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Linking Agency Fees to Outcomes

14 Dec

overheadThe topic of agency remuneration is one that the advertising industry has wrestled with for the last few decades, since the 15% standard agency commission went by the wayside. 

Agencies want to be paid fairly for their services and clients want to earn a fair return on their agency fee investment… at least theoretically. In reality, agencies want to earn as much money as possible on each of their accounts and clients want to pay as little in agency fees a they can. 

Unfortunately, both stakeholder groups’ true intentions can at a minimum negatively impact perceptions one side may have of the other and in a worse case scenario, drive bad behavior. This can include an advertiser focusing on continually ratcheting down agency fees, with little consideration for the relationship between agency fees and the scope of services. In turn, this is a perfect breeding ground for an agency’s decision to pursue non-transparent revenue sources to shore up perceived inequities at the expense of the advertiser. Ultimately, these actions can serve to undermine trust and eventually the stability of the client/ agency relationship. 

Thus the question remains; “How can both parties bridge the divide when it comes to the agency remuneration discussion?” 

The best solution, obviously, would be to structure a compensation system which is fully transparent, fair to both parties, encourages good behavior and fosters a relationship based upon mutual respect and shared goals. As Sam Walton, founder of one of the world’s largest companies once said; 

“We’re all working together; that’s the secret.” 

In our experience as contract compliance auditors, we have found that the most effective compensation programs link to agency fees to outcomes. We have seen more beneficial results when this is the case compared to fixed retainer fees that have no link to a mutually agreed upon foundation. Typically, these outcomes fall into one of three categories: 

  1. Agency deliverables
  2. Agency time-of-staff investment
  3. Qualitative and quantitative outcomes, those controlled/ influenced by the agency and KPIs tied to the success of the client in-market

It should be noted, that remuneration programs often combine elements from each of the aforementioned categories. In many respects, this is an ideal scenario, particularly in the context of agency-of-record relationships, where the nature of the client/ agency relationship is more akin to a partnership than a buyer/ vendor interaction. 

Regardless of the mode of compensation ultimately selected, value-based, direct-labor driven or performance based, we believe that there are two critical components, which must be negotiated in advance of focusing on the level of remuneration. 

First and foremost is the development of a tight scope-of-work (SOW) collaboratively constructed by the client-side marketing team and the agency account services team. At a minimum, the SOW should explicitly identify all projects, expected outputs, the quantity and timing of those outputs and some indication of whether those items must be created versus modified or adapted. Ideally, the SOW will also address issues with regard to project component complexity and the number of rounds of input/ review per project component to assist the agency in assessing the required time-on-task and to assist the client in establishing project briefing and approval processes which are consistent with desired project outputs. 

Secondly, with a mutually agreed upon SOW, the agency should be asked to provide a detailed staffing plan, one which identifies the names, titles and functional responsibilities of the specific individuals who will work on the business along with their utilization rates. The staffing plan should also identify the base number of hours utilized to calculate a full-time equivalent (i.e. 1,800 hours per year) and at a minimum, a blended hourly rate by department or by function for use in pricing out-of-scope work and or in reconciling fees relative to the agency’s time-of-staff investment if and when necessary. 

The time invested by both parties on the front-end to clearly establish the client’s desired outputs, timing requirements and qualitative expectations and to assess the resource investment required by the agency to deliver on those anticipated outcomes will yield significant dividends. 

Additionally, tracking monthly progress project status and the agency’s time-of-staff investment will allow both parties to stay on track and within budget… while eliminating any surprises. 

In the words of Henry Ford; “Coming together is a beginning; keeping together is progress; working together is success.”

 

 

 

 

 

 

 

 

 

 

What is the True Cost of Opacity? (part 2 of 2)

1 May

iceberg riskPart 2 of a two-part look advertiser concerns regarding “transparency” and the impact it is having on client-agency relations.

Why is a tight client-agency agreement important? One need look no further than the recent comments of Maurice Levy, Chairman of Publicis; We have a clear contract with our clients, and we are absolutely rigorous in respecting transparency and the contracts.”  It should be noted that other agency executives have also cited their compliance with the terms of their client agreements as part of their response to recent questions regarding transparency in the context of rebates and the lack of full-disclosure associated with trading desk operations.

