Tag Archives: AVBs

How is Your Media Agency Making Money in 2022?

17 Feb

agency holding company profitsWritten by Oli Orchard, Partner – Fuel Media & Marketinga specialist communications consulting company focused on advising clients in media communications. 

With Publicis and OMG in the news this week (February 2022) with significant revenue increases year-over-year, now would seem a pertinent time to look ‘under the hood’ of the different revenue streams agencies have available to them.

Using the traditional commission method, still prevalent today, it is often thought that a media agency has a disincentive to save clients’ money or indeed manage lower budgets.

Because most media agencies are compensated on a percentage of media spend, if they negotiate the prices down, and potentially reduce total spend, they will earn less money.

In practice, the traditional ATL percentages involved stop this being much of a disincentive.

  • A buy of $10,000 at 3% commission provides the agency with just $300 income.
  • If the agency negotiates 25% discount on the media, the agency will only lose $75.

Obviously, the agencies are doing this at scale, and those $75 discounts start to add up, as a result the agencies have long looked elsewhere to bolster their incomes. So, in 2022, what other revenue streams are open to the agencies?

Agency income takes many forms, and too many to go through here, so we’ll stick to the top ten.

  1. Fees & Commissions – Whether Time and Materials based, or a percentage commission on media spend these should need no introduction to advertisers. At Fuel we hold data on innumerable best practice contracts, and always work with clients and agencies to come to the most appropriate basic remuneration package
  2. Bonus/Malus schemes – These programmes have become synonymous with best-in-class-advertisers, looking to reward their agency beyond the basic remuneration for exemplary work. The Malus scheme has gained more traction in recent years, as agencies look to differentiate themselves from the competition by having some ‘skin-in-the-game’, often putting part of their profit margin at risk
  3. Incremental services outside of Scope of Work – These are often the result of out-of-date contracts, and can commonly comprise things an advertiser might expect to be included in the contract, such as Quarterly Business Reviews, competitive monitoring, dashboards, post-campaign reporting and even out-of-home planning
  4. Deposit Interest on bank accounts – Historically agencies have taken advantage of bank interest rates and been fast to invoice and slow to pay. With rates on the increase again, albeit slowly, advertisers will need to become increasingly aware of this. Agencies deal in vast sums of money, and this revenue stream should not be overlooked
  5. Kickbacks from vendors – AVBs, rebates, Specialist Agency Commissions, the list goes on; kickbacks have many names, and they don’t always take the form of cash. Free Space that can be given to advertisers to bring the CPM down to hit bonus targets, or alternatively sold on to other clients is another common form these shapeshifting kickbacks can take. It is also imperative that the contract encompasses as much of the agency holding group as possible, often kickbacks can be routed through other parts of the group
  6. Unbilled media – It is not uncommon for a media vendor to forget, unintentionally or intentionally, to bill an agency for a media placement that the agency has already billed the client for. The agency should be reporting and returning unbilled media on a regular basis, though clients should be aware of the fiscal statute of limitations, meaning the vendor could invoice the agency within a specified period of time (it is currently 6 years in the UK) and demand payment, which will then be passed on to the client
  7. Agencies acting as the principal (rather than agent) – This is commonly known as inventory media, the agency takes a position on, or buys, a quantity of media directly from a vendor, with no specific client lined up for it. There will be NDAs in place with the vendor preventing the agency from disclosing the actual price paid to clients or auditors. This allows them to mark-up prices, generally by a very significant percentage when selling this space on to clients. The flip side of this is that an advertiser can get a great rate on something they may have bought anyway, though they may also be pushed into a buy that is sub-optimal for their strategy just to meet the agency’s internal need to offload inventory
  8. Subcontracting to related 3rd Parties – Agency holding groups are vast and have many complimentary disciplines. It is not uncommon for a specific task to be subcontracted (attracting an additional fee) within the holding group
  9. OOH commissions – It is worth listing these separately to those above because OOH often has a unique commission structure where both the advertiser and vendor routinely pay the poster buying specialist for placing the media. This is frequently dealt with in agency contracts as an additional ‘Disclosed Commission’ tucked away in a schedule at the back of the document as Specialist Agency Commission
  10. DSP usage – Programmatic has long been the poster child of non-disclosed fee structures further down the digital value chain but there is one significant agency revenue stream that crops up near the top of the chain in non-disclosed White Label mark-ups. The DSPs allow their clients (in this case the agency, not the advertiser) to add an additional CPM into the net media cost, meaning that it doesn’t show up in any of the auditable invoicing trails, and is passed back to the agency
  11. As you can see from above, agencies constantly evolve income streams, seeking out new ways to profit, and let’s not get the intent of this piece wrong, agencies should be able to profit from their great work for clients. However, many advertiser clients are becoming cash cows, based on the agencies’ opaque trading practices.

