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Increase Your Digital Coverage by 40% In One-Easy-Step

1 Aug

simpleisgoodConfucius once said that “Life is really simple, but we insist on making it complicated.”

Perhaps the same can be said of digital media buying. Too often it seems as though the onset and rapid growth of programmatic buying has created more problems than solutions. An expanded media supply chain with multiple layers of costs, increased levels of fraud, brand safety concerns, visibility challenges, a lack of transparency and perhaps most troubling, eroding levels of trust between advertisers and their agencies.

Growing pains? Perhaps. But something needs to change and this author would like to suggest one potential solution… abandon programmatic digital media buying altogether. Seriously? Why not?

Consider the following and the concept won’t seem so far-fetched:

  • In 2015, advertisers spent $60 billion on digital media, with close to two-thirds of that going to Google and Facebook (source: Pivotal Research).
  • According to the advertising trade group, Digital Content, today this duopoly is garnering 90% of every new dollar spent on digital media.
  • What happened to the magical pursuit of the long-tail and the notion of smaller bets being safer? Economics. The fact is that the notion of the long-tail simply didn’t work as researchers and economists found that having less of more is a better, more statistically sound pursuit. To wit, Google’s and Facebook’s market share.
  • Today, programmatic digital display advertising accounts for 80% of display ad spending, which will top $33 billion in 2017 (source: eMarketer).
  • Between 2012 – 2016 programmatic advertising grew 71% per year, on average (source: Zenith).
  • In 2018, programmatic will grow an additional 30%+ to $64 billion, with the U.S. representing 62% of global programmatic expenditures (source: Zenith).

Come again. Two publishers are getting $.90 of every incremental digital dollar spent and programmatic digital media buying accounts for 80%+ of digital media spend. What are we missing? Is there an algorithm that specializes in sending RFPs and insertion orders to Google and Facebook in such a manner that the outcome yields a 40% or better efficiency gain?

As we all know, there have been numerous industry studies, including those sponsored by the World Federation of Advertisers (WFA) and the Association of National Advertisers (ANA), which have suggested that at least 40% of every digital media dollar spent goes to cover programmatic digital media buying’s transactional costs (third-party expenses and agency fees), with only $.48 – $.60 of that expenditure going to publishers.

So, for an advertiser spending $40 million on programmatic digital media, if the law of averages holds true, $16 million will go to cover transactional costs and agency fees. That means that of the advertiser’s original spend, they will actually get $24 million worth of media. While we know that programmatic media can yield efficiencies, can it overcome that type of transactional deficit?

If that same advertiser eschewed programmatic digital and decided to rely on a digital direct media investment strategy, what would it cost them?

Assume that they hired ten seasoned digital media planning and investment professionals for $150,000 each (salary, bonus, benefits), they would spend $1.5 million on direct labor costs. Further, in order to afford their team maximum flexibility, let’s say that the advertiser allocated an additional $1 million annually for access to ad tech tools and research subscriptions to facilitate their Team’s planning and placement efforts. This would bring their total outlay to $2.5 million per annum.

If they were spending $40 million in total, this means that the team would be able to purchase $37.5 million worth of digital media. Don’t forget that placing digital buys direct will greatly reduce fraud levels that can eat up another 8% – 12% of every digital ad dollar, while also greatly improving brand safety guideline adherence. Compare that to the $24 million in inventory purchased programmatically.

So how efficient is programmatic?

Sadly, most advertisers can’t even address this question, because their buys are structured on a non-disclosed, rather than a cost-disclosed basis. Even if they had line of sight into what the third-party costs (i.e. media, data, tech) and agency fees being charged were, they wouldn’t have a clue as to the fees/ charges that sell-side suppliers were levying, further eroding working media levels.

A simplistic solution? Perhaps. But the fact that the industry continues to drink the programmatic “Kool-Aid” without any significant progress toward resolving the dilutive effect that programmatic transactional costs, agency fees and fraud have on an advertiser’s investment seems a tad irresponsible.

Ask yourself. What would you do if it were your money?

 

 

Is Your Contract Worth the Paper It’s Written On?

25 May

partnershipThe Association of National Advertisers (ANA) recently released its study on programmatic media. The study was conducted in conjunction with the Association of Canadian Advertisers (ACA), Ebiquity and AD/FIN.

While the study provided fascinating insights into programmatic media performance and costs at the transactional level, there was one particular item that stood out:

88% of the advertisers that were interested in and 75% of the advertisers that signed up to participate in the study could not or had to opt out.