As contract compliance auditors we would suggest that most of the client-agency agreements, which we review do not have sufficient language to deal with the evolving advertising landscape.  It is common to find contract language gaps when it comes to items such as; AVBs, related party obligations, disclosure requirements and or right to audit clauses. Therefore, it is quite possible for an agency to be in compliance with an agreement as Mr. Levy suggested and still not be operating in a fully transparent manner.

To the extent that reducing the level of opacity is an important step in establishing a solid client-agency relationship founded on the basis of trust, we would strongly encourage advertisers to review their marketing agency partner agreements.

If agencies truly functioned as principal agents for the advertiser, a less structured agreement may pose less risk. However, today we operate in a complex environment where agencies may have a financial stake in certain outcomes and those stakes are not always fully disclosed to clients. Thus the reality is that the potential for bias to impact an agency’s recommendations clearly negates the principal of agency neutrality.  Think about it, agencies today operate as independent agents, partnering with a range of third-party vendors in the research, technology and media sectors and actually owning and reselling media inventory to their clients.

Don’t agree? Consider the comments of Irwin Gotlieb, CEO of WPP’s Group M at the aforementioned ANA conference; “Those relationships, rightly or wrongly, don’t exist anymore” he said, adding that “You cease to be an agent the moment someone puts a gun to your head and says these are the CPMs you need to deliver.”

It is imperative that advertisers protect themselves from a legal and financial perspective by crafting contract language and implementing the appropriate monitoring and control processes to insure that they have the transparency that they seek in the context of their agency partners’ financial stewardship of their advertising investment.  This does not mean that clients cannot forge solid relationships with their agencies or that their agency partners should not be afforded positions of trust. Quite the contrary, it simply means that candid, direct dialog must occur so that each party in the relationship is clear and comfortable with regard to the guidelines that will be put in place to govern their relationship.

Once clients and agencies have aligned their interests in the context of their relationship, the ability to focus their time, talent and resources on driving business forward and tackling industry challenges will be greatly enhanced. Interested in learning more about industry best practices when it comes to client-agency agreements? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management, LLC at ccampeau@aarmusa.com for a complimentary consultation on this important topic.

Is Agency Ownership of Audience Measurement Providers a Good Idea?

13 Feb

transparencyRecently, WPP indicated that they were planning to take a large equity stake in comScore, one of the world’s largest online campaign measurement providers. This is in addition to WPP’s recent investment in Rentrak, a television audience measurement service, an organization in which WPP is now the largest institutional shareowner.

With WPP’s continued push into the campaign measurement space, advertisers may begin to question the consequences of an agency holding company’s ownership of audience delivery measurement resources. After all, these campaign measurement service providers gather and analyze data and publish ratings which are utilized to assess the efficacy of the agency’s media purchasing efforts on the advertiser’s behalf.

More broadly, based upon the business activities in which the agency holding companies now routinely engage in, one might legitimately question whether or not the designation of “agent” is even an apt description of the role which advertising firms play in support of their clients. Activities such as media arbitrage or reselling if one prefers, joint media and technology ownership deals with publishers, participation in AVB or volume rebate programs offered by media owners to agency holding companies tied to transactions entered into on behalf of their clients, all raise a legitimate question about “Whose” interests agencies are beholden to.

What recourse do advertisers have? After all, there are often distinct advantages to utilizing large agency holding company brands. Independent agencies, which while unencumbered by questions regarding their fiduciary focus, sometimes lack the scale or depth of resources required to perform in certain situations. Enlightened protectionism in the 21st century requires advertisers to aggressively push for enhanced transparency, improved controls and the unimpeachable right to audit their agency’s contract compliance and financial management performance. In the oft quoted words of President Ronald Reagan; “Trust, but verify.”

As a sound first step, it is essential for advertisers to understand their agency partners’ affiliate relationships. Secondly, it is imperative for advertisers to fashion contract language which requires their agencies to provide full disclosure when an agency affiliate is being utilized on their behalf, how that affiliate is compensated and by whom and whether or not the rates charged by that affiliate are competitive with comparable providers in the market. Whether in the context of ad serving, programmatic buying, trading desk operations or campaign measurement, an advertiser has a right to know when their agency has engaged an affiliate firm. This affords client stakeholders the opportunity to raise any questions or concerns they may have regarding such a selection and its impact on the agency’s objectivity. 

