Tag Archives: advertising agencies

Media Agency Estimated Billing Should Be Eliminated

24 Oct

accountspayableLet me start by saying that Advertising Agencies are not banks and should never be asked to settle vendor obligations, made on behalf of clients, with their own funds. That said, the long-standing practice of “estimated billing” is a relic of a bygone era and one which should be abandoned.

In a day and age where the electronic transfer of funds is commonplace and where most media owners invoice agencies based upon “actual” activity, following the month of service, the notion of an advertiser being billed upfront on an estimated basis is no longer necessary for the vast majority of media being purchased. From an advertiser’s perspective, this antiquated system results in burdensome levels of paperwork, drives up accounts payable processing costs, needlessly extends the invoice reconciliation process, restricts client use of funds, results in lost interest income opportunities for the advertiser and perhaps one of the less apparent benefits, eliminating the apprehension/reliance on an agency to accurately track and timely reconcile such estimated billing.

Can anyone cite a single benefit that accrues to an advertiser from this approach? If an advertiser were to purchase inventory directly from the media seller they would pay based upon actual costs, so why should it be any different when purchasing media via a client-agent relationship?

The move to final billing has but one drawback, to one stakeholder… the loss of agency float income on pre-billed activity. While conceptually we don’t believe that it is appropriate for an agent to make money on the use of client funds, we do understand that eliminating this non-transparent source of revenue would have a negative impact on an agency’s bottom-line. This, however, should not be the concern of the advertiser community, as this was never the intent of the estimated billing process to begin with. After all, it is the advertiser’s money and as such, they should be the only stakeholder to benefit from access to and the use of those funds.

Transitioning to actual billing makes good sense from both a treasury management and a transparency accountability perspective. It is more efficient, can reduce payment processing costs and can potentially improve days payable outstanding performance for the media seller.

As it is, advertisers generally have little to no insight into the time gap between remittance of their funds to their agency and in turn the time it takes for the agency to reconcile media activity and remit payment to an advertiser’s third-party media vendors. If client-side CFO’s were aware, there would certainly be significant interest in reforming the estimated billing system and the stewardship of an advertiser’s media advertising investment.

When it comes to financial management within the advertising sector, we have always been cognizant of the words of Robert Sarnoff, past president of NBC and RCA in the mid-twentieth century:

“Finance is the art of passing currency from hand to hand until it finally disappears.” 

Interested in learning more about improved financial management practices across your marketing agency network? Contact Cliff Campeau, Principal at AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on this topic.

3 Reasons Why Marketing Accountability Matters

1 Jan

AccountabilityAs 2015 has come to a close, many of us who are involved in the marketing and advertising industry will most certainly reflect on some of the challenges faced and lessons learned during the prior year. Rightly so, as future success is often based upon the knowledge gleaned from reviewing past experiences. 

We work in an industry that is dynamic and exciting and yes, at times, trying. The dizzying array of issues which industry practitioners deal with on a daily basis are not for the faint of heart; big data, ad technology, media fragmentation, changes in consumer media consumption behavior, industry consolidation, talent procurement and retention and a myriad of financial oversight challenges ranging from ad agency compensation to optimizing an advertiser’s return-on-marketing-investment (ROMI). 

One of the highlights from this past year is that a significant spotlight was cast upon a handful of seminal issues that have a direct and meaningful impact on the industry. These include conversations on improving transparency, mitigating the risk associated with fraudulent activity, particularly in digital media, and the need to strengthen client/ agency relationships. 

