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Never a Wrong Time to Do the Right Thing

27 Sep

DoTheRightThingDoing right by others is certainly a core value and one that many of us subscribe to. For me personally, as a former ad agency account director, I have always been fond of the quote by Victor Hugo, the nineteenth-century French author: “Initiative is doing the right thing, without being told.

In the professional services business sector this credo was once considered “cost of entry.” Today, however, having one’s advertising agency and or intermediaries “do the right thing” isn’t a given and, in the current environment, very likely will come at a cost.

As an example, Forrester recently interviewed thirty-four media agency clients and found that “transparency” was a key priority for marketers. However, many of the media agencies that they spoke with indicated that they “are only transparent if clients require it in their contracts.” Nice to know.

Perhaps you’ve been following the trend among influencer marketing agencies and their vendors who are now charging clients incremental fees for conducting content reviews or brand-safety checks to safeguard advertisers’ placements. For years, influencers have been paid largely based upon the number of followers that they had. Sadly, many influencers had engaged in buying followers to boost their appeal to advertisers and, in turn, their revenue. Now that advertisers are savvy to this practice and are looking for assurances on the influencers utilized and the nature of their followers, influencer agencies want to incorporate an upcharge to advertisers.

What about those instances where trading desks and DSPs are now charging premiums to access content from exchanges that will ensure proper placement, safeguarding brands and minimizing the incidence of media fraud? Whoever said that it was okay to purchase high-risk, low return inventory to begin with?

Maybe you’ve experienced abnormal delays with regard to your ad agency partners closing and reconciling projects to actual costs or in receiving post-campaign media performance recaps. Or perhaps you were expecting your agency to competitively bid your production work, only to find out that they were relying on the same vendor(s) that they’ve always used (maybe even an agency affiliate). Or, you were of the belief that your media campaigns were being monitored and that audience delivery guarantees were being negotiated in-flight, only to find out that there was no such stewardship of your media investment.

What is going on? What happened to doing the right thing? When you query your agency partners they suggest that the Scope of Work (SOW) didn’t specifically call for those activities nor did the agency Staffing Plan allow for providing that support at the frequency or within the time frame that you had come to expect. This obviously begs the question, “When did the agency stop providing the level of service and oversight support that it once did?”

The message is clear, advertisers can take nothing for granted and certainly cannot assume that their agency, adtech, production and media vendors have their back. Simply stated, we are operating in an era when advertisers must incorporate legal terms and conditions, which provide the requisite safeguards and controls that govern the behavior and service levels that they expect, into their agency agreements in order to have each vendor in the advertising supply-chain do the right thing.

As importantly, having solid contract language and tightly written scopes of work in and of themselves does not guarantee that agents and intermediaries will fall in line and comply with advertiser expectations. Experience suggests that adherence will typically only be achieved through performance and accountability monitoring. As the old adage goes; “What is inspected is respected.”

Please note, that we are not suggesting that an advertisers shouldn’t pay for the level of coverage and service that they expect to receive. That said, advertisers can no longer take it for granted that certain service standards, which historically have been part and parcel of agency standard operating procedures and hadn’t been necessary to be called out in an agreement or an SOW, are still being followed. If a service provider drops or alters the nature of a service being provided, it should be incumbent to at least communicate those decisions to the advertiser and engage in discussions to ascertain if the changes are acceptable or negotiate additional fees to cover the desired level of support.

In the end, successfully aligning advertiser expectations and supply-chain member service delivery standards comes down to all parties committing to a policy of open, honest, two-way dialog to ensure that there are no surprises and to incent an environment of initiative taking.

 

 

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.

 

3 Keys to Strengthening Client-Agency Relationships

25 Jan

Keys to SuccessMost would agree that strong client-agency relationships are more conducive to achieving positive results that drive in-market performance levels which meet or exceed expectations.

Similarly, both client-side and agency executives agree that “trust” is imperative in building and maintaining a solid partnership. Thus, one could logically conclude that establishing a relationship predicated on trustworthiness would be beneficial to advertisers and agencies alike.

However, as the ad industry has evolved and grown over the last decade or so, it seems as though the ability to establish trust between stakeholders has been greatly compromised. Whether this is between advertisers and agencies or agencies and ad tech providers or between ad tech providers and publishers. While the reasons for this are many, pundits will point to the myriad of documented transparency related issues that have plagued the industry, while cynics might suggest that Agatha Christie had it right when she said: “Where large sums of money are concerned, it is advisable to trust nobody.”