Once affiliate firms have been identified, tracking what percentage of an advertiser’s budget is being spent collectively at the agency holding company level can prove enlightening. More importantly, understanding the value of their account to the holding company based upon total revenues enhances an advertiser’s negotiating position when considering agency remuneration options going forward. 

As the ad industry has grown in size, generating approximately $521.6 billion in revenue in 2014 (source: MAGNA GLOBAL), it has also grown in complexity which is due in large to the rate and rapidity of technological change. Thus, it comes as no surprise that relationships among industry stakeholders have evolved, becoming more complex in their own right. The industry has begun to come to terms with the plurality of such relationships where partners may simultaneously be competitors or buyer agents may also function as sellers. However, “coming to terms” doesn’t mean blind acceptance. Rather it requires a new level of discourse and enhanced controls to protect advertisers and their investment.

Interested in learning more about agency network “affiliate management?” Contact Cliff Campeau, Principal at Advertising Audit & Risk Management, LLC at ccampeau@aarmusa.com for a complimentary consultation on the topic.  

 

For Advertisers Concerned About Transparency, There is an Immediate Solution

4 Nov

transparency concernsLet’s face it the advertising industry is a complex, fast-moving and ever evolving marketing eco-system which at times can mystify even its most experienced participants.  The expansion in both the number and types of media channels combined with the technology revolution that has ushered in tools such as digital asset management systems and programmatic buying platforms have only served to fuel advertiser concerns about their advertising investment.

The Association of National Advertisers (ANA) has twice this year issued statements regarding their membership’s concerns about the “transparency crisis” enveloping certain industry practices.  In May they announced that they were stepping up their “scrutiny of media practices” with the goal of shedding some light on the “dealings” between agencies and publishers.  Based upon a study which the organization had completed in February, 2014 forty-six percent of the ANA members’ surveyed expressed concern over the “transparency of media buys.” This was followed by a blog post in October in which the ANA acknowledged concern over a position paper issued by the trade group AICE dealing with agency in-house production practices entitled; “A Push for Greater Transparency, Ethics, and Fairness.

The good news is that advertisers need not wait for the various industry associations and their members to form task forces or appoint committees to assess the risk and propose potential solutions to the “transparency crisis.”  While these are important steps to be taken, they are time consuming, the potential outcomes are uncertain and the proposed solutions will not be tailored to a specific advertiser’s needs.  So what can an advertiser do today to thoroughly vet these issues and reassure their stakeholders that any attendant risks have been mitigated and to validate that they are receiving fair value for the advertising investment being made?

The answer is as close as a copy of the executed contract which is in place between the advertiser and the agency.  Specifically, the solution can be found in the “Right to Audit” clause, which is a staple in an overwhelming majority of client-agency agreements.  In short, this important clause affords advertisers the opportunity to examine the agency’s records of expenditures pertaining to the agency’s billing to the client for the purpose of validating media bills, production bills, studio costs and reconciling agency fees.

Audit clauses are inserted into contracts because they are an important financial control.  Yet, too often advertisers treat their right to audit as a fall back option, which all too frequently is never acted upon.  When this clause is not acted upon, the advertiser forgoes the opportunity to implement standard compliance testing, which in turn limits their opportunity to validate agency billings and gain a certain level of comfort that comes with transparency into the agency’s financial stewardship of their advertising budget.

Once audit rights have been established, industry “Best Practice” would suggest that implementing periodic and routine testing is a must for introducing and maintaining ongoing preventative control measures.  The resulting testing which occurs as part of the audit process can help to deter wasteful practices, identify errant billing transactions and to monitor key financial metrics. All told, a well defined contract compliance audit program can help an individual advertiser address the “transparency crisis” while providing the organization the necessary legal and financial safeguards.

