Tag Archives: agency contract compliance auditing

Advertisers: Contract Compliance is Easier to Secure Than You Think

19 Apr

EasyIf you’re an advertiser, we have three brief questions for you to consider:

  1. Does your organization have contracts with its ad agency partners?
  2. Do those contracts contain right to audit clauses?
  3. Has your company ever enacted its right to conduct contract compliance and or performance audits?

Chances are your answer to the first two questions is “Yes” and very likely “No” to the third question. Why is this? Why would the majority of advertisers negotiate audit rights into their marketing supplier agreements and not take advantage of such an important control mechanism? This is particularly perplexing given the materiality of marketing spend and the many publicized challenges confronting advertisers and their relationships with advertising agencies. Challenges such as waning levels of transparency into agency financial management practices, lack of a direct line-of-sight into the rates paid by its agency partners, agency resource constraints and personnel turnover.

After years of conducting advertising agency contract compliance audits, our experience shows the agency community wants to do the right thing in most instances. Are there bad actors? Sure, as there are in any business sector. Are there lapses in oversight or judgment? Certainly. This is a people business and people make honest mistakes. Do errors occur? Of course, as in every organization… no entity is perfect in that regard. Beyond common lapses in judgement, follow-through and or mistakes the primary compliance challenge is often a sub-standard or outdated client/ agency agreement which does not supply an advertiser with the requisite legal safeguards and financial controls.

It is for all of these reasons that “Right to Audit” clauses exist and why it is considered “Best Practice” to engage independent audit support to assess an agency’s contract compliance and financial performance. The benefits of auditing are meaningful and many, with the resulting financial true-ups, identification of process improvement opportunities and new learnings in general, providing substantial contributions to future efficiencies.

These outcomes can have significant financial impacts for both stakeholders. For agencies, who have made oversights, misinterpreted or misapplied certain contractual conditions there is the obvious impact of correcting those items and reconciling their fee and or third-party expense billings. Advertisers benefit from the collection of past due credits, trueing up financial matters, identifying and eliminating unauthorized, non-transparent agency revenue and realigning its scope of work and agency resources on a go forward basis.

It is true that the consequences of an audit can sometimes cause an agency some discomfort and even be outside an advertiser’s comfort zone. However, these important accountability programs are more than offset by the positive outcomes that ultimately drive compliance with the agreement and motivate more effective financial stewardship. To this end, it was with interest that I read a recent article entitled, “Mix Enforcement with Persuasion” by Lucia Del Carpio, Assistant Professor of Economics with INSEAD. Professor Carpio wrote about the topic of improving compliance with laws and regulations. One of his observations had particular relevance to our compliance auditing experience and crystalized what we often profess:

“Compliance sometimes requires nothing but enforcement.”

 The cost to conduct agency contract compliance auditing is nominal relative to the benefits yielded by these initiatives. In our experience, we have never seen an instance where the financial and operational benefits of an audit didn’t provide a return multiple times its attendant cost. Factor in the notion that compliance auditing actually incents agency contract adherence and it is easy to understand why “Right to Audit” clauses exists in client/agency contracts to begin with.

Interested in learning more about agency contract compliance auditing? Contact Cliff Campeau, Principal at AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com for your complimentary consultation on this topic.

Advertiser Audit Rights: Define & Exercise Them

2 Aug

dreamstime_xs_7828625There is a new trend developing within the marketing agency community when it comes to negotiating client contract language – and that is a fairly aggressive attempt to limit the advertiser (client) audit rights and scope. In other words, limiting what the agency is required to have available as “proof” and support for agency billings to the client and agency use of client funds.

At a time when there is much talk about the need for transparency and its role in helping to bolster trust and strengthen client-agency relationships, this trend is highly antithetical.