At Fuel, we work with the agency and advertiser to produce the optimum contract for the situation, one where transparency around agency income is openly discussed, and the advertiser can make an informed, supported decision about the relationships they forge with their agency partners.

Here’s our checklist for advertisers:

  • Check that your contract is up to date – does it cover the entire scope of business transacted between you and your agency? The very best contracts are reviewed and revised annually to take landscape shifts and revised media strategies into account
  • Make sure that your agency is obliged to ‘call out’ and seek approval for inventory media and use of subsidiaries/sister companies
  • Have a frank discussion with your agency about the non-disclosed White Label mark-up that the DSPs allow them to add into the platform costs, and consider requesting to be part of the conversation around DSP selection
  • Undertake regular audits of performance vs. pitch or year-over-year guarantees, and tie the buying results to a bonus/malus scheme in tandem with service scores and achievement of business objective KPIs 

To find out more on how Fuel can help, contact Oli on +44(0) 7534 129 097 or email [email protected].

Key to Media ROI: Chief Media Officer or Compliance Auditing Support?

14 Aug

AccountabilityIn the wake of this spring’s Association of National Advertisers (ANA) “Media Transparency” study, conducted by K2, many in the industry have suggested that advertisers add a Chief Media Officer to staff to assist them in navigating what is clearly a complex, rapidly changing industry. For those advertisers that have the financial wherewithal to support such a position, the benefits could be significant when it comes to strategy development, planning and stewardship of their media agencies and extended supplier base.

That said, the dynamics which impact media return-on-investment require resources that go well beyond the reach, and sometimes knowledge, of a Chief Media Officer and create an entirely different set of challenges even for those organization’s that do have the luxury of adding a seasoned, media executive to their staff.

The findings of the ANA/K2 study dealt with non-transparent media agency practices effecting advertisers such as: rebates taken at the agency holding company level and not passed through to advertisers, media arbitrage, value banks, related party transactions and inappropriate mark-up on both media and non-media expenses. The economic and relationship impact of these practices, and the continued adverse effects of digital ad fraud and viewability challenges besetting the industry, all serve to greatly reduce the efficacy of an advertiser’s media investment.

Experience suggests that the key to resolving these issues is more likely rooted in the development of a sound, broad reaching media accountability program. One which focuses on improving client/agency contract language, client/ agency focused communications, financial and legal controls and enhancing advertiser transparency rights that allow clarity into the disposition of their funds at each stage of the media investment cycle.

This is not an easy task in an industry still largely reliant on an estimated billing model, with inordinately long campaign closing/reconciliation processes and multiple third-party vendors and middlemen, which all serve to negatively impact working media ratios.

Add to this the fact that the C-Suite within many advertiser organizations simply doesn’t pay much attention to media, in spite of the materiality of spend in this important area. Consider the results from a July ANA study, conducted by Advertiser Perceptions, following the release of the ANA/ K2 study:

Only one-quarter (25%) of advertisers surveyed were aware of the ANA’s media transparency study.

We believe that advertisers do care about how their media funds are being managed. However, we also know that very few organizations know what happens to their money, once an agency invoice has been paid.

It is for this reason that we believe strongly in the vast benefits that a structured, agency compliance and financial management auditing program. One that can also assist advertisers by providing a context for understanding the scope of the risks they face when it comes to building mitigating controls to optimize their media investment.

At present, few advertisers undertake such testing and even fewer have the requisite industry experience and specific media-based accounting, auditing and fraud examination experience represented in-house. Additionally, we have yet to evidence a client organization that has implemented the requisite software in their media function capable of processing and catching media billing discrepancies and performing other detailed financial analysis on their media investment.