Of note, the agency community has come to accept independent audits as a normal part of an advertiser’s broader corporate or marketing accountability initiative.  Any pushback on this front should be viewed as a “red flag.”  For those agencies which have implemented sound financial stewardship practices there is nothing to fear from an advertiser’s review of their performance in this important area.  Quite the contrary, a well conceived, balanced independent audit process can yield insights and recommendations which also benefit the agency.  Lailah Gifty, a Ghaniaian and founder of the Smart Youth Volunteers Foundation, rightfully said:

“Never believe all that you hear. Always verify the original source of information.”

Those advertisers conducting business without a comprehensive “Right to Audit” clause are simply at risk, forgoing the most important control mechanism available to them to protect their interests.  For those advertisers, which have secured audit rights, but have failed to act upon this right, you are unnecessarily exposing your organization to legal and financial risks.

The “transparency crisis” cited by the ANA is a legitimate issue, which the industry will successfully address in due course.  The question to be asked of advertisers is; “Are you prepared to wait for a broad-based industry solution? Or do you leverage the contractual rights which you have already secured to address these concerns now?”

If you’re interested in learning more about how you might improve your agency contracts or the benefits of advertising agency contract compliance audits contact Cliff Campeau, Principal with Advertising Audit & Risk Management at ccampeau@aarmusa.com for your complimentary consultation.

Technology Companies Are the New Media Owners

1 Apr

technology firms as media ownersBy Oliver Orchard, Senior Client Director – EMM International 

This week I was fortunate to attend a debate in the British Parliament, The House of Commons.  The debate was hosted by the International Advertising Association (IAA) and organised by The Debating Group.   The IAA was formed in the 1930’s to help advertisers who were moving more and more towards export trade to understand the complexities of the different global ad markets. EMM’s staff are encouraged to take an interest in the work of the IAA, and we put many people through the residential training courses, with some of our senior staff holding committee positions.  The remit today is very much about helping to develop the client and agency heavyweights of the future, through networking, training and support.  The Debating Group has been holding debates in the House of Commons since 1975, and they regularly bring politicians, journalists and marketers together to discuss the political issues that surround marketing; and together they host a number of debates annually for the industry to participate in. 

The motion “Technology Companies are the new media owners” was supported by Rory Sutherland, Executive Creative Director and Vice Chairman of O&M and seconded by Anjali Ramachandran, Head of Innovation at PHD.  It was opposed by Hugo Rifkind of the Times and Chad Wollen, Group Head of Innovation and Commercial Futures at Vodafone. 

Rory and Anjali focused on the idea that ever since the Caxton Press printed the first secular work technology has always been the new media owner; whilst Hugo and Chad focused on the idea that media owners display some sort of moral conscience, or in some way better the world, through editorial.  Naturally, with Hugo’s work as a journalist this focused on print media and the role of Twitter and Google in events such as the Arab spring; though what sort of conscience media owners such CBS Outdoor, Exterion or Decaux demonstrate was conveniently overlooked.  Chad explored the idea that the message is separate to the medium; which as any junior planner will tell you is exactly why they have a job. 

The panel spoke eloquently for 40 minutes, and ultimately the motion was defeated. I voted against it myself, though with a different line of argument I feel the result would have been very different. 

The proposers missed a trick by ignoring media agency trading desks, DSPs, SSPs, RTB and inventory wholesaling.  Media agencies are the new technology companies, they are also the new media owners.  This situation is becoming more and more apparent to advertisers.  Many are scrambling to change their contracts in order to maximise their returns on the ‘good’ output of these technologies (the fantastic targeting and pricing), whilst seeking to limit the ‘negatives’  (unaccountable placements, lack of evidence of genuine exposures and the opaque margins anecdotally between 20% and 80% depending on quality of placement as one rather inebriated global head of a big five DSP network let slip to me recently). 

These technologies are increasingly supplanting the traditional agency/vendor relationship and are replacing transparency with opaqueness in an unprecedented way.  The share of digital on the schedule grows every year, the number of clients with a DSP clause in their contract grows weekly and every day traditional media channels become more and more digitalised.

Clients are often under-informed about these developments and contractually deficient when it comes to agency scopes. So what can you do? 