As consultants specializing in marketing supply chain accountability, working with advertisers and their agency network partners, we take a more pragmatic view. We believe that trust is not elusive, that it can be earned and nourished if clients and agencies are willing to commit to the following three steps:

  1. Establish a Principal-Agent Relationship – In short, an advertiser should never have to doubt the allegiance of their agency partners or the objectivity of their recommendations. A principal-agent relationship establishes the expectation that the agency has a fiduciary responsibility to always act on behalf of and in the best interest of its client. Memorialized within the client-agency agreement, this principle is the single best means for fostering trust.
  2. Perform Independent Transparency Accountability Reviews – Actions that advertisers should consider and that agencies should welcome include contract compliance reviews, financial management audits and media performance assessments. Independent reviews of agency performance relative to client expectations and contractual performance requirements instills a certain level of discipline when it comes to governance, and provides both parties with the assurance each is acting within the guidelines of agreement and a platform in which to discuss improvement opportunities.
  3. Conduct QBRs and 360° Performance Evaluations – We are all in the communications business, yet too often client-agency communications are inadequate when it comes to strengthening the relationship. Not talking about day-to-day interactions, but dialog regarding key business strategies and challenges, performance expectations and opportunities that occurs at even the most senior level within each organization. The use of quarterly business reviews (QBRs), that involve cross functional team members and executives from both the advertiser and client organizations are a great way to ensure that both sides are focused on the business and relationship priorities established at the beginning of the year. Complementing the QBRs should be an annual performance evaluation where representatives from the client and agency are invited to provide feedback on the relationship and identify opportunities to improve processes and performance. This should then be followed by a brief meeting to discuss the results of the evaluation and come to an agreement on actions to be taken in the coming year.

Business relationships can be complex and at times difficult. In our experience, implementing the aforementioned steps greatly enhances effective levels of communication, which fosters trust and confidence, which leads to solid relationships that drive superior performance.  As George Bernard Shaw intoned: “The biggest problem in communication is the illusion that it has taken place.”

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

 

Is Programmatic Advertising Worth the Risk?

26 Jul

dreamstime_xs_50082776Conceptually, it is easy to understand the potential of programmatic media buying. It is obvious to most that using technology to supplant what is a manual, labor intensive process to drive efficiencies and improve media investment decisions could be a plus for advertisers, agencies and publishers (not to mention ad tech vendors).

The only question to be addressed is “when” will the benefits of programmatic outweigh the costs and the risks to advertisers?

Proponents of programmatic will argue that this buying tactic has already generated economic benefit for advertisers when it comes to digital media buying. After all, streamlining the processes related to the issuance and completion of RFPs, buyer/ seller negotiations and preparation of insertion orders clearly saves time and reduces labor costs for all stakeholders.

No one would argue this premise. However, reducing labor costs associated with traditional buying is but one component of programmatic buying costs. Consider the broad array of programmatic buying related fees and expenses currently being born by advertisers:

  • Data Management Platform (DMP) fees
  • Demand Side Platform (DSP) fees
  • Data/ Targeting fees
  • Pre-Bid Decisioning/ Targeting fees
  • Ad Blocking (pre/ post) fees
  • Verification fees
  • Agency Campaign Management fees

It should be noted, that there are “other” non-transparent charges and fees linked to sell-side platforms (SSPs), bid processing, real-time bidding auction methodology and principal-based buys (media arbitrage) that are born by advertisers and limit the percentage of their digital media spend that actually goes toward inventory.

In a recent Ad News article by Arvind Hickman, the author referenced studies conducted by both the World Federation of Advertisers (WFA) and the Association of National Advertisers (ANA) that demonstrate the magnitude of these programmatic fees and expenses. The WFA study determined that $.60 of every dollar spent on programmatic digital media buying goes to cover “programmatic transactions and fees.” The ANA study suggests that advertisers could be paying between $.54 – $.62 of every dollar on digital supply chain data, transaction fees and supply side charges.

