Tag Archives: advertising agency contract compliance audits

Two Words That Represent Accountability’s Biggest Obstacle; “Who’s Budget?”

24 Feb

Accountability FinalMany organizations want to implement an accountability program. Virtually all Internal Audit directors would like to extend that accountability initiative across the enterprise and most certainly want to provide coverage for categories with a significant spend, such as marketing.

Yet, in spite of the good intentions, U.S. companies have been slow to embrace independent compliance and performance auditing of their marketing supply chain partners. Ironically, the reason emanates from the answer to a very simple question, “Which departmental budget will be tapped to fund the initiative?” More often than not the answer to that question, in the context of a marketing and advertising spending review, is “Marketing.”

Given this dynamic, it is often a challenge for companies to implement an “unbudgeted” audit project once the fiscal year planning process has been completed, even if results dwarf its cost. Additionally, while many CMO’s have come to value the feedback and insights provided from the independent testing of supplier contract compliance and performance, there are others that still do not embrace audit or accountability initiatives. As a result, unless mandated by the C-Suite, independent accountability testing may never make its way into the budget, causing a huge assurance gap governing that company’s multi-million marketing investment.

There is good news however for procurement, finance and audit executives seeking to remove these obstacles and manage associated risks. Namely, that in addition to the opportunity for process improvements, performance monitoring, contract language enhancements and better controls, these engagements yield hard dollar returns resulting from various financial true-ups and future savings opportunities; far exceeding the fees necessary to conduct the review.

Positive financial returns aside, the costs associated with an audit of an advertiser’s agency network partners is miniscule when compared to the tens of millions or hundreds of millions of dollars being expended in this area.

Perhaps best of all, independent assessments of marketing agency compliance and third-party vendor billings sets a tone of the desired financial stewardship and accountability behavior that the client would like to see employed across its marketing supplier base. In turn, the very act of performing an independent audit, provides a powerful incentive for an agency to diligently self-police itself by tightly adhering to the processes and guidelines agreed to and memorialized in the Client/ Agency Master Services Agreement. In the words of the noted English author and speaker, Simon Sinek:

Actions speak louder than words. All companies say they care, right? But few actually exercise that care.

Interested in learning more about fielding a marketing agency network accountability initiative at your company? Contact Cliff Campeau, Principal at AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com to for a complimentary consultation on the topic today.

 

 

 

For Advertisers Concerned About Transparency, There is an Immediate Solution

4 Nov

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

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

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

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

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

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

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

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

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

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

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

Is the Failure to Comply with Contractual Terms Cheating?

3 Feb

contract complianceHaving been involved in developing marketing accountability systems and monitoring supplier compliance for the last decade or so, this is a question which has been posed many times, in many ways: 

 

  • Was this action or inaction an oversight or an ethical breach? 
  • Did they know or should they have known? 
  • Was their behavior consistent with industry standards? 
  • How could their interpretation of the agreement vary so wildly from ours? 
  • Were they intending to cheat us?
  • How could we have prevented this?

Long a subscriber to the principle of “caveat emptor” or “let the buyer beware”, I have long felt that advertisers need assistance to level the playing field when it comes to the financial stewardship of their marketing investment.  The fact of the matter is that “sellers,” which include marketing services agencies, media publishers and the myriad of third-party vendors whose goods and services are being procured on an advertiser’s behalf by their agency partners are better informed than their client-side counterparts or “buyers” when it comes to the intricacies of these transactions. 

Establishing sound Master Services Agreements with well defined terms and conditions designed to guide agency behavior and provide the requisite legal and financial safeguards are a great first step in any client-agency relationship.  Integrating a performance monitoring system with contract compliance testing further enhances a client’s controls, while yielding greater transparency into the financial management of their marketing spend.  Some may still ask; “But is this enough?”

Thus, it was with great interest that I read an article on the Knowledge@Wharton website entitled; “Cheaters… Win? Why Systems to Prevent Deception Don’t Work.”  Conventional wisdom among psychologists has held that “unethical behaviors” typically “evoke a negative emotional response after the event – if the mere promise of feeling guilt or remorse doesn’t stop the individual from doing it in the first place.”  However, a new research study conducted by Maurice E. Schweitzer of Wharton and colleagues from the HarvardBusinessSchool, LondonBusinessSchool and the University of Washington’s Foster School of Business suggests that there are other forces at work.  The study found that unethical behavior may not create a negative emotional reaction but conversely may “trigger positive feelings” among cheaters.  Why?  Mr. Schweitzer suggests that “part of the cheater’s high comes from a sense of accomplishment when an elaborate system is defeated.”

