Tag Archives: 3rd party vendor billing

Transparency is the Key to Agency Financial Accountability

17 Jul

agency financial management

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

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

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

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

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

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

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

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

~Martin Luther King, Jr.

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

 

The Problem with Focusing on Payment Terms

24 Jun

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

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

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

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

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

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

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

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

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

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

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

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