Tag Archives: agency contract compliance audit

Does Your Agency Agreement Address “Special Relationships?”

29 May

relative party risksWhen it comes to the subject of contracts between advertisers and their marketing agency partners, there is one principle, long understood within the legal, financial and audit sectors that is frequently overlooked… the concept of “Related-Party” transactions.

Why is this important you might ask? Primarily because as principal agent, an advertising agency has a fiduciary responsibility to solely serve the interests of their clients. In fulfilling their role as a fiduciary, agencies are held to a standard of conduct and trust in which they must avoid self-dealing or conflicts in which the potential benefit to the agency is in conflict with that of their client. 

Over the course of the last thirty years, growth within the advertising industry has been chiefly driven by acquisitions and marked by consolidation. The net result was the emergence of large, complex and highly influential agency holding companies such as; WPP, Publicis Groupe, Omnicom, Interpublic and Dentsu. In turn, each of these organizations own dozens of diverse agency brands providing full-service advertising, media, creative, digital and social media, public relations and multi-cultural advertising services and resources. 

Each of the aforementioned holding companies is a publicly traded entity focused on maximizing profits for their shareowners. As such, one of the primary roles of holding company management is to leverage intra-group synergies across their agency brands to profitably drive group revenues. No one would begrudge them this focus, particularly in light of the need to offset acquisition costs and the marketing and operational expenses associated with maintaining dozens of agency brands. 

Unfortunately, advertisers are often unwitting participants in the act of leveraging intra-group synergies. Further, more often than not, the agreements which are in place to formally govern client/ agency relationships do not afford advertisers the requisite controls and or transparency concerning related-party transactions. 

So what is a related-party transaction? In short, related-party transactions can be defined as arrangements between two parties that are joined by a special relationship. For example, if an advertiser’s media agency of record were to funnel a portion of that advertiser’s digital media buy to a digital trading desk operation, which happened to be owned by the media AOR’s parent company that would be considered a related-party transaction. 

While there is nothing wrong with the premise of related-party transactions, they do carry the potential, or at least perception, for conflicts of interest. This may be as simple as an agency awarding work to a related party, rather than competitively bidding that work to a range of providers. Further, undisclosed, these transactions can mask the overall percentage of an advertiser’s budget being spent through their agency, its parent and subsidiary companies.  

Fortunately, this issue is easily addressed in the context of a client/ agency agreement. The first step is straightforward and involves defining the terms “related-parties” and “related-party transactions.” Secondly, it is imperative that advertisers introduce standards for the identification of agency related party relationships that may come into play on its business and to provide disclosure requirements for when an agency seeks to engage a related-party. At a minimum, such requirements should include: 

  • Identification of the related-party and the nature of the relationship
  • Statement of the business purpose of the transaction and why the related-party is being considered
  • Securing the requisite transparency controls ranging from access to invoices, compensation agreements, contracts and audit rights with regard to the related-party
  • A list of client personnel authorized to sign and approve related-party transactions, in advance of work being awarded 

Too often client/ agency agreements do not establish guidelines for behavior in this area. When combined with the fact that agency operating styles sometimes do not openly reveal related-party transactions, a control gap is often created, which can have negative financial consequences for the advertiser as well as blemish the agency relationship. 

In our agency contract compliance auditing practice, we have found that the best approach for all stakeholders when it comes to related-party transactions is total transparency. As President Calvin Coolidge once said when speaking about “living right:”

“The right thing to do never requires any subterfuge, it is always simple and direct.”

If you would like to like to learn more about client/ agency contract “Best Practices” please contact Cliff Campeau, Principal at Advertising Audit & Risk Management via email at ccampeau@aarmusa.com for a complimentary consultation on this important topic. 

Marketers; “Are your agency contracts relevant?”

20 Aug

client agency contractsThe world of marketing is evolving at a rapid pace and the notion of change is a constant.  Technology advancements, media consolidation, agency mergers & acquisitions and evolving regulatory considerations ranging from consumer privacy issues to intellectual property concerns are but a few examples of events that can have a meaningful impact on client-agency agreements. 

Unfortunately, client-agency letters of agreement are not the “living” documents that they are professed or intended to be.  Too often they are outdated, invalid and or untraceable.  Further, seldom are they shared and understood by key internal stakeholders at the advertiser who are responsible for managing agency relationships… including key marketing team members.   