We have learned over the years that the implementation of such controls yields tangible value far in excess of the cost to support such efforts.

The combination of financial loss related to approved but unspent media funds, earned but unprocessed credits and rebates, billing errors, unreconciled pass-through expenses and related party transparency issues can range between 2.0% and 5.0% of total agency billings. Once aware of the causes, savings are realized year-over-year by implementing improved process changes and treasury management.

With this as a backdrop, imagine an organization investing tens of millions or hundreds of millions of dollars on media. The resulting financial benefits, combined with improved controls, enhanced risk mitigation and transparency most assuredly will secure the attention of the C-Suite and their support for media agency compliance auditing.

Interested in learning how to start improving your media transparency today? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at [email protected] for your complimentary consultation.

Decision Time for Advertisers in Wake of ANA Study on Media Rebates

5 Jul

time to decideU.S. advertisers have long suspected their presence and agencies have steadfastly denied accepting rebates in the U.S. market. Depending on which side of the ledger one fell on, the ANA/ K2 study on media transparency may not have swayed your perspective on the topic one iota.

If such is the case, that is too bad. As the noted Irish playwright, George Bernard Shaw once said:

“Progress is impossible without change, and those who cannot change their mind cannot change anything.”

The study was thorough, insightful and shed light on some of the non-transparent sources of revenue available to agencies. These range from AVBs or rebates and value banks consisting of no-charge media weight to the spread earned by agency trading desks from the practice of media arbitrage or “principle buying” as it is often called. The source of these findings were agency, ad tech and publisher personnel that participated in the study in exchange for the ANA and K2 protecting their anonymity. Of note, not one representative from an agency holding company or ad agency was willing to go on the record and participate in this study.

We believe that the study should serve as a wake-up call for advertisers and agencies alike to engage in serious discussions regarding the level of disclosure desired by clients when it comes to the stewardship of their media investment. In the wake of the 4A’s shortsighted, premature withdrawal from the joint task force dealing with this topic and their subsequent challenges of the ANA/ K2 study methodology and findings, these discussions will have to occur on a one-on-one basis. Which, candidly, is the best means of affecting near-term change.

In most instances, it is not illegal for agencies to generate non-transparent revenue and is likely not even a violation of the agreements, which have been signed with their clients. Why? The contracts are lacking in the requisite control language to protect advertisers and agencies are masters at interpreting “gray areas” within those agreements and bending the rules in their favor. This coupled with the fact that only a small percentage of advertisers audit their agency partners and it is easy to see how such practices could exist.

Thus, as an industry we should not cast blame for the emergence of non-transparent revenue as an important element in agency remuneration programs… even if not sanctioned by advertisers. Nor should we accept the agencies excuse that client’s driving fees down somehow makes it acceptable for agencies to pursue non-transparent revenue to counter remuneration agreements, which agencies have knowingly signed on for.

Agencies are not suffering financially. Consider that in the first-quarter of 2016 the “Big 4” holding companies all saw increases in revenue ranging between 0.9% – 10.5%. WPP achieved a 10.5% increase on an 8.5% increase in billings, OMG saw net income per diluted share increase 8.4% and IPG achieved operating margins of 33.8%. Between these performances and media inflation outstripping GDP growth or increases in CPI and PPI it is easy to see how advertiser investments are fueling the trend of continued acquisition by these holding companies as they snatch up ad tech firms, content firms, digital agencies and traditional ad shops. Not to mention the fact that WPP’s chairman has an annual compensation package, which tops $100 million per year.

The focus of clients and agencies should be on returning to a principal/agent relationship predicated on full-disclosure. This is the surest path to rebuilding trust and establishing solid relationships focused on objectivity, transparency and a mutual focus on maximizing advertiser return-on-media-investment. Secondarily, both parties need to evaluate how to minimize the number of middlemen in the media buying loop, particularly for digital media, rethinking the role of ad tech firms, exchanges and publishers and the cut that each takes, lowering the advertisers working media ratios.