The most common examples of agencies trying to dictate and limit the client’s “Audit Rights” are:

  1. Limiting the window of time in which an advertiser can conduct the audit. For example, 12 months from date of service or invoice, as opposed to a 3 year window.
  2. Limiting access to agency financial data and or records, as opposed to full access to information that support agency billings, financial management and performance. This can include denying access to data such as employee time keeping records, agency overhead or holding company allocations to client, freelance records, prices paid for certain media and agency affiliate company costs.
  3. Limiting the amount of time the agency is required to retain data and records.
  4. Limiting the type of audit firm that an advertiser can engage to perform the testing – and or including language that seeks to secure agency approval of advertiser’s auditor selection.

In order to ensure full-transparency into the financial stewardship of funds by the agency and third-party vendors, experience suggests that advertisers must secure client-centric contractual audit terms and conditions. It is our belief that this is an advertiser’s unassailable right. After all, it is the advertiser who bears the risk of non-compliance and sub-standard performance when it comes to the investment and management of their marketing funds. And it is the advertiser who is providing the funding to the agent.

Contract language dealing with Audit Rights should grant advertisers the ability to establish the scope of the audit, deploy an audit team of its choice and to have unfettered access to information necessary to validate agency compliance and or performance (i.e. contract compliance, media performance, etc.). To ensure full transparency, advertiser Audit Rights should extend to the agency holding company and affiliates in any full-disclosure relationship.

As important as securing solid Audit Rights language, within a Client-Agency agreement, is the need for advertisers to exercise those rights on a regular basis. Whether through the deployment of internal audit personnel, engaging independent contract compliance or financial auditors or the use of a media performance audit firm, it is imperative that advertisers monitor and vet agency performance in these areas.

The frequency of such oversight actions can range from annual reviews to quarterly reconciliations to the implementation of continuous monitoring programs to assess the disposition and performance of advertiser funds, while under the control of their agency partners.

Sharing audit findings with both advertiser and agency is highly recommended so that both parties, if necessary, can adjust practices going forward. After all, the goal of an accountability program is to provide improved transparency, assurance, improved process, and stronger client-agency relationships. In the words of Thomas Huxley, the noted 19th century scientist:

“Learn what is true, in order to do what is right.”

If you would like to receive a complimentary review of your organization’s “Audit Rights” contract language please contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com.

 

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.

In the Wake of PepsiCo’s Marketing Procurement Decision

17 Nov

OversightOn November 12, Ad Age reported that PepsiCo had made the decision to eliminate its Marketing Procurement department. As a result of the decision, the company will shift responsibility for marketing procurement activities to their brand executives.

PepsiCo’s move is consistent with its philosophy of shifting responsibilities to their brand teams with the goal of allowing those decision makers to “more quickly balance cost value and quality in all of their decisions.” While the company acknowledged the potential risks associated with the move as it relates to financial due diligence and contract compliance, it believes that it will be able to leverage its procurement experience, practices and processes to support the brand teams in this endeavor.

As industry participants know all to well, the role of procurement in marketing has been a contentious one over the last decade or so. Thus, it is likely that this decision will spark much dialog among marketers, procurement professionals and their agency partners. Some advertisers will evaluate the merits of a similar approach for their business and many in the agency community will weigh the impact of this decision on the broader topic of procurement’s role in marketing going forward.

We believe that regardless of one’s perspective, periodic introspection on seminal topics such as marketing procurement is helpful and continued dialog between advertisers and agencies on the practice is healthy. That said, we do not view PepsiCo’s decision as the beginning of a trend away from enterprise accountability and its application to the marketing function.

In our agency contract compliance practice, we work with advertisers that have highly developed, actively involved marketing procurement teams and we also work with advertisers that have not yet involved procurement on the marketing portion of their business. Regardless, each organization is mindful of the accountability and oversight obligation they have when it comes to their marketing investment. After all, advertising and marketing spend is one of the largest line items on a company’s P&L, and is critical to brand building over the long-term and demand generation in the near-term.

Financial accountability related to marketing can be viewed as falling into the following categories:

  1. Formalizing and centralizing key aspects of the agency relationship lifecycle: agency selection, on-boarding, performance monitoring, optimization, and transition when necessary.
  2. Leveraging the agency investment, by brand and across the organization as a whole. Decisions in this area can include both agency remuneration system development and overall composition of the agency network. Do we draft and engage disparate agency brands? Select agencies from a particular holding company? Or do we build a dedicated shop at the holding company level (i.e. WPP’s Team Detroit serving Ford Motor Company or Garage Team Mazda).
  3. Financial stewardship oversight and implementation of controls to safeguard the organization’s marketing spend at each stage of the investment cycle.