Bear in mind that neither of these studies addressed the impact of media arbitrage or ad fraud. Industry studies, focused on assessing the level of digital ad fraud, fielded by the Association of National Advertisers (ANA) and WhiteOps found that fraudulent non-human traffic in the form of bots was “more prevalent in programmatic environments.” According to the research, display ads purchased programmatically were “55% more likely to be loaded by bots” than non-programmatic ads.

And yet, in-spite of the challenges still being faced with programmatic digital media buying, this media investment model is being rapidly rolled out to out-of-home, print and television.

Who do you think will bear the learning curve costs and risks associated with expanding programmatic to other media categories? The answer, is primarily advertisers and to a lesser extent, publishers.

We certainly understand that programmatic is the future of media buying. That said, rushing headlong into this arena, without satisfactory levels of transparency and or fraud prevention, combined with the upfront costs of the industry’s investment in technology, that are ultimately passed through to the advertiser, are both risky and costly to advertisers.

Is there a need to reach and take risks in order to secure positive progress? Yes. But, it might be best to follow the approach advocated by one of this country’s greatest military leaders, General George S. Patton:

“Take calculated risks, that is quite different than being rash.”

The Ad Industry is Metamorphosing

30 Jun

dreamstime_xs_83082522It was the best of times; it was the worst of times…” Most of us are familiar with the opening line from Charles Dickens in his epic work A Tale of Two Cities. Many marketers may even consider it an apt description of both the current state of the advertising industry and the challenges that they face in sustaining brand relevance and driving growth.

Phoenix risingSo, who will marketers count on to assist them with the tasks of deepening brand engagement with core target segments, revitalizing sales and profits in a low-growth environment and in differentiating their brands for competitive advantage?

Over the course of the last few years, many have opined on the viability of the ad agency model and what it portends for advertiser/ agency relationships going forward. And with good reason. Concerns cited include threats from non-traditional competitors such as management consulting and technology firms encroaching on their turf, talent recruitment and retention challenges and margin compression due to downward pressure on fees and expanded scopes of services.

It may be as some predict that management consulting firms will leverage their capabilities in the area of strategy and integration to pirate work from ad agencies and that ad-tech providers will enable marketers to take certain tasks in-house. The question remains, how will marketers adjust to this dynamic and the evolution of their agency networks to potentially include consulting, data and ad-tech firms? There are already very real challenges related to agency stewardship today due to under-resourced client marketing staffs.

The aforementioned challenges, combined with the rate of digitization and the emerging role of artificial intelligence occurring within the ad industry, certainly pose challenges for advertising agencies and could serve to lessen their stranglehold on the marketing and advertising sector. In a recent McKinsey article entitled; “The Global Forces Inspiring a New Narrative of Progress” the authors note that “disruption is accelerating.” They opine that this dynamic is raising serious concerns for many organizations relating to the question, “How long can their traditional sources of competitive advantage survive in the face of technological shifts?”

That said, in spite of these risk factors and other marketplace developments, ad agencies are doing just fine:

  • Agency holding companies have continued their aggressive acquisition drives, supporting both their horizontal and vertical integration strategies. While overall M&A activity is down from 2016 levels, WPP and Dentsu have consummated twenty acquisitions with a combined value of $700 million through the first 4 months of 2017. (Source: R3’s “State of Agency M&A report” for January – April, 2017).
  • While down from 2016’s 5.7% growth rate, global ad spending is projected to grow 3.6% in 2017 (Source: Magna Global, June, 2017). Of note, this is higher than the International Monetary Fund’s projected increase for global GDP growth.
  • Even though 1Q17 Advertising Industry gross margins fell to 44.15%, the industry itself is healthy. For instance, within the services sector, the Advertising Industry achieved the highest gross margins, net margins, EBITDA margins and pre-tax margins for the quarter (Source: CSIMarket.com).
  • Some 86% of mid-sized ad agencies are confident that this year will be better than last in terms of profitable growth (Source: Society of Digital Agencies (SoDA) survey).

Importantly, since the demise of the “good ole days” of full-service agencies and the fifteen-percent commission remuneration model, agencies have demonstrated a unique ability to not only keep up with industry changes, but to take the lead from both a thought leadership and innovation perspective. They have been able to scale, attracting more clients and deeper talent pools, they have invested in emerging technologies to deal with increasingly complicated, data driven processes and to pioneer the use of algorithms and artificial intelligence to efficiently execute deliverables ranging from digital media investment to creative adaptations… all while dealing with evolving client expectations.