We’re all familiar with the euphemism, “Gaming the System.”  Could it be that some questionable behaviors in the minds of some “cheaters” are perfectly acceptable in this context?  The aforementioned research would suggest that this is the case.  Sadly, given the size of the global advertising ecosystem, which Magna Global estimates will reach $515 Billion in 2014, and the complexity of the marketing supply chain, this mindset raises the risks to advertisers when it comes to insuring that they are receiving value commensurate with what they have paid for. 

Farfetched?  Not really.  Just consider the steady stream of concern raised about the various ways in which digital media advertisers are defrauded.  You may recall the October 2013 story from Adweek’s Mike Shields entitled, The Amount of Questionable Online Traffic Will Blow Your Mind: The Worldwide Rip-offin which Wenda Millard, President of MediaLink purported that “a quarter of the online ad market is fraudulent.”  According to the article, Millard categorized actions such as, “piracy, non-viewable ads, ads stacked on top of one another, inappropriate content and, of course, deliberate malicious behavior” as fraudulent.  This is but one relevant example of the impact of cheating within the marketing sector.

The fact of the matter is that cheaters exist and always will.  They exist in every walk of life, in every industry, within every organization and at every level.  The best course of action to be taken to insulate an organization from cheaters has always been to find effective and efficient means to incent ethical behavior within one’s organization and across its supplier base.  Supplemented of course by an accountability initiative that includes ongoing oversight, performance monitoring and in the case of contract compliance, independent audit support.  In the oft cited words of President Ronald Reagan: “Trust, but verify.”

Interested in finding out what an advertiser can put into action to reduce its exposures to these kinds of abuses?  To learn more, contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation.

Contract Compliance Matters

3 Jun

contract compliance auditingAs an agency contract compliance auditor too often we see client-agency agreements that are one-sided, lack the requisite terms and conditions and generally fail to provide the advertiser with the controls, reporting and transparency necessary to effectively monitor their advertising investment.  Surprisingly, in many instances the agreements are not even executed by both parties. 

Ironically, when we do come across well written agreements which contain the detail, clarity and exhibits required for both the client and agency to protect their legal and financial interests and to promote a health relationship it is rare that those rights and controls are enforced.  There are many reasons for this oversight, none of which are valid and each can create risks for the advertiser. 

In our experience, the chief barrier for advertisers in negotiating a letter-of-agreement (LOA) that integrates the language, terms and conditions that ultimately protect their interests is that an advertiser’s in-house counsel and or procurement team often does not have deep experience in or knowledge of the marketing services space and industry “Best Practices.” 

On the contract compliance front, once an LOA has been executed it is not atypical for that agreement to find its way to an obscure “Legal” file in “someone’s” office without the instrument having been properly socialized with representatives from Marketing, Finance and Internal Audit.  Layer in employee turnover, transfers and office moves and the LOA and its relationship governance framework are often lost and or forgotten about.  As a result, the reporting, controls and behaviors required as part of the LOA go unmonitored and, in the worst case, aren’t complied with. 

A structured marketing services agency contract compliance program can assist clients in addressing these issues, mitigating the potential risks to their organizations and in optimizing the performance of their agency networks.  The benefits of such a program to an advertiser begin with the contract formulation stage of engaging an agency partner and can encompass a range of activities including: 

  1. Implementation of contract and agency remuneration system “Best Practices” 
  2. Standardization of a Marketing Services agency LOA template
  3. Transparency enhancing control, reporting and reconciliation clauses in LOA
  4. Periodic independent agency contract compliance audits
  5. Ongoing contract compliance monitoring and performance assessments
  6. Financial reconciliations (i.e. agency fee, agency billing, 3rd party vendor billing)
  7. Agency transition audit support

Given the number of agencies which often comprise an advertiser’s marketing services supplier network, and the level of the marketing investment being managed by those agencies, “contract compliance” should be considered an essential element of an advertiser’s strategic relationship management effort. 