Why was this? According to the study’s authors, “because of a myriad of legal, technical and process roadblocks put up by players in the ecosystem.” Long story short, those advertisers did not have contractual language providing them with clear data ownership or usage rights with their agency, trading desk and or ad tech partners.

The obvious question to be asked is, How can an advertiser’s programmatic media transactional data not belong to the advertiser? After all, it was their media investment that funded the buys. It was their agency partners who invested those funds on their behalf (or not). So, who could possibly own that data if not the advertiser?

What would you do if your agency partner denied your organization access to programmatic performance data that you had requested. Data that would shed light on your programmatic media performance and costs (i.e. third-party costs, agency fees, tech fees, data fees). It certainly seems short-sighted that an agency would deny their clients access to this data, both in the context of the ANA study and for providing transparency into how their programmatic investment is being stewarded to disclose what their true working media percentage is.

Sadly, this is but one example of Client/ Agency contract language omissions that create disclosure and accountability gaps, which can lead to legal and financial risks for advertisers. Other examples include:

  • No requirement for an Agency to disclose or competitively bid in-house production resources or affiliate companies.
  • Media arbitrage deals in which the Agency is marking-up media by an undisclosed amount on inventory that it owns stemming from principal-based buys it has made.
  • Agencies acting as principals, rather than agents, when investing the Client’s creative production funds. One example might be the Agency or its production studio filing for and retaining incentives offered by states and municipalities for shooting or post-production work completed in their geography.

Marketing spend is on the rise and is certainly considered a material expenditure, which can represent 12%+ of a marketer’s revenue base (source: 2015 CMO survey).

And yet too often, an advertiser’s contractual audit rights are not broad enough to ensure unmitigated access to the data files, records and reporting necessary to evaluate an agency’s compliance with the agreement and or their financial management performance. This can and should include:

  • An advertiser’s right to select an internal or external auditor of its choice (i.e. contract compliance, media performance, financial management).
  • The right to audit the agency and its related parties (i.e. holding company, affiliates, related entities, etc.).
  • Assertion of the advertiser’s right to limit or eliminate an agency’s non-transparent revenue (i.e. AVB’s, rebates, non-disclosed fees, mark-ups, float income).
  • The right to audit principal inventory and or mark-ups.

Contracts are also a great vehicle for communicating performance guidelines for items ranging from brand safety and viewability policies to fraud monitoring requirements and an advertiser’s policy on not paying for bot traffic, all of which are designed to safeguard an advertiser’s investment.

From our perspective, it makes sense for advertisers to engage in dialog with their agency partners to talk through contract terms and conditions, such as these, to secure their perspective and ultimately their buy-in. After all, the contract is a document that will govern most aspects of the Client/Agency relationship. Thus, open dialog that leads to a transparent relationship can form the basis for a trusting partnership that will last for many years to come.

As Stan Musial, the legendary baseball hall of fame member of the St. Louis Cardinals once said:

The first principle of contract negotiations is don’t remind them of what you did in the past – tell them what you’re going to do in the future.”

Funding Accountability Initiatives

26 Aug

Accountability FinalThe desire on the part of many advertisers to extend their organization’s accountability initiative to marketing is high. This is due to the fact that marketing is both one of the largest indirect expense categories within an organization and, for those that believe in its ability to drive strategic outcomes, critical in driving brand value and demand generation.

One of the key challenges for Internal Audit and Procurement professionals in implementing accountability programs is that they typically do not have a budget to fund the projects. Rather, they are reliant on their peers in Marketing to “buy in” to the concept and to underwrite the investment associated with analyzing contract compliance, financial management and in-market performance across their agency networks. This dynamic can create a loggerhead that delays or prevents corporate scrutiny into marketing and advertising spending and its resulting business impact.

The irony is that relative to the millions of dollars invested in marketing, the cost of implementing an accountability program for this corporate function is much less than one-percent of total spend. As we know, applying the skills and capabilities of audit and procurement teams and outside consultants typically results in improved controls that mitigate financial and legal risks to the organization. Further, these efforts often uncover historical errors and overbillings, and always generate future savings and improved marketing return-on-investment opportunities that more than offset the cost of the program.

It has always been a mystery as to why more advertisers simply don’t formalize and legislate the marketing accountability program and establish the requisite budget to be administered by the CFO / Finance organization. A minority of our clients operate in this manner, but clearly a “win, win” situation is created where internal audit and procurement provide their support and apply their resources pro-actively and marketing doesn’t feel as though funding is coming at the expense of critical business building programs within their budgets.

