

  1. How much does the agency actually pay third party vendors? 
  2. Which third party vendors are utilized?
  3. Do any third party vendors pass along prompt pay discounts or agency volume bonification (AVB) rebates to the agency (and is the agency passing these back to the advertiser)?
  4. Is the agency competitively bidding outside services purchased?
  5. What percentage of the advertiser investment is being directed to agency owned business units?
  6. Are jobs being closed and actual costs reconciled to estimate?
  7. What is the agency vouching process to insure that third party vendors have fully delivered on the products/ services owed for the investment made?
  8. How much time has the agency invested in the process?
  9. Did the agency adequately earn their compensation?
  10. Is the financial process and reporting efficient?

These are not trivial topics, yet strangely it is rare that an advertiser invests the time and or energy to pursue answers to these important financial stewardship questions.  Too often, payment of the initial estimate billing from the agency is the end of the client’s review process, rather than the beginning of an important accountability process, when it comes to billing management and contract compliance.  Ironically, even when advertisers establish processes, controls and reporting requirements within the client-agency letter-of-agreement these parameters often go unchecked.  Perhaps there is some redeeming value in the words of renowned educator, David Starr Jordan:

“Wisdom is knowing what to do next; virtue is doing it.” 

If an advertiser cannot readily answer the aforementioned questions, the associated lack of transparency and lax control environment increases an advertiser’s risk quotient… financial, legal and supply chain management related risks.  In our agency contract compliance practice, we uncover many recurring reasons as to “Why” advertisers fail to enforce the requisite level of financial accountability within their marketing supplier relationships.  These can range from staffing limitation issues (competence, knowledge, turnover, etc…) to organizational process gaps or cultural morays which simply don’t place the requisite value on accountability in this area.   

Experience tells us that once advertisers understand the monetary impact of “flying blind” on these key topics, attitudes toward marketing supplier accountability and contract compliance quickly change.  The financial impact of limited visibility and or lax controls in this area can put millions of dollars at risk, year in and year out.  This doesn’t have to be the case.   An in depth independent agency contract compliance review can yield valuable insight into the financial stewardship aspects of a client-agency relationship including industry “Best Practice” standards that can be implemented to enhance visibility, mitigate risks, boost marketing ROI and strengthen the client-agency relationship. 

“The time is always right to do what is right.” 

~Martin Luther King, Jr.

Interested in exploring the benefits of enhanced transparency when it comes to strategic supplier management in the marketing area?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation.

 

The Problem with Focusing on Payment Terms

24 Jun

agency floatNever one to forgo an opportunity to harangue client-side Procurement and Finance professionals, Sir Martin Sorrell couldn’t help but single out those two groups during a session at the Cannes Lions International Festival.  While the topic was client payment terms, Mr. Sorrell suggested that their influence on marketing decisions is putting pressure on the system and the supply chain.

For the record, I am not an advocate of marketers extending payment terms.  The reason is simple, the savings are illusory as those costs simply get factored into the “cost of doing business,” it incents bad behavior and the trickle-down effect of such policies negatively impacts a range of marketing suppliers in the creative, production and media sectors. 

However, for the agency community in general, and Mr. Sorrell in particular, to rail on the client-side procurement and finance teams for the actions of a handful of advertisers who have extended payment terms to their agencies seems disingenuous.  Why?  For years agency holding companies, such as WPP have exerted their influence which is a bi-product of their increased size and clout to arbitrarily extend their payment terms to 3rd party vendors.  The difference between advertisers such as P&G, Mondelez, AB-InBev and Johnson & Johnson and their counterparts in the agency community is that they at least went public with their policies. 

Agency income from float, the interest earned on the agency’s  between the time a vendor invoice is due and when funds are actually dispersed by the agency to pay that vendor, can be significant.  As part of our contract compliance auditing practice, AARM conducts billing reconciliation and days-payable-outstanding analysis pertaining to agency payments to 3rd party vendors.  It is not uncommon to see average day’s payable levels in excess of 75 to 90 days.  When one considers that most agencies bill their clients upfront, on an estimated basis, the interest income that can be 

earned by agency holding companies on their use of client funds is rarely, if ever, openly discussed or factored into agency remuneration.  Unfortunately, save for a small number of large multi-media conglomerates, suppliers downstream simply have no recourse when agencies extend their days-payable-outstanding.  

Thus when the chairman of one of the world’s largest agency holding companies intones that client-agency relationships are  “in danger of being eroded” due to a handful of advertisers extending payment terms it rings shallow.

Regardless of whether an advertiser views their ad agency suppliers as “partners” or “vendors” is immaterial in the context of this discussion.  One thing everyone should agree on is that the ad agency should never be put in the role of “banker.”  Clients should structure payment terms so that their funds are on hand for the agency to pay 3rd party vendors when those invoices come due.  To extend this concept further, client-agency agreements should contain language requiring agencies to promptly reconcile all 3rd party vendor activity and to process payment to that community within a pre-determined timeframe.