  1. Make sure that your contract with the agency is updated every year to cover all new technologies that might emerge – mobile advertising, RTB and interactive TV were all unthinkable until quite recently.
  2. Employ a specialist with a broad helicopter view of the market to ensure you are giving and receiving best practise in your process and relationships with the agencies for traditional and new media.
  3. Ensure you understand fully what the benefits and limitations are of new technologies.  With a recent study showing that just 8% to 15% of impressions online are actually “real” does that CPM deal really offer the best value?
  4. Understand which data is relevant and which is not.  Don Peppers, the social media guru, once said “trying to extract relevant data from digital is like putting a fire hose in your mouth when you’re thirsty” – it’s easy to be blinded by numbers, but in reality very few of them are important.
  5. Don’t go it alone, a market specialist can save you time and money by getting to the point, training your staff, and sitting on your shoulder during important future strategic discussion with the agency. Once you understand the game, ask the right questions, and make informed decisions, increased effectiveness will follow.

Some technology companies are the new media owners, they also happen to be your media agency.

To learn more about EMM International and how media accountability can drive advertiser value, contact guest blogger Oliver Orchard at Oli.Orchard@emminternational.comMr. Orchard is a Senior Client Director for EMM International and a key contributor to the company’s digital media accountability practice.  EMM is a provider of international media auditing and media optimization consulting services.  The company is based in London, England.   

 

 

Intellectual Property Protection: How to Protect Your Firm from Trolls

21 Jan

intellectual infringement protectionRecently we published an article on patent and copyright trolls and the recent legislative changes and legal decisions which have had a favorable impact on advertisers and their agency partners.

We received a tremendous amount of feedback from our readers on the topic, along with the question; “What specifically can we do to protect ourselves from copy and or patent infringement trolls?”  Given the level of interest regarding this subject, we wanted to share our thoughts on measures which advertisers can take to assist in mitigating the risks emanating from law suits brought by non-practicing entities.

By way of background, Advertising Audit & Risk Management (AARM) works exclusively with advertisers in the area of advertising agency contract compliance and performance auditing.  As part of the contract review portion of the audit, we provide counsel on opportunities for advertisers to enhance contract language to incorporate the latest in terms of legal and financial safeguards to protect their interests.  Needless to say, intellectual property infringement protection has been a growing area of concern for our clientele and one of the items on which we provide guidance.

The challenge as it relates to copyright and patent trolls or non-producing, patent enforcing entities is multi-faceted.  On the surface, the answer to this dilemma is pretty straightforward:

  1. Carry Intellectual Property Infringement Insurance.
  2. Ask your agency to conduct “Clearance Searches” to identify where digital work could pose infringement risks.
  3. Require your agencies (particularly digital/ mobile agencies) to carry the same or similar insurance (i.e. patent defense insurance policy)… be sure to provide guidance on terms:
    1. Is the vendor required to indemnify? Indemnify and defend?
    2. What is being indemnified? (damages, attorney fees, injunctions, lost business)
    3. Specify your desired role, exposure limits in a defense should action be brought.
  4. Require your agencies to indemnify you.

In reality however, the aforementioned actions can be expensive (i.e. a “clearance search” can cost $25,000 to $50,000), are not necessarily foolproof and represent serious client-agency contract/ relationship challenges when it comes to the issue of indemnification.

As an example, the American Association of Advertising Agencies (4A’s) recommends that; “Agencies make clear in their client agreements that clients assume all risks associated with patent infringement.”  On the flip side of the ledger, some advertisers, particularly larger organizations, force their agencies to contractually indemnify them… whether the agency has the financial means to do so or not.

This raises the question; “How can we break the logjam when it comes to indemnification protection?”  Clearly the answer to this question includes open, constructive dialog between both parties and their legal counsel.  After all, both advertiser and agency have a shared interest in minimizing the risks associated with frivolous, expensive lawsuits brought by trolls.

For client-side procurement professionals, the most logical approach to resolving this issue with the organization’s agency partners lies in negotiating a middle-ground based upon the notion of “mutuality” or a “proportional and equitable” sharing of risks and costs.  Experience would suggest that negotiations over this matter are more protracted and time consuming than other aspects of a client-agency agreement.  This is understandable given the risks to both parties and the cost and complexity of the potential remedies.

