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Effectively Managing Agency Transitions

22 May

The purpose of this article is not to analyze “why” the average tenure of client – agency relationships have declined precipitously over the last few decades.  Sadly, research conducted by Michell and Sanders in 1995 indicated that a majority of these relationships lasted “no more than” five years.  Many speculate that the average tenure today is less than three years.  Rather, I would like to focus on an advertiser’s post-termination rights.

Much time is spent on the front end of a relationship negotiating the Letter of Agreement (LOA), often referred to as the “terms of separation” document.  Virtually all of these agreements contain “right to audit” clauses that provide the advertiser access to financial documentation, invoices, 3rd party reimbursement data, time-of-staff investment detail, fee reconciliation data, etc… to vouch for the accuracy of the billing process.  However, once a relationship has been terminated, very few advertisers refer back to the LOA or take action on  protections which it affords their organizations.

The reasons for this lack of attention on the LOA governing the “old” relationship are many and varied: Marketing is focused with on-boarding their new agency partner, Procurement and Legal are engaged in finalizing the LOA for the incoming agency and Finance is supporting their Marketing and Procurement peers on the compensation system analysis/negotiation.

Whether or not an advertiser has enacted their right to audit during the relationship, failing to enact this clause once a relationship has been terminated is a financial risk regardless of whether it was the advertiser or agency that initiated the termination. Conducting exit audits is not intended, nor should it be conducted as a vengeful act imposed by an advertiser on an outgoing agency partner.   Auditing in a post Sarbanes-Oxley world is a corporate governance best practice, part of an organization’s fiduciary responsibility to its shareholders. It is simply a means of formally closing out the relationship and mitigating any attendant financial and or legal risks associated with the transition from one agency to another.  In the words of American humorist and writer Finley Peter Dunne:

“Trust everyone, but cut the cards.”

So the question remains: “Why do so few advertisers audit their outgoing marketing suppliers?”  In our practice, we typically come across two primary reasons, the first is related to the investment in on-boarding the new agency referenced above.  The second is a feeling of empathy for the outgoing agency, particularly if the advertiser has terminated the relationship.  Conducting an exit audit in this instance is sometimes viewed by advertisers as the ultimate indignity for a business entity that was once a valued partner.

It has been reported that fewer than one-in-ten incumbent agencies retain an advertiser’s account once it has gone into review.  So what happens once a review has been announced?  Well, if you’re on the agency side and there is a 90%+ chance that you are going to lose the business, you may immediately begin paring back your resource investment, reassigning agency personnel to other accounts or reducing staff, replacing senior personnel with junior level staffers, delaying or holding earned but unprocessed credits, discounts and rebates rather than passing them back to the advertiser, extending 3rd party vendor accounts payable timing, reducing their stewardship efforts over the client’s advertising investment, etc…

Exit audits can mitigate the risks associated with these practices and can yield valuable insights and process improvements that can be applied to other relationships… while insuring that all billing and fees have been properly reconciled and that all intellectual property rights and assets have been properly transitioned.  Conducting an exit audit is an industry “Best Practice” designed to protect the advertiser and ensure a clean transition.  Implemented in a fair, even-handed and respectful manner they are not intended to punish an outgoing agency partner.

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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