Further, it bears noting that the publicly traded holding companies; WPP, Omnicom Group, Publicis Groupe, Interpublic Group of Cos. and Dentsu, had combined estimated worldwide 2016 revenue levels of $60.7 billion (Source: Advertising Age, June 2017). When one considers the pre-dominance of the estimated billing process and agency remuneration schema that includes direct labor and overhead cost reimbursement plus guaranteed profit margins of 14% to 17% or more, one must also respect the financial clout that these publicly traded entities wield.

Is there a need for near-term belt tightening to offset softer 2017 ad spending levels? Yes. Do the holding companies need to consolidate agency brands and realign capabilities to boost the efficacy of their service delivery models and generate much needed efficiencies? Yes. Will agencies need to improve their talent recruitment and retention practices, across a diverse range of specialties? Yes. But no business is immune from these challenges, including management consultants, ad-tech platforms and publishers.

The big question the industry in general and marketers will need to assess is related to whether these players will be able to boldly transform their current business models, repositioning their firms to deliver integrated, multi-specialist services in a nimble, cost efficient, on-demand manner.

Broadly speaking, all participants are facing challenges as the ad industry undergoes its current metamorphoses. We believe that it is too early to predict winners and losers or to suggest that marketers adapt an attitude of empathy toward any of their marketing supply chain partners. After all, it is their marketing spend that has built this sector into a $457.4 billion global machine in 2017 (Source: Statista, 2017). And they must vigilantly safeguard and optimize that investment.

Below is one of the closing lines from A Tale of Two Cities, one that many may not be as familiar with:

“It is a far, far better thing that I do, than I have ever done…”

With this parting thought, Dickens’ suggests that the main character in his novel and the city of France will be resurrected, rising above their present strife and “made illustrious.”

Here’s hoping that the ad industry achieves similar transformative success.

 

 

Has the Time Come and Gone for Digital Advertising Agencies?

28 Apr

digital trading deskWe all understand the concept of “specialization” and the potential benefit delivery for certain service providers in select industries. That said, the era of the digital media specialist agency may be drawing to a close.

Think about it, we have specialist agencies for programmatic advertising, paid search, organic search, social media, email, mobile marketing, website development, user experience, social, native and display advertising.

Why? What are the advantages that accrue to an advertiser from this level of specialization? More importantly, how many advertisers are equipped to engage with multiple media agency partners?

Integrating strategy and resource allocation decisions, coordinating roles and responsibilities and effectively managing relationships among several media agencies takes time, energy and money… assets that are tougher and tougher for marketers to come by. Not to mention, the additional costs incurred for overlapping agency services/personnel.

Specialist agencies aside, when it comes to digital media, advertisers are also contending with general market agencies, PR firms, multi-cultural, experiential and promotional agencies that are also involved with their digital marketing efforts. It is damn difficult for a marketing staff to coordinate and optimize digital communications along this many fronts, let alone integrate such efforts with an organization’s “traditional” media efforts. And, let’s face it, the task is not any easier (or cheaper) for an advertiser’s media agency-of-record to take the lead on this task and coordinate multiple disparate agencies working collaboratively and cohesively toward a common goal.

The ultimate question for advertisers may be, why take what is already a complex process and further complicate it by dividing efforts and resources across so many players?

In our contract compliance auditing and financial management practice we have seen advertisers pay a steep price for assembling agency networks that are too broad for their existing teams to effectively manage. This in turn leads to cost inefficiencies related to duplicative services and fees tied to the lack of clear role differentiation across agencies, and in turn, a reduction in working media. Say nothing of the impact on digital media effectiveness tied to communication and briefing gaps that inevitably arise in these scenarios. Perhaps there is a lesson to be learned from the words of William Blake, 18th century English poet and painter:

“The road of excess leads to the palace of wisdom”

We believe that the time has come for advertisers to give more serious consideration to streamlining their agency networks in general, and specifically to pare back the number of agency partners involved with their digital media efforts… beginning with “specialist” shops.