From our perspective, the source of funding for extending a corporate accountability initiative to marketing is the last hurdle. The reason is that we have seen marketing’s appreciation for accountability support grow along with their respect for the audit and procurement functions and a recognition that such programs can improve the efficiency and efficacy of the organization’s marketing spend.

The advertising industry is a complex; rapidly changing, technology-driven sector fraught with opacity challenges and risks such as digital media fraud and non-transparent revenue practices employed by agencies, ad tech providers, ad exchanges and media sellers. In light of these dynamics, organizations truly understand the benefit of monitoring the disposition of their marketing investment and the performance of their advertising agencies and third-party vendors.

It has been over 140 years since Philadelphia merchant John Wanamaker offered the following perspective on his ad spend:

Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”

Yet, with the passage of time it would be difficult for the industry to suggest that much has changed with regard to a marketers ability to accurately assess the efficacy of their advertising spend.

There is no time like the present to proactively develop; implement and fund transformative accountability programs that can optimize planned business outcomes, while safeguarding marketing spend at every level of the advertising investment cycle.

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

Sourcing Your Programmatic Buying Partner

14 Dec

3 rsWritten by Peter Portanova, Project Analyst for Source One Management Services

The concepts of reach and frequency have long guided the way marketers approach advertising, and when multiplied, they provide the calculation for Gross Rating Points (GRPs) to measure and evaluate the success of your campaigns. However, the rise of programmatic ad buying (automated buying based on real time data analysis of competitive rates) forces marketers to reconsider their historical understanding of success in marketing, and encourages the consideration of new and potentially more effective metrics.

GRPs are hugely important across a variety of marketing channels, exclusive of programmatic buying. The ideology that more GRPs means greater success is severely flawed, and by using such a calculation in a highly targeted and customized solution like programmatic buying, one misrepresents the technology’s true value. However, instead of arguing the utility of GRPs, it is more critical to consider alternative means of success in marketing and how embracing programmatic can revolutionize your approach to online advertising, while driving a variety of critical KPIs.  

Programmatic buying is growing quickly, and is responsible for billions of dollars in digital media placements. Programmatic buying is the intersection where data and advertising truly meet, with engineers, traders, and data-management platforms replace traditional sales planners. Agencies would like you to believe that their programmatic efforts reduce overall costs, but the truth of the situation is that, when viewed holistically, programmatic buying is actually more expensive.

Implementing programmatic buying efforts does have its merits, and agencies are quick to note that initial costs can be negated quickly. However, for programmatic buying to reach its maximum potential, marketers and advertisers must learn to move past the traditional reach and frequency mindset, and consider the long-term advantages of highly targeted placements. In fact, industry experts note that using programmatic buying to place more advertisements decreases transparency, which can lead to fraudulent placements. In using programmatic buying to deliver a highly targeted message to the right individual at the right time, brands are able to increase their visibility to the appropriate segments, increasing potential brand engagement.

Marketers must begin to understand programmatic buying from a holistic perspective. Why is this more expensive? Does it involve fewer people? Most marketers are shocked that programmatic buying proposals suggest fewer advertisements at a greater cost. While inventory is cheaper in programmatic buying compared to manual buying, there are substantial costs of doing business to implement and manage these efforts. In an article on AdAge, a media agency executive said, “Five full time employees are needed to spend $100 million national broadcast budget, while the same number would be needed for a $5 million programmatic buy.”

Understanding the discrepancy in FTEs and costs becomes more complicated when you also factor agency commissions into the equation. The employees required to manage a programmatic buy are in far greater demand, having a unique skillset that commands salaries 50-100% greater than manual buyers. The technology and the platforms do not eliminate the need for human input, and therefore it is critical to entice highly skilled employees for retention. Traditional full-service agencies have seen these employees move quickly to digital agencies that have a greater focus on new technologies, including programmatic buying.

The true cost of programmatic buying becomes noticeable when considering agency commissions that are charged to simply breakeven. The same agency executive interviewed by AdAge stated that, with a budget of $100 million, break-even points begin at 1% with TV, and quickly jump to 10-12% with programmatic. It is also worth noting that the 12% commission is only the break-even, with many agencies charging a rate of around 20%, to turn a meager profit.

There is a substantial cost of placing media through a programmatic partner. AdAge refers to these costs as an “intermediary tax” which accounts for all the transactions that take place to make a programmatic buy occur. With 7% to 20% taken by ad exchanges, another 10% to 20% taken by automated software providers, and then another 15% for the data-management platforms, there is potential that only $.50 of every dollar will reach the publisher. While these rates may seem expensive, there is value in using programmatic buying; however, the marketer should be fully aware of the intended use of programmatic, with no expectation that they are receiving a more targeted solution for a lower price.