As importantly, we believe that a key takeaway from an advertiser’s perspective in 2015 is that accountability matters, perhaps more now than at any point in the recent past. There are three reasons why we believe that it is important for client organization’s to implement marketing accountability measures in the coming year: 

  1. Marketing expenditures represent one of an organization’s largest SG&A expense line times. As such the dollars spent in this area need to be closely monitored to insure that they are allocated and stewarded in an effective manner.
  2. Optimizing ROMI is the primary responsibility of marketers and their agency partners. This has never been truer than it is today given that CEO’s, CFO’s, CPO’s and Internal Audit are more focused on enterprise wide accountability initiatives than ever before. Further, many of these stakeholders view marketing as an expense to be managed tightly on a line-item basis, rather than an investment.
  3. Client marketing departments are the first and last line of defense when it comes to protecting an advertiser’s fiduciary interests. Gone are the days when ad agencies served as principal-agent for their clients. Ad agencies, ad tech firms, trading desks, publishers and fraudsters are all in competition to increase their respective share-of-wallet, often at an advertiser’s expense. As such, it is imperative that CMO’s work with their C-Suite peers to put in place the appropriate financial management processes and safeguards to protect the dollars entrusted to them. 

Ironically, in spite of these truisms, most advertisers have yet to implement formal accountability initiatives inclusive of agency contract compliance reviews, financial management audits or performance assessment programs to protect their marketing investments and to boost ROMI. 

While the reasons are many and varied, they are immaterial in the context of the current state. The reality is that client organizations which fail to embrace marketing accountability initiatives will be at risk when it comes to insuring that their hard earned budgets are spent in an appropriate and effective manner. In the words of Noreena Hertz, the noted English academic, economist and author: 

Transparency, accountability and sustainability have become the slogans of the market leaders.” 

There are many within the industry, including both client-side marketers and agency executives, who would argue that the move to improve advertiser controls takes time away from the business of creating and executing ad campaigns. 

Quite the contrary, in our experience, we have seen the implementation of accountability initiatives within the marketing area actually improve work flow, project briefing and approval processes; enhance client/ agency alignment, boost clarity around roles and responsibilities, provide rationale to upgrade marketing ops and clearly establish the expectations of both stakeholder groups. In the end, this can improve efficiencies, freeing up time for client facing activities and can help solidify the client/ agency relationship, all while enhancing transparency and controls. 

The primary reason for this is that accountability initiatives are predicated on enhanced levels of communications between clients and their agency partners and they ultimately drive understanding and trusts among C-Suite personnel at the advertiser in their agency partners. 

It is for these reasons that we believe that marketing accountability is a practice whose time has come. The stakes are too high for advertisers not to implement improved controls in 2016. Further, we know from experience that what is inspected is respected and respect is not a bad foundation on which to base a relationship. 

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

Are Advertisers Fully Realizing the Benefits of These Production Trends?

2 May

digital production managementPerhaps one of the more significant trends within the advertising industry in the last decade has been the advent of digital asset management platforms and the continued move toward the decoupling of creative development and cross platform production.  

These innovations have resulted in a number of meaningful benefits for advertisers including; the ability to maintain consistent brand standards across the globe, minimizing required production lead times and reducing expenses in this area.  Agency holding companies to have been the beneficiaries of improved efficiencies tied to their horizontal strategy of creating in-network production centers to serve clients across their network of agencies.  There have been numerous reports from agencies indicating that this de-coupled, centralized approach to advertising production can generate savings for their clients in the range of 20% to 50%. 

There is another trend which is positively impacting production efficiencies… “offshoring.”  Ironically, the practice of offshoring is not talked about quite as openly or as often between advertisers and agencies.  Considered a global best practice in the digital production sector, the ability to leverage an advertiser’s digital asset repository from anywhere in the world has fueled the rise of digital production hubs in markets such as Bogota, Colombia, Sao Palo, Brazil and New Delhi, India.  The reason is straight forward.  These markets provide access to a growing talent pool of digital production specialists, while offering comparatively low labor costs that can be as much as 70% below that of North American and Western European markets.  

In our agency contract compliance auditing practice we review numerous client-agency agreements complete with agency staffing plans, labor and studio rate sheets and direct labor cost work-ups.  Of note, it is rare that these documents provide any transparency into an agency’s use of in-network production centers or their utilization of an offshoring strategy.  Rather, we see agency overhead and direct labor rates by function, which reflect more traditional staffing models and costs affiliated with U.S. creative hubs such as New York, San Francisco and Chicago.     