“Knowledge is the true organ of sight, not the eyes.” ~ Panchatantra 

Timely, thorough contract compliance and performance monitoring is an excellent means of incenting positive behavior both within an advertiser’s organization and across its agency partners.  The net result can be stronger client-agency relationships built on a foundation of trust and aligned expectations.  In turn, an engaged and motivated supplier network can help client organizations increase their return-on-marketing-investment.     

Do you know where your agency LOA’s are?  If you would like to discuss the potential benefits of agency contract compliance, feel free to contact Cliff Campeau, Principal of Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation.

A New Year’s Resolution for Marketers

27 Dec

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

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

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

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

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

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

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

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

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

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

There are no guarantees. Are there?

10 Sep

profit guaranteeWhether it relates to new product launches, store openings, catalog sales or a new advertising campaign, there are no guarantees that marketers will meet with success.  No matter how sound the strategy or crisp the execution or the level of investment made to support these initiatives, there is no certainty that response rates, sales, market share or profitability results will achieve expectations.

The same can be said of an organization’s investment in marketing.  Just because a firm spends 5.0% of revenues on advertising support, the investment alone doesn’t automatically guarantee an upward move in the organization’s key indicators.  Further, there is always the risk of campaign failure, or under-delivery, which can have negative consequences on an advertiser’s bottom line. 

Despite this risk, many advertisers continue to contractually guarantee a profit margin to their advertising agency partners.   And yet, agency pundits continue to lament how “unfair” current remuneration programs are, and that the agencies don’t fully participate in the “upside” results of their clients’ demand generation efforts.

Turn it around.  If a client-side CFO knew  they could book guaranteed profits as a result of the advertising investment made by their organizations they would surely take that deal.  Further, the industry would see a steady increase in advertising spending.

Shared pain, shared gain.  As investors know, generally financial returns are directly proportionate to the risks incurred.  In light of this truism, should there be any upside potential when agencies benefit from the security of a guaranteed profit floor?  

With the move toward direct labor based compensation programs, agencies are able to recoup their sunk costs (i.e. labor, employee benefits, rent, corporate expense, etc…) and to secure a guaranteed profit margin typically ranging from 12% – 18% (excludes additional profit from in-house studio and the like).  Perhaps it is time for advertisers to begin to question the efficacy of this practice.  Don’t get me wrong.  I believe that an agency should have the opportunity to earn a profit on each of their client account, and I don’t believe that agencies should bear inordinate risks to their remuneration for items and outcomes that are beyond their control.  However, it seems that agency profitability should be more aligned with resource investments and the outcomes of their efforts.

Further, from a financial control standpoint, without the benefit of tight controls and audit oversight, a cost-plus / fixed profit margin remuneration system can inflate an advertiser’s fees as a percent of marketing spend.  Too often client-agency contracts fail to adequately define key components of agency overhead or to identify employee compensation levels, agency staff utilization and out-of-pocket cost expectations.  Beyond inadequate contractual clarity on these items, there is another factor which compounds an advertiser’s risk in this area… the lack of a disciplined process to verify actual financial performance for each of these categories.

To optimize agency fee investments and enhance transparency into this aspect of advertising spend, there are three items that an advertiser can include in their letter-of-agreement (LOA):

  1. Comprehensive definitions of key remuneration program components and examples of how various factors will be calculated.
  2. Quarterly reconciliation process for agency fees, time-of-staff investment and billings.
  3. An advertiser’s “Right to Audit” clause and an “Agency Records Retention Policy.”

Successful optimization hinges on a commitment to actually following through on the right to audit, whether through the advertiser’s Finance/ Audit team or by engaging a 3rd party agency contract compliance auditor. 

To kick off the process, we would suggest an open dialogue and information exchange between client and agency to discuss profit expectations and to review those items which impact agency costs and client fees.  This conversation should take into account a client’s total spend with the agency and its parent company, which offices the client’s account is serviced from, agency employee compensation, retention & training philosophies and the agency resources that will be brought to bear on the client’s business.