From our perspective there are four steps, which advertisers can take to address these issues:

  1. Revisit client/ agency Master Services Agreements to tighten terms and conditions, which deal with disclosure, financial stewardship and audit rights.
  2. Undertake constructive conversations regarding agency remuneration, with the goal of ensuring that your agency partners are fairly compensated, removing any incentive for non-transparent revenue generating behaviors.
  3. Pay more attention to the proper construction of statements of work (SOWs), establishing clear deliverables and review/ approval processes against which your agency partners can assess the resource investment required to achieve such deliverables. This will assist both client and agency in aligning remuneration, resources and expectations.
  4. Monitor agency performance, resource investment levels vis-à-vis the staffing plan and audit contract compliance to ensure that contractual controls and the resulting levels of protection and transparency are being met.

The ANA/ K2 study can and should serve as a platform for advertisers and their agency partners to work through any concerns or expectations regarding media transparency, both in the U.S. and across the globe. Experience suggests that progressive organizations will use the insights gleaned from the study as a launch pad for improving contractual controls, working media ratios and client/ agency relations.

For the industry, it is important to dispatch with concerns regarding media transparency quickly. This will allow all stakeholders to focus on tackling the myriad of issues that dramatically impact media effectiveness including ad fraud, cross channel audience delivery measurement, viewability and attribution modeling.

 

Is the Ad Industry on the Verge of a Revolution?

25 May

White clock with words Time for Action on its face

“It was the best of times, it was the worst of times…” Charles Dickens evocative opening to his book; “A Tale of Two Cities” described the period leading up to the French revolution. It may also be an apt description of where the ad industry and advertisers stand on the topics of transparency, fraud and trust.

As an industry, all stakeholders, including advertisers, agencies, ad tech firms, media sellers and the various associations, which serve these constituencies have long been talking about the need to implement corrective measures. Joint task forces have been formed, initiatives launched and guidelines published, yet little progress has been made in addressing these issues. As evidence of the quagmire, one need look no further than the 2016 Association of National Advertisers (ANA) and White Ops report on digital ad fraud, which saw the estimated level of thievery increase by $1 billion in 2015 to an estimated $7 billion annually. This led Bob Liodice, CEO of the ANA to boldly and rightfully tell attendees at this year’s ANA “Agency Financial Management” conference that; “marketers are getting their money stolen.”

The ANA’s message has resonated with the C-Suite within advertiser organizations the world over as CEOs, CFOs CIAs and CPO’s are working with their chief marketing officers to both assess the risks to their organizations and in fashioning solutions to safeguard their advertising investments. From this pundit’s perspective, it was refreshing to see the ANA take such a strong stance and a welcomed leadership position on remedying these blights on our industry.

Some may view the ANA’s recent stance on fraud and transparency and the upcoming release of its study with K2 on the use of agency volume bonuses (AVBs) or rebates as incendiary. However, in light of the scope of the economic losses, financial and legal risks to advertisers and the havoc which transparency concerns have wreaked on advertiser/ agency relationships we view the ANA’s approach as a rational, measured and necessary stake in the ground.

Mr. Liodice was not casting blame when he suggested that the K2 survey would “be a black and white report that for us (ANA) will be unassailable documentation of what the truth is.” It is refreshing to see an industry association elevate dialog around the need for full-disclosure, moving from disparate opinions to establishing a fact-based perspective on the scope of this practice. To the ANA’s credit, this will be followed by a second report, authored by Ebiquity/ Firm Decisions, introducing guidelines for the industry to proactively address the issue.

To be clear, it is not a level playing field for advertisers. There are many forces at play as a variety of entities look to siphon off portions of an advertisers media investment for their own financial gain. Thus, we’re hopeful that the ANA’s message to marketers to “take responsibility” for their financial and contractual affairs when it comes to protecting their advertising investment takes hold.

In our experience, the path forward for advertisers is clear. It begins with re-evaluating their marketing service agency contracts to integrate “best practice” language that provides the requisite legal and financial safeguards. Additionally, this document should clearly establish performance expectations for each of their agency partners, introducing guidelines to minimize the impact of fraud, including mandating the use of fraud prevention and traffic validation technology, banning the use of publisher sites that employ traffic sourcing and establishing a full-disclosure, principal-agent relationship with their agency partners.

Experience suggests that another key element of a well-rounded accountability initiative should include the ongoing, systematic monitoring of agency contract compliance and financial management performance to evaluate progress. Of note, wherever possible, these controls and practices should extend to direct non-agency vendors and third-party vendors involved with the planning, creation and distribution of and advertisers messaging.