While so far we have discussed mostly the potential benefits (and drawbacks) of programmatic buying, there is always a need to manage costs. Consider the following best practices when working with your agency to ensure greater transparency in your agreement.

  • Contract Language
    • When contracting with your programmatic buying partner, ensure that language exists around specific rates. Furthermore, consider a period where you can renegotiate these rates to be more favorable.
  • Redundant Services
    • Prior to considering your programmatic needs, understand the services you require and what you may need outside of traditional manual buying. When working with multiple vendors (which is common with programmatic buying), there is potential to be charged for the same service multiple times.
  • Liberate your Data
    • Unless specifically outlined, your data may not belong to you after working with a particular partner. If you are unable to retrieve your data during any part of the process, the supplier immediately gains tremendous advantage.
  • Understand your Options
    • Do you need managed service, or do you need self-service? In a self-service agreement, the vendor charges for the use of their technology, but does not charge for any resources associated with operating the platform. A managed option typically has charges for not only the technology, but also the management fees associated with run and execute a campaign.
  • Consolidate
    • Find a partner capable of providing you with a variety of services, and consolidate your marketing to that one agency. Using separate agencies to plan and execute your manual and programmatic buys is inefficient, and unless information is shared freely across agencies (it probably will not be), the effectiveness of both operations will be hindered. Consolidation also allows for better reporting and recognition of opportunities across channels.

As for the future of programmatic buying? It’s only anticipated to grow. EMarketer predicts total programmatic buying spend to exceed $20B in 2016. When it comes to digital marketing, there is no “one size fits all.” While programmatic buying is typically more expensive than other traditional tactics, there’s no doubt the method offers significant ROI in the form of operational speed and efficiency and increased scale and targeting. Like any other agency sourcing engagement, do your due diligence when looking for the right partner for your programmatic buying requirements. Beyond assessing agency scale, technology and data analytics, and skillsets, take steps to establish a strategic client-agency relationship. This begins with strong contract language that drives further value from your programmatic efforts and continues with fostering ongoing communication and transparency with your agency.

Peter Portanova is a marketing category enthusiast and Project Analyst for Source One Management Services. He is an expert at developing RFPs and executing strategic sourcing strategies for clients in a wide array of industries, specializing in navigating the complexities of the Marketing spend category. Click to learn more about Source One’s Marketing Category expertise.

In the Wake of PepsiCo’s Marketing Procurement Decision

17 Nov

OversightOn November 12, Ad Age reported that PepsiCo had made the decision to eliminate its Marketing Procurement department. As a result of the decision, the company will shift responsibility for marketing procurement activities to their brand executives.

PepsiCo’s move is consistent with its philosophy of shifting responsibilities to their brand teams with the goal of allowing those decision makers to “more quickly balance cost value and quality in all of their decisions.” While the company acknowledged the potential risks associated with the move as it relates to financial due diligence and contract compliance, it believes that it will be able to leverage its procurement experience, practices and processes to support the brand teams in this endeavor.

As industry participants know all to well, the role of procurement in marketing has been a contentious one over the last decade or so. Thus, it is likely that this decision will spark much dialog among marketers, procurement professionals and their agency partners. Some advertisers will evaluate the merits of a similar approach for their business and many in the agency community will weigh the impact of this decision on the broader topic of procurement’s role in marketing going forward.

We believe that regardless of one’s perspective, periodic introspection on seminal topics such as marketing procurement is helpful and continued dialog between advertisers and agencies on the practice is healthy. That said, we do not view PepsiCo’s decision as the beginning of a trend away from enterprise accountability and its application to the marketing function.

In our agency contract compliance practice, we work with advertisers that have highly developed, actively involved marketing procurement teams and we also work with advertisers that have not yet involved procurement on the marketing portion of their business. Regardless, each organization is mindful of the accountability and oversight obligation they have when it comes to their marketing investment. After all, advertising and marketing spend is one of the largest line items on a company’s P&L, and is critical to brand building over the long-term and demand generation in the near-term.

Financial accountability related to marketing can be viewed as falling into the following categories:

  1. Formalizing and centralizing key aspects of the agency relationship lifecycle: agency selection, on-boarding, performance monitoring, optimization, and transition when necessary.
  2. Leveraging the agency investment, by brand and across the organization as a whole. Decisions in this area can include both agency remuneration system development and overall composition of the agency network. Do we draft and engage disparate agency brands? Select agencies from a particular holding company? Or do we build a dedicated shop at the holding company level (i.e. WPP’s Team Detroit serving Ford Motor Company or Garage Team Mazda).
  3. Financial stewardship oversight and implementation of controls to safeguard the organization’s marketing spend at each stage of the investment cycle.