The obvious question to be asked is; “Are advertisers fully participating in the efficiency gains related to these practices?”  Based upon our experience, too often advertisers do not have the requisite transparency into this area to assess the extent to which any realized production efficiencies are flowing through to their bottom line.  As the twentieth-century U.S. architect and engineer, Richard Buckminster Fuller once said: 

“None of the world’s problems will have a solution until the world’s individuals become thoroughly self-educated.” 

Interested in learning more about your true production costs?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com to schedule your complimentary consultation on this important topic today. 

 

Agency Charging Practices Questioned

9 Sep

ad agency charging practicesEarlier this week Digiday, a media company serving digital media, marketing and advertising professionals ran an interesting article regarding agency compensation and the “tricks” played by agencies to boost their bottom lines. 

In short, the article asserts that; “For ad agencies, it’s harder than ever to get paid. Their services are becoming increasingly commoditized, and their margins are getting squeezed as a result.”  According to the author, Jack Marshall, this in turn is “driving some to get creative with the ways they bill clients, as they exploit loopholes and tricks in an attempt to maximize their rewards.”  Examples of the bad practices employed by some agencies in this particular area include:

  • Artificially inflating the salaries of their employees when developing compensation programs
  • Double-charging clients by including items such as medical expenses in both salary costs and overhead calculations
  • Slow rolling projects and or throwing more people at a project than is required to boost billable hours

Andrew Teman, one of the agency executives interviewed by Digiday for the article suggested that;

“The problem with big agencies is they don’t make money being efficient; they make money billing more hours.”

For practitioners within advertising industry, the aforementioned revelations are not newsworthy.  Attempts to game the system have been ever present and serve as a reminder of the decades long struggle clients and agencies have had in structuring mutually beneficial agency remuneration programs in a post “15% commission” world. 

Ironically, advertisers and agencies want the same thing… a fair and efficient compensation program which incents extraordinary performance, good behavior among the stakeholders and which leads to a solid client-agency relationship.  To that end, neither party’s needs are being effectively served by the games and subterfuge described in the Digiday article.  The solution to the issue, which seems elusive, is actually rather straightforward: 

  1. Development of detailed scope(s) of work (SOW) to serve as the basis for agency resource investment modeling.  This is an important first step, since it is the SOW which will drive agency staffing and the resulting schedule of charging practices.
  2. Completion of a comprehensive agency staffing plan, with personnel names, titles, functions, utilization percentages and billing rates.
  3. Implementation of an agency remuneration program which aligns the client’s goals with the agency’s resource investment.  Of note, there should be full transparency into the various cost elements used to calculate agency fees, overhead and profit levels.
  4. Reporting and control mechanisms to monitor agency time-of-staff investment, performance and outputs to protect the financial interests of both clients and agencies. 

Unfortunately, as straightforward as the solution may appear, few clients and or agencies have effectively implemented the four steps suggested above at a sufficient level of detail as part of their continuous relationship management processes. 

Some would suggest that the real challenge has been in effectively scoping the work required on behalf of an agency.  According to Michael Farmer, Principal of Farmer & Company which specializes in assisting advertisers and agencies in developing and implementing accurate, effective Scope of Work practices and tools, “New metrics are required to track and measure workloads, prices and resource productivity. That’s the only way agencies can evaluate and negotiate changes in the fees they are paid in today’s marketplace — and halt the erosion in agency operational health.” 

We would suggest that putting in place an effective monitoring program in this area is long overdue at most advertisers.  If not addressed, the institutionalization of the bad behavior referenced in the Digiday article sets a dangerous precedent for treating relationship ailments with trickery rather than frank dialog between clients and agencies.  

 

 

Are Agency Relationship Managers a Luxury or Necessity for Advertisers?

26 Jul

madison avenueIn the “good ole” days of full-service ad agencies, 15% commission and powerful, independent ad agency brands… responsibility for an advertiser’s agency relationships was typically limited to a handful of executives within the organization, up to and including the CEO. 