The advertising industry is on the verge of a revolution and for the sake of advertisers we hope so. One that can usher in positive change and allow all legitimate stakeholders to refocus their collective energies on building productive relationships predicated on trust. It is our belief that knowledge and transparency are critical cornerstones in this process:

“I believe in innovation – and that the way you get innovation is you learn the basic facts.”

                                                                                                                                                  ~ Bill Gates

What is the True Cost of Opacity? (part 2 of 2)

1 May

iceberg riskPart 2 of a two-part look advertiser concerns regarding “transparency” and the impact it is having on client-agency relations.

Why is a tight client-agency agreement important? One need look no further than the recent comments of Maurice Levy, Chairman of Publicis; We have a clear contract with our clients, and we are absolutely rigorous in respecting transparency and the contracts.”  It should be noted that other agency executives have also cited their compliance with the terms of their client agreements as part of their response to recent questions regarding transparency in the context of rebates and the lack of full-disclosure associated with trading desk operations.

As contract compliance auditors we would suggest that most of the client-agency agreements, which we review do not have sufficient language to deal with the evolving advertising landscape.  It is common to find contract language gaps when it comes to items such as; AVBs, related party obligations, disclosure requirements and or right to audit clauses. Therefore, it is quite possible for an agency to be in compliance with an agreement as Mr. Levy suggested and still not be operating in a fully transparent manner.

To the extent that reducing the level of opacity is an important step in establishing a solid client-agency relationship founded on the basis of trust, we would strongly encourage advertisers to review their marketing agency partner agreements.

If agencies truly functioned as principal agents for the advertiser, a less structured agreement may pose less risk. However, today we operate in a complex environment where agencies may have a financial stake in certain outcomes and those stakes are not always fully disclosed to clients. Thus the reality is that the potential for bias to impact an agency’s recommendations clearly negates the principal of agency neutrality.  Think about it, agencies today operate as independent agents, partnering with a range of third-party vendors in the research, technology and media sectors and actually owning and reselling media inventory to their clients.

Don’t agree? Consider the comments of Irwin Gotlieb, CEO of WPP’s Group M at the aforementioned ANA conference; “Those relationships, rightly or wrongly, don’t exist anymore” he said, adding that “You cease to be an agent the moment someone puts a gun to your head and says these are the CPMs you need to deliver.”

It is imperative that advertisers protect themselves from a legal and financial perspective by crafting contract language and implementing the appropriate monitoring and control processes to insure that they have the transparency that they seek in the context of their agency partners’ financial stewardship of their advertising investment.  This does not mean that clients cannot forge solid relationships with their agencies or that their agency partners should not be afforded positions of trust. Quite the contrary, it simply means that candid, direct dialog must occur so that each party in the relationship is clear and comfortable with regard to the guidelines that will be put in place to govern their relationship.

Once clients and agencies have aligned their interests in the context of their relationship, the ability to focus their time, talent and resources on driving business forward and tackling industry challenges will be greatly enhanced. Interested in learning more about industry best practices when it comes to client-agency agreements? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management, LLC at [email protected] for a complimentary consultation on this important topic.

What is the True Cost of Opacity? (part 1 of 2)

29 Apr

icebergPart 1 in a two-part look advertiser concerns regarding “transparency” and the impact it is having on client-agency relations.

Ad industry concerns regarding the issue of transparency and the trust which exists between advertisers and their agencies have taken a new, decidedly negative turn over the course of the last month.  What had been largely an “in-house” debate focused on items such as AVBs, programmatic buying, media arbitrage and concerns over digital media viewability was thrust into the limelight as the result of one Wall Street analyst’s recommendation that ad agency holding company investors “sell their shares.”

The recent revelations about the utilization of media rebates or AVBs in the U.S. marketplace and the resulting firestorm in the advertising trade press seems to have been the tipping point that spurred Brian Wieser a Senior Analyst from Pivotal Research Group to downgrade the stocks of IPG, Omnicom, WPP and Publicis and to recommend that investors exit the category. Mr. Wieser’s recommendation provoked an additional round of denials by some holding company CEOs regarding the practice of agencies accepting rebates in the U.S. and spurred some debate amongst the holding companies about the transparency of their revenue realization processes. One notable CEO, Sir Martin Sorrell of WPP reiterated his company’s policy regarding rebates and encouraged WPP’s competitors to be more forthcoming on that front; “We said what the model is in the U.S., the way it’s a non-rebate model. We’ve made that quite clear. I would urge greater transparency in what’s happening to net sales and revenues, then we would have less black box and more open box.”