A great place to start is to evaluate the potential for centralizing media planning for traditional and digital media. This is a logical “first step” and will allow marketing organizations to better leverage their data, to improve their targeting and segmentation schema, enhance their resource allocation decisions and integrate all facets of their communication plans. Additional benefits from such a strategy include more collaborative and improved media briefings and streamlined communications across agency partners. Similarly, when it comes to media buying, focusing on fewer partners makes it easier to leverage an organization’s overall media spend, optimize sponsorship and value-add opportunities across media properties, and to minimize agency fees by eliminating redundant buying activities across partner shops.

Major holding company media agencies and larger independent media firms, with broad resource offerings and the scale to provide “one-stop” service certainly stand to benefit from consolidation. As do ad technology firms such as Adobe, Oracle and Google that provide advertisers with the tools to manage certain digital functions in-house. It should be noted that while the large media networks of a holding company will benefit, specialized, stand alone digital media shops within those holding companies may face challenges related to such a consolidation.

In closing, we wanted to address the topic of the “rise of the management consultancies” as legitimate competitors to traditional agencies. As it relates to media planning and placement, we believe that the large ad agencies and holding companies will retain an edge in this area for some time to come. However, vulnerability in the areas of strategic consulting and customer connectivity (i.e. data integration, user experience and system development) is where we believe consulting firms will continue to make significant inroads with CMOs as marketers seek to fulfill corporate mandates to assist in digitally transforming their businesses. As this is occurring, some agencies have announced plans to expand their resource offerings to compete with the likes of Accenture, IBM, PwC and Deloitte in this area. Realistically, at least in the near-term, agency constraints on talent and functional expertise represent significant hurdles before an attack in this area can be mounted… while concurrently defending their current base of business.

 

Advertisers: Contract Compliance is Easier to Secure Than You Think

19 Apr

EasyIf you’re an advertiser, we have three brief questions for you to consider:

  1. Does your organization have contracts with its ad agency partners?
  2. Do those contracts contain right to audit clauses?
  3. Has your company ever enacted its right to conduct contract compliance and or performance audits?

Chances are your answer to the first two questions is “Yes” and very likely “No” to the third question. Why is this? Why would the majority of advertisers negotiate audit rights into their marketing supplier agreements and not take advantage of such an important control mechanism? This is particularly perplexing given the materiality of marketing spend and the many publicized challenges confronting advertisers and their relationships with advertising agencies. Challenges such as waning levels of transparency into agency financial management practices, lack of a direct line-of-sight into the rates paid by its agency partners, agency resource constraints and personnel turnover.

After years of conducting advertising agency contract compliance audits, our experience shows the agency community wants to do the right thing in most instances. Are there bad actors? Sure, as there are in any business sector. Are there lapses in oversight or judgment? Certainly. This is a people business and people make honest mistakes. Do errors occur? Of course, as in every organization… no entity is perfect in that regard. Beyond common lapses in judgement, follow-through and or mistakes the primary compliance challenge is often a sub-standard or outdated client/ agency agreement which does not supply an advertiser with the requisite legal safeguards and financial controls.

It is for all of these reasons that “Right to Audit” clauses exist and why it is considered “Best Practice” to engage independent audit support to assess an agency’s contract compliance and financial performance. The benefits of auditing are meaningful and many, with the resulting financial true-ups, identification of process improvement opportunities and new learnings in general, providing substantial contributions to future efficiencies.

These outcomes can have significant financial impacts for both stakeholders. For agencies, who have made oversights, misinterpreted or misapplied certain contractual conditions there is the obvious impact of correcting those items and reconciling their fee and or third-party expense billings. Advertisers benefit from the collection of past due credits, trueing up financial matters, identifying and eliminating unauthorized, non-transparent agency revenue and realigning its scope of work and agency resources on a go forward basis.

It is true that the consequences of an audit can sometimes cause an agency some discomfort and even be outside an advertiser’s comfort zone. However, these important accountability programs are more than offset by the positive outcomes that ultimately drive compliance with the agreement and motivate more effective financial stewardship. To this end, it was with interest that I read a recent article entitled, “Mix Enforcement with Persuasion” by Lucia Del Carpio, Assistant Professor of Economics with INSEAD. Professor Carpio wrote about the topic of improving compliance with laws and regulations. One of his observations had particular relevance to our compliance auditing experience and crystalized what we often profess:

“Compliance sometimes requires nothing but enforcement.”