Over the course of the last 30+ years, agencies decoupled, remuneration programs evolved, ad agencies went public, and agency holding companies rose to power and the number of agency partners on a client’s roster have greatly increased.  Unfortunately, as agency rosters grew in breadth and their interaction with client personnel expanded across the organization, there was one area that was overlooked.  Simply, “Who” would be responsible for these important relationships?  Factor in CEO and CMO turnover rates and one can begin to understand why client/ agency relationship lengths are now measured in years rather than decades.   

For those who believe that advertising agencies play vital strategic roles in building and positioning brands for long-term success, driving near-term demand generation and in furthering an advertiser’s understanding of their customer base, agency turnover is a risky and expensive proposition.   

“Remember upon the conduct of each depends the fate of all.” ~Alexander the Great 

In order to stabilize client/ agency relationships and to optimize performance across their agency network, many advertisers have invested in the addition of Agency Relationship Management specialists.  Working across an advertiser’s organization to assist Marketing, Procurement, Legal and Finance with the various nuances of effective agency stewardship this position can be a vital component of any supplier relationship management initiative.   

From contracting for agency services to developing remuneration programs and performance evaluation processes to overseeing contract compliance assessments and cost benchmarking audits there is much work that goes into maintaining an effective and efficient marketing supplier network which may include dozens of agencies.  The Agency Relationship Management specialist brings the subject matter expertise to counsel internal stakeholders on industry “Best Practice” and the experience to help shape decisions pertaining to key aspects of the organization’s agency stewardship efforts. 

As importantly, from an agency perspective, this position can and should serve as an advocate and an ombudsman providing an objective perspective when it comes to resolving issues or mediating disagreements.  By further providing unambiguous, consistent two-way communication between the partners and their respective stakeholders coupled with the establishment of clear expectations regarding agency performance the odds of building strong, enduring relationships are greatly enhanced.

This service can either be maintained internally at the client (by appropriate personnel with both broad and deep advertising experience – client and agency side) or the service can be outsourced to a select qualified and dedicated specialist or group. 

For those advertisers who view their agencies as partners rather than vendors, and who want to foster increased involvement, contribution and interactivity, a strong case can be made for the addition of the Agency Relationship Manager role.  Responsibilities would entail being the “hub” of all things related to agency stewardship, developing a marketing agency database cataloging all aspects of the client/ agency relationship and agency performance, disseminating information to all stakeholders and sharing industry “Best Practice” insights on this important area.  It is a role which requires a tremendous amount of patience and tact, but one where the value provided far outweighs the salary investment outlay required to improve an organization’s agency stewardship and financial management practices. 

Do Advertisers Get What They Pay For?

17 Sep

do advertisers get what they pay forToo often, the answer is “No” advertisers do not get what they’ve paid for.  These shortfalls typically manifest themselves in two camps: 1) Lackluster service levels and work quality; and 2) Financial stewardship missteps.  Needless to say, both can have a negative impact on the efficacy of an organization’s marketing investment.

How can this be?  You ask.  There is a truism in the advertising world that what is inspected is respected.  Organizations that don’t apply this standard to their agency partners and third-party vendors are, quite simply, at risk. 

There are a number of factors that can impact service levels and work product.  These can include excessive agency staff turnover, deficient levels of involvement by senior agency personnel on the business, process limitations that squander time or fail to produce “memorable” work that is on strategy.  These items can result in high levels of project rework, scope creep, relationship dissonance and, if not kept in check, can negatively impact an advertiser’s demand generation efforts.  Make no mistake about it, this carries economic consequences that limit an advertiser’s return on marketing investment (ROMI).

Sound financial stewardship of an advertiser’s funds by their agency and third-party vendors is the fiduciary responsibility of each and every supplier.  However, an advertiser cannot leave anything to chance.  Tight contract controls regarding agency staffing, scope of work, remuneration parameters and reconciliation and reporting guidelines are a must and represent the first line of an accountability defense. 

Additionally, advertisers should require their media agency partners to conduct thorough post-buy analyses, conduct regular third-party billing reconciliations and to secure compensatory media weight and or cash for audience under delivery on a timely basis.  In the creative services arena, agencies should be monitored to insure adherence to the organization’s cost controls, production management and third-party accounts payable guidelines to insure that an advertiser’s billing and accounts payable expectations in these areas are being met. 