In our experience, the best tactic for aiding management of an agency network is the use of a standardized but customizable “Master Services Agreement” template. Formalizing the legal and financial terms and conditions necessary to protect an advertiser’s monetary investment and intellectual property rights is a critical first step on the path toward accountability. This is closely followed by the need to identify representatives from select functional areas of the organization that have would have involvement in the contracting, compensation system development and performance review portions of the agency relationship management program.

Organization’s that have implemented Strategic Relationship Management (SRM) initiatives will undoubtedly have an edge when it comes to leveraging their agency fee investment across brands, divisions and geographies. These companies will likely already have pre-determined agency selection protocols and established compensation guidelines or at a minimum maintain a database of information that can be accessed by client-side executives responsible for agency relationship management to help shape their decision making in this area.

Finally, whether an advertiser has a formalized marketing procurement department or not, independent agency contract compliance and performance monitoring support will typically satisfy an organization’s oversight and transparency requirements.

Many will suggest that PepsiCo’s decision will lead the industry down the path of rethinking the role of or need for marketing procurement. To the contrary, we believe that procurement’s role in marketing has been and will continue to be a highly individualized decision for advertisers. While important, we believe that procurement is but one piece in the overall puzzle for advertisers seeking to optimize their return on marketing investment.

Why Working Media is Still a Relevant Ratio

20 Jul

In the decades since full-service agencies unbundled and the 15% agency commission fell by the wayside, advertisers have sought ways to assess the efficiency of their overall advertising investment.

One of the more reliable measures of efficiency had been the ratio of working media to non-working media. Working media being defined as the percentage of an advertiser’s budget spent on distributing their message to the intended audience (media pass-through costs). Conventional wisdom held that non-working media expenses (i.e. production, studio charges, agency fees, etc.…) should fall between 15% and 20% of an advertiser’s total spend.

The media landscape evolved to include digital, social and mobile channels, which have garnered a greater percentage of media spend, leading many industry pundits to suggest that focusing on working media ratios as a measure of efficiency is irrelevant. Why? Partly because of the increased focus on content creation, analytics and the expansion of an advertiser’s roster to include a host of specialty agencies. All of which have served to fuel non-working media costs.

Stop. While applying a 15% to 20% benchmark may no longer be appropriate, that doesn’t nullify the need to assess the efficiency of advertiser spending.

One must remember that there have also been developments within the industry to increase efficiencies and offset the justification for a rise in non-working media as a percent of total spend. Digital media asset management systems, production centers of excellence, offshoring and programmatic buying are but a handful of items which have leveraged technology to wring costs out of the system.

Advertisers have no choice but to establish goals and benchmarks for monitoring the efficiency of their overall advertising investment. No one is suggesting that this be done at the expense of creating brand relevant, distinctive, effective content. Quite the opposite, trimming unproductive non-working media expense is a necessary means of boosting that effectiveness. Perhaps this is why major advertisers such as Unilever and PepsiCo publicly share their goals and performance as it relates to the non-working media ratio.

The fact is that advertisers’ agency rosters and third-party vendor networks have expanded dramatically. This in turn has created additional layers and redundancies across many of their agency network partners, which can serve to fuel non-working media expense. A few short years ago the World Federation of Advertisers (WFA) conducted research, which found that a majority of advertisers surveyed felt that their agencies had added layers of costs when it came to one important aspect of their advertising spend… media buying.

So why shouldn’t advertisers monitor non-working media spend in addition to the analytics utilized to assess effectiveness? In the end, eliminating waste is part of a marketing organization’s fiduciary responsibility to their enterprise.

The good news is that advertisers can establish their own internal guideposts for monitoring working media ratios. It is relatively easy to look back on expenditures by category to provide a historical perspective to calculate this particular measure of efficiency. Importantly, this will also allow advertisers to establish firm goals to assist them with their resource allocation decisions.

 

Strategic Sourcing and Vegetarian Haggis

19 Feb

Guest Article by Katherine Wang, Senior Project Analyst at Source strategic sourcingOne Management Services, LLC

How would you describe strategic sourcing and procurement? Source One’s company website demonstrates, for instance, that a variety of solutions and services are involved in the day-to-day responsibilities of a specialist in this growing field. I, for one, tend to prefer utilizing the terms “consulting” or “subject matter experts” when explaining to others what I do to, in order to capture the multidimensional nature of my activities. Never have I heard of my work being described as “Vegetarian Haggis.”