There are numerous opportunities for advertisers to improve treasury management practices when it comes to the handling of their marketing investments.  However, issuing edicts to extend agency payment terms is short-sighted and belies the ripple effect that this practice can have on inflating the cost of doing business for those advertisers.  It is time for advertisers and their agencies to deal with the issue of payment terms; client to agency and agency to 3rd party vendors, in a constructive and transparent manner.  The fact that either side would look to achieve a financial edge at the other’s expense when it comes to the disbursement of funds is not where the focus should be.  As Voltaire, the noted French philosopher once said;

“When it is a question of money, everybody is of the same religion.” 

The focus, lest we forget should be on leveraging that marketing investment to build brands and drive consumer demand for the client’s product and service offering.

Interested in learning more about improved treasury management practices when it comes to agency stewardship and 3rd party vendor payment processing?  Contact Cliff Campeau, Principal at AARM at ccampeau@aarmusa.com for a complimentary consultation.

What is the #1 Advertising Agency Control Oversight?

24 Jan

spreadsheetIn our experience as contract compliance auditors, the answer to this question is unequivocally an advertiser’s failure to reconcile agency billing activity.  Whether we’re talking creative services, digital production or media, advertisers are simply not vouching for the accuracy or completeness of either the agency’s or the 3rd party vendors billing efforts.

Given that “Estimated” billing remains the predominant form of agency billing to advertisers this lack of oversight creates tangible risks and the potential for financial loss that could be eliminated with the implementation of some fairly simple controls.  These risks include the potential for billing errors to go undetected and aged credits, earned discounts and rebates not being returned to the advertiser and lost interest income opportunities tied to agency float.

The principal stop-gap measure that could allay this problem is frequently overlooked by too many advertisers.  What is that measure you ask?  Simply requiring agencies to provide copies of all 3rd party vendor billing with their bill-to-client invoices. 

In two recent examples, one in North America for a multi-channel direct marketer and one in the middle east for a pan-Arabian conglomerate, the client had put significant funds at risk, which had it not been for an independent audit, would surely have been lost.  Each client was billed on an estimated basis by their agency, and each agency routinely failed to reconcile billing to actual expense.  In both instances there were incremental agency remuneration activities identified that were not supported by the client/ agency agreements.  These came chiefly in the form of AVBs, or volume-rebates, provided by media properties based on large expenditures made by each of the respective advertisers.

Had the requisite bill-to-client “back-up” data been available, client-side Accounts Payable personnel would have had the opportunity to review and challenge the billing and to secure financial true-ups along the way.  Ironically, both advertisers had incorporate “Right to Audit” and “Document Retention” clauses into their agency agreements.  However, as is typical across the industry, neither had previously enacted those clauses to engage an independent auditor to review the accuracy and timeliness of the agencies billing and 3rd party vendor payment processing efforts.

When advertisers take a lax posture on billing reconciliation and vouching, invariably two other areas are frequently impacted.  The first represents a risk to the advertiser in the form of approved purchase order (P.O.) balances and earned, but not yet processed, credits being managed “off-book.”  While these practices seem innocent enough on the surface and often involve client-side marketing personnel, the risks are very real.  The notion is a simple one, the agency and client teams identify credits or unspent budgets and accrue these funds for future use on unexpected new initiatives or for planned projects that exceed budget.  Harmless, right?   Perhaps, until the client-side marketing representative is transferred out of their position or leaves the company altogether.  This usually creates a knowledge gap that allows these “off-book” funds to remain undetected by the advertiser.  Thus, in this scenario the agency is the only entity with knowledge that these funds even exist.

The second area impacted is an advertisers treasury management practices.  With estimated billing, clients are often invoiced by their agency at the time of project approval, with payment due in 15 to 30 days.  However, the agency may not be billed by 3rd party vendors until costs are actually incurred (i.e. calendar month following the month of service) and remittance may not be due for another 30 to 45 days.  Finally, the agency may take an excessive amount of time to reconcile the vendor billing and hold off on processing payment until the charges are fully reconciled.  While that all makes sense, the advertisers funds have been in the agency’s possession and not in an interest bearing account generating interest income for the advertiser. 

Billing reconciliation is too important a task not to have a rigid oversight process and controls in place.  Agencies handle anywhere from several dozen to thousands of 3rd party vendor invoices on the advertisers behalf.  The sheer volume of billing activity can in and of itself create an environment that is ripe for mistakes.  As noted twentieth-century American author Paul Eldridge once said;

“In the spider-web of facts, many a truth is strangled.”

Having a process that provides billing analysis redundancy makes good sense and will likely be welcomed by the agency.   If you’re interested in learning more about independent billing reconciliation audit support, please contact Jim Bean, Principal at Advertising Audit & Risk Management at jbean@aarmusa.com for a complimentary consultation on this important topic. 

 

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