As long as advertisers negotiate from a position of strength and fairness, they can bridge the gap with their agency partners and reach agreement on this important legal construct.

 

A New Year’s Resolution for Marketers

27 Dec

new year resolutionInevitably, as 2012 draws to a close our mind turns to the New Year and we begin to reflect on things that we are thankful for, ways that we can better ourselves as individuals and how we might contribute more broadly to our families, companies and communities.

Having survived the Mayan “Doomsday” prophecy we can all breathe a sigh of relief and focus on the future with a renewed sense of vigor and commitment.  So what will it be?  Shall we resolve to give up caffeine, drop fifteen pounds or go the “I’ll be a better person” route?   Based upon our past resolutions, how should we handicap our chances for success in 2013?   Should we share our resolutions with others, or heed the words of the renowned 16th century English statesman John Selden:

“Never tell your resolution beforehand, or it’s twice as onerous a duty.”

Looking to mix it up a little and try a different approach?  Here’s an idea that will take less than 30 minutes of your time and can yield financial benefits and productivity gains that will benefit your organization throughout the year.   Go to the “Legal” drawer of your marketing services agency filing cabinet and pull out a copy of the letter of agreement for your firm’s agency of record, creative services partner or media agency.  If you’re feeling ambitious, pull all three.

When was the last time you reviewed these contracts?  In our advertising agency contract compliance audit practice too often our clients answer is, “It has been years” or “I have never seen them.”  Sadly, from time-to-time the advertiser cannot even locate a copy of their agency agreements, or at least an executed version of the contracts that govern their supplier relationships in this important area.

Whether your budget is $50 million or $500 million an annual review of your agency agreements is a worthwhile investment of an organization’s time and resources.  After all, the intent of these instruments is to provide the legal and financial safeguards required to protect the organization’s marketing investment, intellectual property and brand assets.   As importantly, they set the tone for the Client/ Agency relationship, establish performance expectations and provide the framework for shaping supplier behavior and resource investment.

The brief review will yield insights into statement-of-work deliverables, agency’s staffing plan and agency compensation methodology.  You might also notice a looseness of terms or that important controlling language is missing.  Once identified, you can set about fine-tuning the document to reflect the current nature of the relationship with that particular supplier and shoring up the language that will afford your organization the level of protection, transparency and control that it desires. 

An initial Client/ Agency agreement review is exactly the first step in any AARM advertising agency contract compliance audit process – a high level risk assessment based solely on agreement terms based on having tested hundreds of such agency agreements on behalf of our clients.  It is this experience and knowing where, in actual practice, financial and performance controls have fallen short of client expectations that set the stage for an expanded assessment of supplier contract compliance. 

Next steps then expand out to stakeholder discussions, agency data analysis, discrepancy identification and on-site audit work.  The net result of the discovery and analysis conducted around contract compliance involves financial true-ups, process refinements, improved reporting and controls and future efficiency gains. 

So as you consider your New Year’s resolutions for 2013, you may want to add a review of your advertising agency agreements to the list.  To assist on the path to improved agency stewardship, AARM is offering a “Free Agreement Based Risk Assessment” to any advertiser who reaches out prior to close of business on January 4, 2013.  Contact Don Parsons, Principal at AARM via email at dparsons@aarmusa.com  and we’ll follow-up to discuss scheduling.

Do Performance Incentives Have a Place In Agency Remuneration Systems?

1 Oct

Agency Performance CompensationThe direct answer is “yes” bonus compensation systems can be a viable means of incenting proper resource allocation decisions, behavior and performance among an advertiser’s agency network… just as they are with driving employee performance within an organization.

Perhaps a better question is; “What type of outcomes should be recognized?”  While the answer to that important question will vary by advertiser, as Stephen Covey wisely stated:  “Begin with the end in mind.”

This is clearly the case in designing performance compensation systems for marketing services agencies.  Properly structured, incentive compensation systems are an excellent tool for aligning an advertiser’s agency network partners with the organization’s long-term business goals.  Yes, that’s right, long-term goals.  That is not to minimize the importance of the near-term sales and profit needs of the business and the role that marketing communications can play in successfully realizing those goals, but those outcomes should be the focus of the “base pay” portion of an agency remuneration system.  A solid base compensation program is a requisite first step toward insuring that an agency makes the appropriate investment in staffing, consumer research & analytics, market insights and efficiency enhancing technology tools necessary to achieve next quarter’s demand generation goals. 