When I think of Scottish-related stereotypes, I think fondly of things like rugged terrain, tartan, and James Bond, so I will leave out any negative comments about haggis until I try the dish. However, due to the nature of haggis being a hearty and meaty dish, Rob Guenette’s comparison of procurement to a vegetarian version* humorously captures the common frustration and ambivalence agencies often feel towards the division that handles the RFP, negotiation, and contracting processes.

A common point of contention appears to be the perception that the only objective procurement is concerned about is cost reduction, regardless of the shop’s creative ingenuity or type of work, and as a consequence, parties habitually develop unreasonable expectations of themselves and of their partners.  Another concern is the idea that procurement departments do not have a clear enough understanding of the sales and marketing industry to make the best judgment calls. Digiday’s interview with two digital agency leads indicate how their greatest concern is that procurement develops scorecards and “scientific systems” to evaluate shops and disqualify candidates for incorrect or irrelevant reasons. These perceived impediments are only exacerbated by the fact that pitch processes are lengthy and costly, and according to PRWeek, increasingly drawn out thanks to the procurement department’s increasing involvement in marketing-related decisions. When considering those factors, it’s no wonder procurement is as appealing to the agencies as vegetarian haggis is to Sean Connery (or anyone else for that matter).

Nevertheless, it is unlikely that marketing teams will exile the procurement division any time soon. Putting aside company regulations and bureaucratic hurdles, procurement is, as discussed by Alan Wexler, EVP of SapientNitro, and James Gross, co-founder of Percolate, utilized as the “investigative layer that takes the workload off the buyer when making a purchasing decision,” and help add accountability and structure to a company’s buying decisions. This is especially important when large firms with a multitude of divisions and products seek marketing services and are faced with a daunting number of choices from different agencies.

To allay the qualms engendered by the agency-procurement relationship and to emphasize the benefits that such a partnership would bring, I conclude with a few notes on best practices observed in the business. All paths point to how clear communication is integral to the process. Forbes’ recent exposition on the 2013 ANA Advertising Financial Management Conference in Scottsdale Arizona illustrates the gap as well as constructive links between procurement, agency and marketing teams. Brett Colbert of MDC Partner’s quip about procurement at the conference, “…It can’t just be about procuring or buying…. We have to move the conversation beyond savings, talk about value not price,” deftly sums up the ultimate goal. To meet this target and derive value from business engagements, parties should increase the flow of information to better comprehend each initiative’s needs.

Similarly, ISBA and IPA provide six useful principles to make the most out of an agency pitch. The lesson to be mastered sounds simple enough: procurement, agency, and marketing teams should work to ensure that there is effective communication and transparency among the three parties. Collaboration is important to understanding the ultimate objectives and nuances of selecting an agency that fits well, in terms of capabilities and chemistry, and to avoid using the RFI/RFP as a blunt instrument. As they say, “Quality, not quantity.”

To learn more about how strategic sourcing may bridge the disconnects between marketing teams, procurement, and advertising agencies and obtaining value, contact guest blogger Katherine Wang at kwang@sourceoneinc.com.  Katherine Wang is a senior project analyst for Source One Management Services LLC and a key contributor to the company’s sales and marketing services group. Her unique experiences and insights are leveraged daily as the group develops innovative and effective sourcing strategies for a client list of global leaders in industries including pharmaceutical, health care, and manufacturing. Source One Management Services is a provider of procurement services, helping clients with strategic sourcing and supplier management solutions. The company is based in Willow Grove, Pa. 

*A final note on vegetarian haggis: according to The Guardian, it’s actually pretty good, all things considered.

 

4 Common LOA Oversights

2 Dec

client agency contractsWithout question, the single most important relationship management instrument for both advertisers and agencies alike is the letter-of-agreement (LOA).  At its most basic level, the LOA establishes the ground rules for each party along with their respective responsibilities during the relationship and afterwards, identifies agency deliverables and staffing commitments and spells out how the advertiser will compensate and evaluate the agency.

From an advertiser’s perspective, the LOA establishes critical legal and financial controls. These controls are designed to provide a level of protection and transparency required to assist the advertiser in effectively monitoring the agency’s stewardship of their advertising investment.  However, in spite of the importance of LOAs in safeguarding advertiser interests it is an area in which many advertisers fall short when it comes to securing their rights and protecting their interests.  The reasons for this range from insufficient industry specific experience among an advertiser’s legal and procurement team to the lack of an advertiser-centric agency contract template for utilization across an advertiser’s agency network.