The financial impact of shortcomings in any of these areas can be significant.  In our agency contract compliance auditing practice it is not unusual to identify one-time errors or systemic oversights that can represent between 1.0% and 9.0% of an advertisers budget.  So what can an advertiser do to insure that they are securing maximum value for their advertising expenditure?  In the words of noted businessman and author Albert E.N. Gray:

“Inspect what you expect.”

Clients that have clearly articulated their expectations regarding agency staffing, deliverables, performance criteria and reporting have a much better chance to achieve their objectives and ensure they’re getting their “money’s worth.”  However, an advertiser must go beyond this important first step and incorporate a transparent process for auditing agency contract compliance and assessing performance relative to their stated goals.  The notion of an audit inspection should not send a negative message.  To the contrary, it is respected aand understood as a necessary control process like any other, such as balancing the cash-register daily in retail.   Call it what you would like (review, continuous monitoring, compliance testing, advertising audit), it’s simply a thorough way to ensure the millions of dollars spent on advertising are tracked appropriately.  Too many large marketers do not have such a process in place.  The combination of these actions will afford an advertiser the opportunity to drive each of the stakeholders that comprise their marketing supply chain to extraordinary performance.

It should be noted that supplier accountability management is not a one-and-done proposition.  Implementing and executing a system which has an ongoing monitoring component, often utilizing independent auditors, is necessary to ingrain the requisite processes into the culture of the advertiser and each member of their marketing services agency network.  In the words of the great philosopher Aristotle:

We are what we repeatedly do.  Excellence, then, is not an act, but a habit.”

Interested in learning more about marketing accountability and how to implement the appropriate controls and transparency?  Contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com for a complimentary consultation on this topic.

It’s Your Money and Your Reputation

26 Jun

advertiser's reputationDo you know what happens to your organization’s money, once it has paid the advertising agency?  If you’re like most advertisers you probably don’t know and may not even care.  Perhaps you should. 

Advertising agencies, regardless of the contractual definition of their role (agent vs. independent contractor), act on an advertiser’s behalf to procure and pay for services, space, time, etc… purchased from third-party vendor organizations that are related to producing and distributing the client’s advertising and communications messaging.  In turn, the advertiser is billed by the agency, typically upfront on an “estimated” basis for those goods and services with payment due to the agency in 15 to 30 days from receipt of invoice.  Terms between agency and client are usually set to insure that the agency has the client’s funds prior to the time third-party vendor invoices are presented for payment. 

For most advertisers, there is little transparency into the financial transactions between their advertising agencies and their third-party vendors, which number in the hundreds, if not thousands.  This lack of transparency results in diminished advertiser control and increased risks associated with third-party vendor reconciliation and accounts payable management.  Risks typically fall into four areas: 

  1. Clear and unambiguous title to any and all intellectual property/ work product
  2. The advertiser’s reputation among 3rd party vendors
  3. Treasury management “opportunity” costs
  4. Exposure in the case an agency became unable to pay its creditors 

AARM conducts agency contract compliance and financial audits of advertising and marketing agencies on behalf of advertisers.  In our experience it is rare to see a client-agency contract that identifies clear terms and conditions for the agency’s handling of third-party vendors or in establishing processes and controls to allow the advertiser to monitor performance in this area.   Don’t advertisers want to know if and when third-party vendors have been paid?  If vendors were paid at the agreed upon rate or something less?  If the reconciliation process resulted in credits, discounts or rebates that are due back to the advertiser?  Who are the vendors being utilized? 

Based on our financial audit experience, there has been a clear trend in recent years of agencies stretching out disbursements to third-party vendors well beyond their payment terms, as measured by “Days Payable Outstanding” or the time lag from vendor invoicing to agency payment to the vendor.  There can only be two reasons for this performance and neither is particularly sound.  Firstly, the agency may have flawed vendor reconciliation processes and or they are putting inadequate resources against this “non-revenue generating” area of their business.  Secondly, the agency is seeking to maximize interest income from float.  Simply defined, “float” is the amount of money that the agency has collected from the advertiser but has not yet disbursed to a vendor.  In almost all instances, agencies both earn and retain the interest income on this float. 