In our experience, the best tactic for aiding management of an agency network is the use of a standardized but customizable “Master Services Agreement” template. Formalizing the legal and financial terms and conditions necessary to protect an advertiser’s monetary investment and intellectual property rights is a critical first step on the path toward accountability. This is closely followed by the need to identify representatives from select functional areas of the organization that have would have involvement in the contracting, compensation system development and performance review portions of the agency relationship management program.

Organization’s that have implemented Strategic Relationship Management (SRM) initiatives will undoubtedly have an edge when it comes to leveraging their agency fee investment across brands, divisions and geographies. These companies will likely already have pre-determined agency selection protocols and established compensation guidelines or at a minimum maintain a database of information that can be accessed by client-side executives responsible for agency relationship management to help shape their decision making in this area.

Finally, whether an advertiser has a formalized marketing procurement department or not, independent agency contract compliance and performance monitoring support will typically satisfy an organization’s oversight and transparency requirements.

Many will suggest that PepsiCo’s decision will lead the industry down the path of rethinking the role of or need for marketing procurement. To the contrary, we believe that procurement’s role in marketing has been and will continue to be a highly individualized decision for advertisers. While important, we believe that procurement is but one piece in the overall puzzle for advertisers seeking to optimize their return on marketing investment.

What is the Outlook for 2013

22 Oct

marketing spend forecastAccording to the International Monetary Fund’s world economic outlook, the “risks for a serious global slowdown are alarmingly high” in the coming year.  So how will the economic uncertainty impact the advertising industry? 

Marketing budgets are already under pressure as the U.S. economy plods along at steady, but lackluster growth rates and international markets struggle with the uncertainty surrounding the European Union.  Like it or not, Europe is an important part of the “growth” conversation.  Why? Europe accounts for approximately one-fifth of both the U.S.’ and China’s total exports.  Thus, if the economic situation in Europe takes a downturn, the repercussions on the world’s two largest economies could be significant.

In spite of the challenges posed by the global economic situation, from a marketing perspective, Zenith Optimedia is forecasting a 4.5% spending growth rate in 2013 to $524.7 billion.  Of note, a majority of the growth will occur in the United States.  Zenith’s CEO commented that while marketing spend levels are “solid,” companies are “seeking to ensure that any expenditures are delivering strong return on investment.”

With demand generation a desired, but uncertain outcome for marketers, the role of marketing accountability increases in importance to help keep all stakeholders focused on performance.  Establishing clear marketing KPIs that are aligned with an organization’s business goals, and translating those KPIs into specific performance criteria for each agency in an advertiser’s marketing services agency network, is a critical first step in any accountability program.

Once performance goals have been established, everything will fall in place, right?  Not necessarily.  Advertisers may want to evaluate agency remuneration programs, staffing plans and statements of work to insure that these foundational elements of an agency stewardship system are properly constructed and conducive to aligning their agencies’ resource investments with the desired outcomes.  Layer on a continuous monitoring program which provides all stakeholders with the requisite information for assessing progress and adjusting resource allocations on a timely basis and the chances for improving the efficacy of one’s marketing investment will be significantly enhanced. 

While there are no guarantees when it comes to ROMI, experience has shown that a deliberate systematic approach to marketing resource management can boost results.  In the words of Sir Edward Coke the noted English barrister;

“Precaution is better than cure.”

In a slow growth environment, with budgetary pressures likely for the foreseeable future, this may very well be the “cost of entry.”  In our Agency Contract Compliance & Performance practice, we see the results of marketer commitment to sound accountability practices first hand.

Interested in learning more, contact us for a complimentary consultation on, “Building a High Performance Marketing Agency Network.”  Simply contact Don Parsons, Principal at dparsons@aarmusa.com to schedule a convenient time.

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