So, how can you assess the relevancy of your organization’s agency contracts?  Start by answering the following questions: 

  1. Can you locate an executed copy of your agency contract(s)?
  2. Are the terms of the agreement and the accompanying exhibits current?
  3. Are the scope of work and staffing plan detail incorporated into the original agreement reflective of the agency’s role and responsibilities today?
  4. Do your contracts contain a “Right to Audit” clause?
  5. Is there specific language defining a fee reconciliation process and agency time reporting requirements?
  6. Does your contract extend coverage, control and transparency to both the agency brand you work with along with its affiliates and holding company?
  7. Are there clear definitions in and around intellectual property ownership and licensing arrangements? 

If you answered “No” or “I’m not sure” to any of the aforementioned questions, then your agency contract may not be providing your organization with the level of risk mitigation, financial and legal control that is consistent with your supplier governance standards.    

In our agency contract compliance auditing practice it is not uncommon to discover that the client-agency letters of agreement (LOA) have either expired and or are simply out-of-date.  Since the LOA is the document which governs these important relationships, why are client organizations so lax when it comes to maintaining this legal instrument?  Below are a few “reasons” and observations that we have identified across 100+ contract compliance engagements: 

  • The “Master Agreement” or contract was negotiated as an “evergreen” document with the core terms and conditions remaining in place unless either the advertiser or the agency terminates the agreement.  In this scenario, it is typical that the scope of work, staffing plan and remuneration program are to be updated and reviewed annually.  Unfortunately, sometimes these important legal exhibits are not updated on a timely basis or in a manner consistent with the terms of the Master Agreement or actual current practices.
  • Turnover within the client-side procurement and or marketing departments often leads to a knowledge gap when it comes to marketing agency LOAs and the attendant “rules of the road” that were arduously poured over at one time and put in place to guide the company’s agency relationships.
  • Many client organizations simply do not have standardized marketing services contract templates/ terms and conditions nor do they have a central repository for maintaining any and all LOAs, addendums and statements of work pertaining to their agency network… let alone a process for periodic review/updating. 

The legal and financial issues that can arise from an outdated, expired or inadequate client-agency contract are significant and can create a number of risks for advertiser and agency alike.  If you have identified issues, we would urge you to take action immediately by working in conjunction with your agency partners to update and evolve these agreements.  If you’re looking for guidance on industry “Best Practices” in this area you can contact the Association of National Advertisers to access relevant articles and guidelines on this topic. 

As another consideration, 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.

 

Marketing Agency Relationship Management; “Who’s Responsible?”

24 Jul

contractWho owns the relationship between your organization and your network of marketing services agencies? Simple question, right? We would suggest that the answer to this straightforward inquiry is more convoluted than you might think.

Here is a process for self-assessing whether your organization has the most basic, yet overlooked, supplier governance characteristics in place:

  1. Identify the functional area(s) and or individual(s) that you believe are responsible for the stewardship of your marketing agencies.
  2. Request of them a current copy of the executed letter-of-agreement (agreement), along with amendments and all relevant statements of work related, including the basis & calculation methodology for current agency compensation.
  3. Request of them a copy of the latest independent agency contract compliance audit results, performance assessment document, and agency fee reconciliation.

From our experience in working with advertisers large and small, chances are very likely that securing the aforementioned documentation will prove to be much more of a challenge than it should be. The reasons are many and varied, and range from the rate and rapidity of turnover within the marketing organization to the lack of a clear established process for managing and monitoring the marketing services vendor network.

In most organizations there are multiple touch points over the course of the lifecycle of an agency relationship that usually involve representatives from Marketing, Procurement, Finance, Legal and Internal Audit. Typically, certain of these groups plays a role on the front-end in on-boarding an agency, negotiating the agreement, ensuring proper controls are set, and developing the compensation program. The groups should then stay involved. However, in practice once initial terms are set, involvement of non-marketing personnel tends to end. This leads to relationship “drift” and creates risks for the advertiser that are directly related to a lack of (or a lax enforcement) of controls and transparency into the stewardship of its marketing funds.

How much does your organization spend on marketing? According to a 2009 Businessweek article, “What Should You Spend On Advertising?” the authors indicated that retailers typically spend between 1.5% – 5.0%, automotive advertisers between 2.5% – 3.5% and consumer packaged goods marketers between 4.0% – 10.0% of revenues on marketing. No matter how you view it, the absolute dollar marketing investment is significant and is worthy of a commitment to solid contracting and contract maintenance procedures, as well as a consistent program to monitor contract compliance and agency performance; all in an effort to optimize the return on marketing investment (ROMI) and manage risk.