In the end, it is in each parties best interest to develop an agency remuneration program that incents an agency to deliver superior performance, recognizes an agency’s resource investment and where there is a shared investment in market-based performance stemming from the client’s and agency’s efforts. 

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

Media Rebate Follies Continue

17 Jul

media rebatesThe Association of National Advertisers (ANA) conducted a survey among 180 members with regard to the prominence of media rebates within the U.S. media market.  Of note, both the ANA and those members surveyed expressed concern about the existence and appropriateness of this practice. 

By way of background, media rebates or volume over-rides have been in use within the European advertising market for several years.  In essence, media properties offer advertising agency holding companies a financial incentive tied to their overall purchases of space and or time.  These rebates can take the form of cash rebates or no charge media weight which is banked by the agency holding company.  These rebates can range between 1% and 15% of the media commitment.  The agency community has long contended that this practice did not take place in the U.S.  Advertisers on the other hand have always had their doubts about those denials and with apparently good reason. 

In the recent ANA survey, 28% of the respondents indicated that they “were aware” of incentives being provided by the media to advertising agencies.  Further, 85% of the ANA members surveyed felt that those rebates should be passed along to the advertiser.  Yet in spite of these beliefs, only one-third of the respondents had client-agency contract language to that effect.   Of note, Bill Duggan, EVP of the ANA stated that; “Frankly what I find personally surprising is that agencies are doing this.  It’s in my opinion a totally inappropriate practice.”  Some of the ANA members echoed those sentiments indicating that it was a “dark and murky” area of the business that required greater transparency. 

Why the concern?  Quite simply, the notion that a media seller would offer a media buyer with a financial incentive to increase the level of media purchased from them raises a serious conflict of interest issue.  In fact, I cannot think of one cogent argument for the agency to participate at any level in the retention of volume over-rides at either the holding company or operating agency level.  The media agency has a fiduciary responsibility to its clients.  The advertiser needs to know with certainty that the resource allocation decision being made by its media agency are driven by sound, fact-based analysis tied to optimizing the advertisers return on media investment… not tied to the agency being able to supplement their revenue base. 

Having contract language that clearly defines what constitutes a “rebate,” how the advertisers pro-rata share of that rebate is to be calculated, in what currency that rebate is to be paid (cash or media) and the timing of those payments is a must.  However, that may not be enough.  Why?  The utter lack of transparency regarding these deals between global media concerns and global agency groups creates a series of challenges for the advertiser to assess the validity of the rebate amounts identified.  In our advertising agency contract compliance auditing practice we have often encountered scenarios where the advertiser was receiving quarterly “rebate” checks, but had no basis for calculating or forecasting the amounts of those rebates.  Of note, more often than not, the CFO of the operating agency does not have insight into how the holding company is allocating the rebates back to the client base. 

In our opinion, independent contract compliance auditing is a necessary compliment to solid contract language to protect the advertiser’s interest.  The knowledge gleaned across multiple audit engagements and the subject matter expertise necessary to even identify the presence of a rebate program, let alone calculate payment levels is crucial. 

Let’s remember one fact.  The multi-national agency holding companies are publicly traded entities.  They are responsible for accreting shareholder value… their shareholders, not the advertisers.  The incremental profit margin on volume over-ride programs, interest income from float, the mark-up on in-house studio or trading desk charges and the like is significant.  To be clear, no one begrudges an agency from profiting on the investments which they make in building out their infrastructure and resource offering to improve performance or operating efficiencies.  The issue is quite simply one of transparency.  In the case of rebates, it is the advertisers’ money being invested, not the agency’s.  Therefore, any economic benefit should come back to the advertiser, plain and simple. 

Hopefully the ANA’s recent survey on this topic results in meaningful dialogue within the advertising community over this practice and how to monitor and control its use within the U.S. market.  However, no one should be surprised with regard to the existence of these programs.  In a March 3, 2008 BusinessWeek article entitled; “An Adman Tests the Limits” Irwin Gotlieb Chairman of WPP’s Group M media operation stated that the agency had begun to pursue rebate programs with U.S. based outdoor advertising companies and that they were looking at other media channels to expand the concept to in the U.S. market.  

Interested in learning more about the utilization of rebates and how to implement the appropriate controls and transparency?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on this topic.

 

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