 The cost to conduct agency contract compliance auditing is nominal relative to the benefits yielded by these initiatives. In our experience, we have never seen an instance where the financial and operational benefits of an audit didn’t provide a return multiple times its attendant cost. Factor in the notion that compliance auditing actually incents agency contract adherence and it is easy to understand why “Right to Audit” clauses exists in client/agency contracts to begin with.

Interested in learning more about agency contract compliance auditing? Contact Cliff Campeau, Principal at AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com for your complimentary 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.”

What is Missing in Client-Agency Relationships Today?

28 Dec

What's Missing Question Words Puzzle Holes Gaps Incomplete PictuOne can’t help but marvel at the length of some of the most enduring and successful client-agency relationships. Unilever and Lowe & Partners have been together for 117 years, Unilever and J. Walter Thompson for 114 years, General Electric and BBDO for 96 years and FCB and Levis Strauss for 43 years. In an age where the average lifespan of client-agency relationships is less than 4 years, you certainly have to tip your hat to these partnerships.

What is it that they know or are doing differently that has eluded others in their pursuit of long lasting, stable and productive relationships?

While there are certainly many contributing factors, I believe that the most important ingredient in these long lasting relationships is the principal of “fidelity.” In short, these organizations obviously share a commitment to the quality of being faithful to one other. This can be evidenced by their ongoing loyalty and mutual support for one another, an intangible but valuable trait that has served them well. As the late German actress, Lilli Palmer once said; “Fidelity is a gift, not a requirement.” But as can be evidenced by the length of these unions, this gift can yield meaningful benefits.

Experience has taught us that successful client-agency relationships are more often than not predicated on marketplace performance… building enduring brands, driving revenues and expanding market share. Great work and great outcomes are clearly an integral part of achieving success when it comes to enduring partnerships. Such work is also a byproduct of one of the keys to achieving and maintaining fidelity, a shared sense of purpose. This shared sense of purpose is truly the glue that holds relationships together. Whether that is between an organization and its associates or between advertisers their agencies and their third-party vendors.

In a complex, ever changing global marketplace the best way to instill a shared sense of purpose is to gain alignment on five key components of a client-agency relationship:

  1. Client Business Goals – For an agency, understanding the client’s overall objectives is a necessity for generating break-through ideas and developing work that will move the proverbial needle. It is also a pre-requisite to earning the respect of the C-Suite when providing strategic counsel and advice. The client organization also benefits exponentially when its personnel and business partners have a clear line of sight into the enterprise’s goals. Thus, client-side CEOs might benefit from the wisdom of George F. Burns, who said, “Define your business goals clearly so that others can see them as you do.
  2. Agency Deliverables – Establishing the agency’s role and overarching responsibilities is a necessary first step in identifying a specific set of deliverables, which in turn are designed to support the marketing objectives that will contribute to the attainment of the business goals. In turn, these deliveries will also provide the impetus for both the agency and the client to assess what level of resources they need to allocate to satisfy these expectations during the fiscal year.
  3. Resource Requirements – While we normally think about resource commitments in the context of agency time-of-staff, technology, data resources and the like, both the agency and client must ask themselves what level of resource investment is required to execute these deliverables in an efficient manner. Too often, client organizations may not be adequately staffed to provide timely and or relevant feedback on day-to-day decisions or in the context of providing sound strategic direction at the onset of campaign planning. Thus, both parties must carefully assess the amount of time and level of subject matter expertise each will require to support one another.
  4. Communication Protocols – One of the realities of client-agency relationships is the constant grind of daily tasks and unforeseen activities that sap resources, energy and potentially creativity. However menial these tasks might be, they are necessary. That said, it is equally as important to establish client-agency contact plans that allow for periodic contact between executives of both organizations to discuss business performance, opportunities and exchange ideas on how the agency can better assist the client in pursuit of its goals. Similarly, outside of the weekly status updates, monthly performance tracking discussions and financial management reporting it can be very helpful to establish regular quarterly business reviews (QBRs). These QBRs should be attended by cross functional representatives from each parties marketing, finance and procurement teams and should address both year-to-date status updates (i.e. project tracking, budget management, agency time-of-staff/ fee tracking) but also allow for meaningful discussion on potential shifts in strategy or tactical support to address competitive actions or market opportunities.
  5. Performance Measurement – Simply put, what criteria will the client use to assess the value of the agency’s contribution to the attainment of the organization’s goals… and the timely, efficient execution of its deliverables. Discussing these expectations upfront, monitoring progress on a monthly basis and making the requisite course change decisions if and when necessary can be helpful in driving consensus on how the agency and client teams are performing.