Implementing a pro-active marketing services agency vendor management program starts with the perspective that members of an organization’s agency network are valuable contributors to the organization’s demand generation efforts. Secondly, the enhanced asset value generated through clarifying agency roles and responsibilities and synchronizing their efforts can yield asset value well in excess of the advertiser’s agency fee investment. Thirdly, developing performance criteria and agency remuneration systems that align an agency’s resource investment with the organization’s business goals is a critical component of the process. Finally, it is imperative that agency performance vis-à-vis both contractual obligations and KPIs is monitored and feedback provided to insure that each link of the marketing services supply chain is properly focused on what is important to the advertiser.

With the average tenure of a “Top 100” branded company CMO right at 23 months (source: 2004 Spencer Stuart, Blue Paper “CMO Tenure: Slowing Down the Revolving Door”) businesses must provide a level of “continuity” insurance to counter the level of turnover among CMOs, and to avoid unnecessary vendor churn.

Without a commitment to continuity the predictable cycle of upheaval and change within an organization’s marketing agency network will begin anew every two years.

Often when a new CMO comes on board, a number of agency reviews are launched to bring in “their team” and before the new agency even has two full planning seasons under their belt, the cycle begins again. And make no mistake about it, changing marketing agencies carries a level of risk and cost that negatively impacts an advertiser’s ROMI – due to the agency / client business learning curve, cultural assimilation, and transition management, amongst others.

Best Practice: Constructing and implementing a successful vendor management program for marketing services should NOT be the sole purview of marketing. In order to achieve a level of stability and sustainability with an organization’s professional services providers in this area, cross-functional involvement is an important and necessary ingredient.

Thus, shared ownership, strong stakeholder continuity outside of Marketing, along with independent compliance and monitoring support to provide objective feedback on marketing agency performance, can assist an organization in building a responsive, highly productive agency network.

Interested in learning more about a marketing services vendor management program? Contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com for a complimentary consultation; “Building a High-Performance Marketing Agency Network.

Drive Contract Compliance, Boost ROMI

10 Jul

ROMIDoes your organization believe that its marketing investment can have a profound impact on growth, revenue flow and profitability?  If the answer is “yes,” then implementing a strong marketing accountability program can help boost financial outcomes.

Establishing performance criteria within the marketing function, and across the organization’s marketing agency network, is an important first step on the path to improved results and a higher level of accountability.  This can be accomplished by integrating agency financial performance metrics into the letter-of-agreement, and by linking agency remuneration and or incentive compensation to the desired outcomes.  Each metric and incentive goal should be well defined and directly tied to the organization’s business goals.  However, well thought out and agreed-to measures only lay the foundation – a constant review and feedback cycle is required to achieve the desired sound accountability.

A successful accountability plan must be sustainable and is dependent on the development of an agency performance monitoring discipline, relative to the letter of agreement, whereby progress and success criteria can be regularly tracked and communicated to stakeholders.  Unfortunately, too few organizations follow through and make the relatively minor investment necessary to implement and sustain such an initiative.

Perhaps the best way to jump start the control and feedback cycle is through the initial use of an agency contract compliance audit.  Let’s assume that the letters-of-agreement and agency remuneration programs were properly constructed and aligned with desired business outcomes.  Conducting an independent audit over marketing agency partner (creative agency, digital agency, media agency, PR firm, sales promotion agency, diversity agency) activity provides the requisite unbiased focus.  A well-scripted audit process will focus on testing past agency activity and reporting, detection of outlying transactions, review of parameters in place, metric refinement, and identification of process improvement opportunities to further enhance the program.

Reasons for an independent audit are many and varied, but here are a few key considerations:

  1. The organization may lack the depth of resources or subject matter expertise to conduct a thorough assessment of an agency’s contract compliance and performance.
  2. Independent auditors can provide agency stewardship insights and “Best Practice” feedback that can strengthen the client/agency relationship while laying the groundwork for improved performance.
  3. Contract compliance audit firms have the tools and experience to probe on all aspects of the marketing investment cycle ranging from agency staffing investment assessments and fee reconciliations to comprehensive billing reconciliations of both the agencies’ and the organization’s 3rd party vendors.
  4. The compliance and performance metrics gleaned from the audit process can enhance an organization’s marketing, financial and legal controls while supporting the firm’s corporate governance initiative.

In our experience, advertisers that have achieved success in optimizing their return on marketing investment (ROMI) have done so with the aid of a top-down accountability program.  At the end of the day, all stakeholders want marketing to succeed and to lead the way toward attaining its organization’s cash generation and brand equity building goals.  None more than the marketing team and their agency partners.  With solid stakeholder support, linking your marketing goals with your organization’s desired financial outcomes, creating a culture of accountability, and a dedicated effort to monitor performance, the path to success will become infinitely easier.

Interested in learning more about the potential benefits of a contract compliance and performance audit that can accrue to your organization?  Contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com for your complimentary consultation.

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