In our agency contract compliance audit practice we have had the opportunity to review several hundred client-agency contracts including those that incorporate industry “Best Practice” language and others that limit an advertiser’s rights and leave them legally and financially exposed.  Over the course of this experience we have identified four common LOA oversights that advertisers should be mindful of when negotiating their agency agreements:

  1. Lack of a viable “Right to Audit” clause
  2. Failure to require the agency to track and report on their time investment and to reconcile fees
  3. Inadequate definitions surrounding agency remuneration models
  4. Failure to legally extend the agency’s obligations under the agreement to their affiliates

Without a comprehensive Right to Audit clause an advertiser is forgoing the single most important control mechanism available to protect and monitor their interest.  Advertisers would be well served to heed the words of Ralph Waldo Emerson;

“All promise outruns performance.”

Thus, advertisers should secure their right to review any facet of the agency’s compliance to the LOA and or their stewardship of the client’s advertising investment.  This would include, but not be limited to; fees/ commissions paid to the agency, the accuracy of agency time-of-staff reporting, assessing the accuracy and timeliness of third party vendor billing activities or reviewing the agency’s compliance with competitive bidding requirements.  Importantly, the Right to Audit clause should survive the termination of the relationship for a period of two to three years.    

Regardless of whether an agency is compensated based upon staffing investment levels, retainer fees tied to a statement-of-work (SOW), project fees or commissions it is imperative that the advertiser require the agency to track their time.  Ideally, time should be tracked by person, by day in quarter-hour increments by project/ task and reported back to the advertiser on a monthly basis.  This allows both client and agency the opportunity to assess the efficiency of the processes that are in place to guide project workflow and to identify means to refine and improve those processes.  Similarly, whether the remuneration is tied to an agency’s direct-labor investment or commissions tied to advertising spend the LOA should require that the fees/ commissions paid be reconciled on a quarterly basis.  Further, the LOA should specify how differences in planned activity or resource levels (over or under) will be squared up at the time of the quarterly reconciliation.

As agency compensation models have evolved over the years, so to have the number of components that go into the calculation of agency remuneration.  Of note, none of these components have standardized definitions.  Thus it is critical to clarify client-agency intent and understanding within the LOA by specifying what constitutes a full-time equivalent, what comprises direct labor or indirect overhead, is the commission rate established off of a gross or net base, etc…  Additionally, when and where possible, incorporate the use of examples to show the method to be utilized to calculate specific outcomes.

Finally, with the proliferation of agency holding companies and the myriad of mainstream agency and specialty services providers which they own it is likely that an advertiser is being served by many of those firms, with or without their knowledge.  Beyond creative, media, and digital resources these could include research firms, barter companies, production companies and trading desks.  The LOA should require that an agency fully disclose all intra-company transactions and assert that the LOA terms and conditions apply to and bind each of those affiliate companies as well as the agency-of-record.  This will insure full transparency for the advertiser while enhancing financial controls.

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.   

 

Insightful Approach to Marketing Services Procurement

30 Aug

marketing services procurementIt was with great interest that I read a blog post on Procurement Leaders from Danny Ertel dealing with the topic of strategic sourcing’s role in the procurement of complex services. 

The article provides an insightful approach to dealing with the services business owners within the organization to gain their confidence and importantly, their buy-in to an active collaboration with the procurement team.  In our experience working with marketers, the chief fear cited by Mr. Ertel when it comes to marketing leaders hesitation to actively engaging with procurement is the fear that their “trusted advisor” will be abandoned in favor of a lower-cost provider that is not as capable of supporting the branding and demand generation needs of the organization.  From a marketer’s perspective this potential outcome carries an inherent level of risk that can be difficult to overcome when attempting to forge a productive relationship between marketing and procurement.

There has been a significant shift of late in assessing the procurement team’s “value proposition” to their internal marketing clients due in large to the recognition that the sourcing of complex services is different than that of direct procurement categories.  It is generally agreed that the former carries more risk and in turn can yield greater strategic value to the organization when a productive, long-term relationship can be forged or enhanced with a marketing partner such as an advertising agency, public relations firm or marketing insights provider.  In the words of M. Kathleen Casey:

“Do not free the camel from the burden of his hump; you may be freeing him from being a camel.”

