Tag Archives: advertising agency holding company

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.   

 

Transparency Rules: Not So Clear

18 Mar

digital trading deskThe hot topic thus far at the American Association of Advertising Agencies (4As) “Transformation” conference in New Orleans has been in and around agency charging practices for their digital trading desk operations.

It would appear as though the panel of agency digital media experts fell into one of two camps:

1) Arbitrage and profiting on the spread between actual inventory cost and client authorized plan costs is an acceptable way for agencies to recoup the investment they make in digital technology support and there is no obligation to share true cost data with clients.

2) Agencies should fully disclose the cost of the original inventory and any fees or commissions charged to clients in association with an agency’s procurement of that media.

Over the course of the last three to five years, virtually every agency holding company has launched a digital media “trading deskoperation focused on the procurement and in some instances re-selling (arbitrage) of online advertising inventory.  Evolved from the early days of demand side platforms, agencies have layered on significant data analytics capabilities that allow the trading desks to select the most appropriate inventory/ audiences for their clients in a real-time-bidding (RTB) auction environment.  No one disputes the value of that capability and its role in securing optimized inventory at the right price.  The questions surface around the transparency into the true cost of that inventory and whether it’s purchased for all the right reasons.

Theoretically, agency holding companies present their trading desk clients with agreements that specify the type of buying practices employed by the trading desk operation and the fees associated with that service.  Practically speaking, in our agency contract compliance audit practice, seldom have we seen separate agreements executed for this service nor have existing letters-of-agreement (LOA) been modified to reflect the terms of engagement for this aspect of an agency’s media buying offering.

Separate from the 4A’s conference, Rob Norman, Global Digital Chief of GroupM presented an interesting perspective in an interview with Ad Age when he referred to their policy on trading desk charging practices as “transparent, but not disclosed.”  In the end, this may be the most practical approach to the debate on this topic.

For savvy advertisers who seek full-disclosure on all aspects of the relationship with their agency partners and 3rd party vendors this is a discussion that they need to have prior to authorizing the agency to engage their trading desk on their behalf.  On the other hand, for advertisers who believe that they are receiving superior online ad inventory pricing and that the results of the effort are consistent with expectations, they may be comfortable forgoing insight into the cost of the original inventory.  The point is, that these are conversations that should be had upfront between the advertiser, agency and trading desk.  Any decisions made with regard to agency/trading desk remuneration, 3rd party vendor disclosures and transparency requirements on behalf of the digital trading desk process and performance should then be incorporated into the LOA.

While it would be convenient if there were published industry guidelines on this issue and others related to contract and compensation topics ranging from the composition of agency overhead rates to standard ranges for fee multipliers and full-time equivalent definitions, the fact is there are no standards.  Thus, advertisers must enter into all agency agreements with their “eyes wide open.”  Caveat emptor.

An agency can best serve the needs of their clients and their proprietary interest by initiating these conversations, sharing the agency’s philosophy on the practice in question and discussing options that are available to the advertiser within the context of that agency offering.  There is nothing to be gained by suppressing dialog on topics such as trading desk charging practices and transparency.  In fact, having these conversations surface after work has been begun can call into question the agency’s trustworthiness and or loyalty.

So if you’re an advertiser that has engaged your agency partner’s expanded service offering whether in the form of digital trading desks, in-house studios, programming procurement or production, poster specialists and or barter, check to make sure that you have a current binding agreement in place that affords you the desired level of protection, control and transparency.

If you would like a complimentary consultation to discuss agency contract “Best Practices,” contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com.

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