Within the agency community it is often joked that interest income (from float) is an agency’s best client; “It pays on time and never complains.”  However, when it comes to the advertiser’s reputation the risk of being labeled a “slow pay” is no laughing matter.  Whether deserved or not, such a reputation can carry both opportunity costs and economic costs in the form of vendors charging higher rates to compensate for their “carrying costs” or not offering preferential treatment.  Nor do many client-side CFO’s find much humor in lost interest income opportunities, aged vendor credits or delayed earned but unprocessed discounts and rebates.   

When the size of an advertiser’s budget is considered and the fact that this investment is being managed through a small group of agencies, who in turn handle purchases and payments on behalf of the advertiser with hundreds of diverse third-party vendors ranging from media property owners to production studios to third-party ad-servers, it may be time to perform an independent assessment of performance in this important area. 

After all, we’re all familiar with the adage: “What is inspected is respected.” 

Interested in learning more about the financial portion of an agency contract compliance audit?  Please contact Don Parsons, Principal at AARM at dparsons@aarmusa.com for a complimentary consultation.

 

4A’s Conference Debate Not Healthy

9 Mar

Intriguing article in Advertising Age on the musings, or should I say public rants, of some agency executives coming out of the 4A’s conference. Are the views voiced by this select group of executives indicative of others in the industry?  If so, this year’s 4A’s conference is likely to have a negative impact on client (and employee) perceptions of the industry.

If select agency leaders aren’t proud of their shop’s work product or staff talent levels or feel that the agency holding company model stifles creativity then they should address these issues in a constructive manner. Blaming clients for their woes and publicly slurring advertiser procurement professionals is certainly not going to address their internal housekeeping issues Read More.

What is it About Procurement That Ad Agencies Dislike?

18 Dec

agency client procurement relationshipBriefly, it appeared as though Strategic Sourcing, client-side Marketing and Agency professionals were engaged in constructive dialogue regarding procurement’s role in the marketing services arena.  That is until representatives from the ad agency community took to their soap boxes and railed against corporate procurement’s role.

Why do certain agency community representatives continue to wage a public battle to minimize or eliminate the influence of procurement in the agency sourcing process?  Perhaps one has to move beyond the seemingly endless diatribe about procurement’s “lack of understanding” of how to value an agency’s contribution or the intangible nature of agency deliverables on brand health or procurement’s role in driving agency margins down to get to the root cause of their concern.

After all, forging strong alliances with Strategic Sourcing professionals represents an opportunity for agencies and should be a cornerstone of their business development and client retention strategies.  Could it be that some within the agency community are fearful of the financial scrutiny and performance benchmarking that are part of the process?  Perhaps they are not comfortable justifying fees and or offering demonstrable proof that their stewardship of their clients’ advertising investments generated a positive economic impact.

If their concerns are grounded in the former line of thinking that ship has left the pier and those arguments no longer hold water. Company Boards of Directors and Senior Management teams have both mandated Strategic Sourcing’s involvement on an enterprise-wide basis and expanded their near-term charter to include marketing services.  If the concern is related to the difficulty in valuing their contributions there are two economic analyses that are required.

The first is certainly well within an agency’s ability to catalog, monetize and communicate… their investment of resources into stewarding their clients advertising investments.  The second may require more work, particularly if the client-side marketing team and the agency have not implemented a sound return-on-marketing-investment monitoring system to accurately track and attribute their in-market results back to each facet of the client’s marketing investment.  Difficult as that may be, a fact-based, rational construct is the best bet for engaging all parties in a productive discussion regarding agency performance and contributions and for positively impacting the procurement process.

For many organizations the investment in marketing and advertising is one of their largest indirect expenses… it will continue to be scrutinized. Interested in reading more? Attached is a fascinating exchange between individuals with slightly different perspectives … Read More.

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