Securing agency “buy-in” and participation in supporting the broader strategic objectives of the organization are essential for long-term brand health and market share success.  This is where we believe a performance compensation program should be focused.  Too often we have seen incentive programs focus on tactical or executional outcomes at the expense of tapping into an agency’s strategic reserves as a means of upping the value of their contribution to an organization’s long-term success. 

One of the keys to success in this area is to involve the top management of both the advertiser and the agency.  Bringing senior management together to discuss the client’s vision for success, business goals and the performance criteria that should be put in place to assess progress has a dual benefit.  One, it can elevate the perspective of the agency from “vendor” to “partner” status in the eyes of the client’s management team and gain their appreciation for the agency’s strategic capabilities.  Secondly, the opportunity for a broader level of “strategic engagement” with a client can be an incredibly compelling proposition for senior agency management.  In turn, the combination of the respect exhibited by the client for the agency’s ability to contribute and the corresponding financial reward tied to their mutual success will fuel an agency to make the desired resource investment.

When structuring the performance criteria for an incentive compensation program, the need to blend both quantitative and qualitative measures is very real.  While written in the context of organization’s incenting their employees to take a long-term perspective, we were intrigued with a recent article in the McKinsey Quarterly and its relevancy to this topic.  Entitled; “Encouraging Your People to Take the Long View” authors Gibbs, Heywood and Pettigrew surmised that “over time, traditional hard performance metrics can encourage short-term success at the expense of an organization’s long-term health.”  However, they recognized that both measuring and strengthening the “capabilities that help companies thrive over the long haul” can be challenging.  Their answer?  Structure an evaluation process that effectively assesses contributions to “corporate health” by embracing the following principles:

1) Root-Out Unhealthy Habits 

2) Prioritize Values

3) Keep it Simple

We would certainly echo the notion of “simplicity.”  Too often in our contract compliance auditing practice, we encounter incentive compensation systems that are confusing, overly complex and metric laden to the point that they may incent very little in the way of extraordinary performance.

Finally, we would recommend integrating an annual client-agency 360° evaluation process that involves the same senior managers that were party to constructing the terms of the performance compensation program.  The ability to mutually assess progress and to identify areas for refinement in the coming months can boost the chances for successfully achieving the client’s goals and for building the client-agency relationship. 

Interested in learning more about the role of performance compensation programs in agency remuneration systems?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation. 

Marketers; “Are your agency contracts relevant?”

20 Aug

client agency contractsThe world of marketing is evolving at a rapid pace and the notion of change is a constant.  Technology advancements, media consolidation, agency mergers & acquisitions and evolving regulatory considerations ranging from consumer privacy issues to intellectual property concerns are but a few examples of events that can have a meaningful impact on client-agency agreements. 

Unfortunately, client-agency letters of agreement are not the “living” documents that they are professed or intended to be.  Too often they are outdated, invalid and or untraceable.  Further, seldom are they shared and understood by key internal stakeholders at the advertiser who are responsible for managing agency relationships… including key marketing team members.   

So, how can you assess the relevancy of your organization’s agency contracts?  Start by answering the following questions: 

  1. Can you locate an executed copy of your agency contract(s)?
  2. Are the terms of the agreement and the accompanying exhibits current?
  3. Are the scope of work and staffing plan detail incorporated into the original agreement reflective of the agency’s role and responsibilities today?
  4. Do your contracts contain a “Right to Audit” clause?
  5. Is there specific language defining a fee reconciliation process and agency time reporting requirements?
  6. Does your contract extend coverage, control and transparency to both the agency brand you work with along with its affiliates and holding company?
  7. Are there clear definitions in and around intellectual property ownership and licensing arrangements? 

If you answered “No” or “I’m not sure” to any of the aforementioned questions, then your agency contract may not be providing your organization with the level of risk mitigation, financial and legal control that is consistent with your supplier governance standards.    