So how should procurement fashion their appeal to professional services owners?  According to Mr. Ertel, “procurement needs to consider ways to help address what such stakeholders might actually consider to be in need of fixing.”  While simple in nature, this is an incredibly straight forward approach which too often is not followed.  The primary reason for this is a lack of a basic understanding of the marketing services value chain and the role which suppliers play in assisting the organization in achieving its sales and profitability goals.  Further, it requires procurement and marketing professionals to work in tandem to map out those areas where the marketing services team’s needs align with procurement’s resource and capability offering to find “win-win” opportunities. 

While the end result of such collaboration could be savings, in all likelihood the rewards will be much greater and encompass future cost avoidance, process improvements, the mitigation of risk, alignment of corporate governance oversight and better resource management… for both the organization and its marketing supplier network. 

When there is a perceived risk involved in the sourcing process, such as with the procurement of complex services, careful analysis of those risks relative to the cost: benefit proposition is paramount.  This cannot be accomplished solely by the procurement team.  For strategic service providers such as an advertising agency of record, deep category knowledge is required which will necessitate the active involvement of the internal marketing stakeholders and potentially independent advisors with specific skill sets in the area of search, agency remuneration and contract compliance. 

The consequences of a poor decision in the sourcing of complex professional services are too great to be ignored. Therefore, the logical path forward necessarily requires a solid working relationship between procurement and marketing built on the notion of trust, a clear delineation of project goals and a mutually agreed upon division of roles and responsibilities over the course of the indirect procurement process. 

Marketing investment is a substantial component of an enterprise’s overall cost structure which often runs as high as 3.0% to 5.0% of gross revenues –  way too substantial to believe that this investment category can forgo the type of internal scrutiny and control rigor applied to other areas of the company.  Thus, it is imperative that procurement and marketing strive to address their differences and forge ways to collaborate that unlock the value gains which are inherent in a marketing services supplier network. 

 

 

 

Moving Toward Strategic Sourcing

17 May

Advertisers strategic sourcinghave come a long way in forging stronger ties between their marketing and procurement teams.  Yet, there is much more to be done as organizations look for ways to improve their return on marketing investment (ROMI).  After all, while important, expense reduction is only part of the ROMI equation and some would argue a secondary consideration when contrasted with marketing’s role in demand generation.

The Association of National Advertisers (ANA) released the results of a recent survey of procurement professionals fielded earlier this year.  Not surprisingly, survey participants indicated that “cost reduction” and “cost avoidance” were the top two metrics by which their efforts were judged within their respective organizations.  No problem.  These are important financial goals for any enterprise.

However, the key to evolving the collaboration between marketing and procurement is to evolve their focus to include various means of boosting supplier performance.  The potential strategic value related to improvements in; agency relationship management processes, resource allocation decision making, supplier innovation and client/ agency engagement can have a meaningful impact on the bottom line.  On this topic, the aforementioned ANA survey would suggest that marketing and procurement have made significant progress, at least philosophically.

So what are the impediments to strategic sourcing playing a more meaningful role in marketing procurement and supplier relationship management?  Many in the marketing and advertising industry would suggest that “experience” is the principal challenge facing procurement professionals when it comes to the marketing services arena.  To be fair, this is not a procurement issue, this is an organizational issue. Recruiting sourcing talent with marketing experience, educating and training procurement professionals on the nuances of professional services sourcing and creating a culture which embraces accountability and transparency across the organization are key issues to be addressed.

In our opinion, marketing has a significant opportunity to shape the organization’s efforts in building the proficiency of the procurement team.  Work begins with, but clearly is not limited to, assisting HR to identify sourcing professionals with marketing experience, assisting in the crafting of job descriptions, educating and informing their procurement peers on differences between marketing services and other direct or indirect procurement categories, and working diligently to articulate their supplier optimization initiatives as the basis for driving goal alignment between marketing and strategic sourcing.

Unfortunately, in some organizations, rather than assist in developing procurement’s skill set and resource offering, marketers take advantage of the procurement team’s lack of category experience to stave off or minimize their involvement within the marketing services realm.  Given the significant level of marketing investment advertisers are making this is clearly not a desirable outcome; either as it relates to ROMI or relates to mitigating financial and legal risks inherent across the marketing services supplier network.

Unlike George Carlin’s “seven dirty words” which were once “forbidden” by the broadcast industry; accountability, audit, collaboration, cost containment, expense reduction, risk management and transparency are not taboo.  Rather, these activities should be considered necessary ingredients in any strategic supplier management initiative.   It remains a mystery as to why this perspective has been slower to take seed in the U.S. advertising marketplace than it has in the U.K. and Western Europe, but it is an issue that will need to be addressed for any real progress to occur.

Interested in learning more about constructive marketing procurement programs? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation.

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