Focusing on these components of client-agency relationships will not only instill a sense of shared purpose and fidelity, but will strengthen the level of respect both organizations have for one another. In the end, this is the key to transcending the organizational changes that will inevitably occur on both sides of the aisle and nourish a long-term, mutually beneficial relationship.

When one considers the strains on today’s client-agency relationships there may be no truer words than those spoken by the 35th president of the United States of America, John F. Kennedy, when he said;

“Efforts and courage are not enough without purpose and direction.”

 

 

 

Is It Too Late for the 4A’s on the Topic of Transparency?

26 Sep

toolateEarlier this month, the 4A’s announced that it was pulling out of the Association of National Advertisers (ANA) “Transparency” panel scheduled during Advertising Week in New York City.

In light of the organization’s decision to break from ANA / 4A’s joint media transparency initiative earlier this spring, ostensibly to chart its own course, this move comes as no surprise. However, it is nonetheless disappointing. After all, why wouldn’t the 4A’s and it member agencies want to share the stage with the ANA to address the advertiser community on the topic of transparency?

The quest for improved standards and performance related to transparency would benefit mightily from the involvement of the 4A’s. The ANA, advertisers and many within the agency community have sought the 4A’s cooperation on this issue and would welcome a united effort to address this topic.

Clearly a full-court press is necessary if the industry is going to improve both transparency and ultimately the level of trust between advertisers, agencies and publishers. Aside from the eye opening findings from ANA / K2 study on media transparency, there have been two recent announcements that certainly seem to bolster the results of this study. First, just this past week Facebook indicated that it had misrepresented average viewing times for video ads played on its site. Secondly, the global agency holding company Dentsu came forward and cited multiple instances where there were “failures of placement,” “false reporting” and “inappropriate operations” which impacted over 100 of their clients. Dentsu’s CEO, Tadashi Ishii issued a statement saying that there were “instances where our invoices did not reflect actual results, resulting in unjust, overcharged billings.”

In fact, the impact of the 4A’s decision has resulted in two agencies, Empower and Mediasmith, pulling out of the 4A’s citing the associations failure to take a more progressive stance when it comes to working more closely with the ANA to resolve the issue of media transparency.

From the perspective of advertisers, they are rightly concerned about the issue of transparency and are taking matters into their own hands. Consider the September 23rd article in the Wall Street Journal; “Major Marketers Audit Agencies“ in which firms such as J.P. Morgan, General Electric Nationwide Mutual Insurance and Sears Holdings Corp. indicated that they “had hired outside counsel” to conduct audits, due in part to the ANA study. Additionally, the article identified more than a half-dozen other firms that are “trying to get more liberal auditing rights” to improve the protections afforded them under their Client/ Agency agreements.

Given the importance of transparency and full-disclosure in establishing productive, long-term relationships between advertisers and agencies it is unclear what the 4A’S hopes to gain with its current approach. While the 4A’s has issued transparency guidelines of their own, advertisers and many industry observers have indicated unequivocally that these guidelines are inherently biased in favor of the agency holding companies and that they simply don’t go far enough to address advertiser transparency concerns.

The very fact that many agencies are deriving non-transparent revenue from the budgetary dollars entrusted to them by advertisers is an affront to a principal-agent relationship. And even if, as some agency leaders have suggested, not all client / agency contracts espouse a principal-agent relationship, it is simply not a good practice (and promotes distrust) for an agency to leverage an advertiser’s funds for its financial benefit without its knowledge. This is particularly true when such gains undermine the notion of “objectivity” when it comes to the media investment counsel being provided by these agencies to their clients.

Noted novelist, Thomas Hardy once said that, “The resolution to avoid an evil is seldom framed till the evil is so far advanced as to make avoidance impossible.” One might argue that as an industry, when it comes to transparency, trust and their impact on client / agency relationships the point in time to frame a resolution is long past due. Sadly, for the 4A’s, change is afoot and the organization’s actions may render it as an observer rather than a co-author of a doctrine for positive change.

 

 

 

 

 

 

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