In our agency contract compliance auditing practice it is not uncommon to discover that the client-agency letters of agreement (LOA) have either expired and or are simply out-of-date.  Since the LOA is the document which governs these important relationships, why are client organizations so lax when it comes to maintaining this legal instrument?  Below are a few “reasons” and observations that we have identified across 100+ contract compliance engagements: 

  • The “Master Agreement” or contract was negotiated as an “evergreen” document with the core terms and conditions remaining in place unless either the advertiser or the agency terminates the agreement.  In this scenario, it is typical that the scope of work, staffing plan and remuneration program are to be updated and reviewed annually.  Unfortunately, sometimes these important legal exhibits are not updated on a timely basis or in a manner consistent with the terms of the Master Agreement or actual current practices.
  • Turnover within the client-side procurement and or marketing departments often leads to a knowledge gap when it comes to marketing agency LOAs and the attendant “rules of the road” that were arduously poured over at one time and put in place to guide the company’s agency relationships.
  • Many client organizations simply do not have standardized marketing services contract templates/ terms and conditions nor do they have a central repository for maintaining any and all LOAs, addendums and statements of work pertaining to their agency network… let alone a process for periodic review/updating. 

The legal and financial issues that can arise from an outdated, expired or inadequate client-agency contract are significant and can create a number of risks for advertiser and agency alike.  If you have identified issues, we would urge you to take action immediately by working in conjunction with your agency partners to update and evolve these agreements.  If you’re looking for guidance on industry “Best Practices” in this area you can contact the Association of National Advertisers to access relevant articles and guidelines on this topic. 

As another consideration, if you would like to gain the benefit of what we’ve learned through first-hand experiences and would like to schedule a complimentary consultation on “Client-Agency Contract Trends,” please contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com.

 

Agency Agreements Require Adequate Audit Rights

14 Apr

Advertising Audit is an important financial control process – not an optional luxury.

Any large company conducting business with an advertising agency or media buying firm without comprehensive Audit Rights is simply at risk. The marketing supplier may refuse to cooperate with (or significantly restrict) even very reasonable audit requests.

Based on years of experience and observation, it is clear that a sub par or non-existent audit clause often limits an Advertiser’s ability to implement standard compliance testing which therefore limits their opportunity to validate agency billings and gain comfort. Important learning opportunities are also lost – clearly an undesired outcome.

An example of a healthy financial relationship between parties – there are cases to note where even lacking clear audit documentation, the marketing supplier has complied with audit requests, but these cases are few and far between.

Pushback is a “red-flag.” Good financial practices should have nothing to fear from thorough scrutiny. The more pushback the higher the risk meter should rise.

Verification of billing accuracy / support would seem an innate right of any large company spending millions of dollars with a vendor (yes, even in Marketing).

What should you do? (1) in the near term amend the current Client-Agency Agreement to add a Right to Audit clause – and make it retroactive for at least 3 years; (2) add a Right to Audit clause within an ancillary document such as a Statement of Work (SOW) or an annual amendment to the Master Client-Agency Agreement; or (3) create a new document signed by both parties creating a Right to Audit and adding it to the vendor master file.

Ensure the audit clause is
well-defined and comprehensive.
For a guide, contact AARM at info@aarmusa.com

Once Audit Rights are established, a best practice and preventative control measure is to implement periodic and routine testing to deter wasteful practices, to identify errant billing transactions and to monitor key financial metrics. Testing should be performed at least annually, and always in cases where an agency relationship has been terminated (“transition audit”).

The audit concept also applies to systematic (or continuous) monitoring processes. A systematic monitoring program measures agency financial transactions, reporting and timing against a predetermined set of tolerances. Metrics are compiled and delivered at least monthly to stakeholders. Systematic monitoring is generally performed by an independent third-party with specialized software, and the Advertiser often chooses to share results with the agency – to support incentive compensation goals of and or a basis for behavior modification.

Right to Audit is a necessary safeguard in today’s business environment. Determining a schedule, methodology, and defined approach that encompass at some level each vendor in the organization’s marketing network will provide necessary assurance to management that adequate oversight and preventative controls are in place to catch errors, drive efficiencies and enhance ROI.


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