While the topic of rebates seems to have garnered a lion share of the attention, when it comes to transparency the rebate issue carries with it much less financial risk than the challenges associated with the rapidly evolving digital media landscape. Consider the fact that various research studies have suggested that digital media advertisers may be losing 50% + of their investment to click fraud, bots, piracy and excessive fees related to supply chain complexity.

Given that digital media now ranks second only to television in terms of media spending and that it continues to grow at double-digit rates the potential for Wall Street commentary regarding advertiser investment in this area could be much more problematic. For instance, at the recent ANA conference on “Agency Financial Management,” Peter Stabler, Managing Director, Senior Equities Analyst with Wells Fargo Securities raised concerns about one particular aspect of the digital media space… agency trading desks. Specifically, Mr. Stabler cited the inconsistent manner in which holding companies report on trading desk operations, the potential for the proceeds from trading desks to inflate revenues and create margin dissolution and the potential for conflict-of-interest concerns between advertisers and their agencies.

If there is a silver lining to this maelstrom, now that the genie is out of the proverbial bottle, perhaps the highly charged nature of these issues can serve as a galvanizing force to bring clients and agencies together to address these issues in an objective manner… without the emotion and finger-pointing which has characterized the discussions to date. Let’s face it, the last thing either party wants is to see their market capitalization rates decline because analysts and investors have concerns about how they transact business and or the state of client-agency relations. 

While the individual issues raised are substantive, many feel that they have taken on additional import as a result of an erosion of trust between clients and agencies. Thus, shoring up the strength of these strategic relationships could yield significant asset value both in the context of issue resolution and the ongoing business of building brands and generating demand. As automotive pioneer Henry Ford once said;

If everyone is moving forward together, then success takes care of itself.”

In our opinion, the best place to begin is to develop a sound client-agency letter-of-agreement, which clearly articulates both parties expectations and desired behaviors. Further, the agreement should specifically identify the level of disclosure required by the client of the agency, their related parties (i.e. holding companies, sister agencies, trading desk operations, in-house studios, etc…) and their third-party vendors. We believe that this is a critical first step in establishing accountability standards and controls.

Estimated Billing: Time for Reform?

3 Sep

estimated billing processAccording to ZenithOptimedia global ad spending will exceed $520.0 billion in 2013.  Based on common industry practices, the majority of this money will be prepaid by the advertiser based on its agency’s “estimated billing” invoicing process.  Simply put, estimated billing occurs when an advertising agency bills their client upfront, based upon planned expenditures, in advance of performance and in advance of the agency being billed by the advertisers 3rd party vendors. 

With such a material level of expenditure at stake, the question to be asked is quite simply; “Is estimated billing the best approach?”  In our advertising agency contract compliance practice, we are engaged by global advertisers to conduct financial management reviews and provide consulting support for effectively stewarding an advertisers marketing investment. In two decades, we have seen many repetitive inefficient practices tied to estimated billing. 

By in large, advertisers trust their agency partners to act in a proper fiduciary manner when managing the marketing funds entrusted to them.  As well intended as agencies may be, errors happen, delays occur and yes there can be  non-desirable manipulation of funds limiting an advertiser’s ability to optimize the return on their advertising investment.  Further, limited transparency into the unused portions of prepaid monies compounds the risk to an advertiser.  

It is understood that the premise of estimated billing was that advertisers did not want their agencies to function as their bankers, fronting money to 3rd party vendors to cover commitments made on the advertisers behalf by the agency.  By billing upfront, once funds have been approved, agencies assure themselves that they will have the advertisers’ funds in hand once 3rd party vendors begin to invoice the agency for the products, time and services purchased on an advertiser’s behalf.  Conceptually this makes perfect sense.  No one in the marketing services supply chain wants the agency community to be at risk or to front funds to compensate 3rd party vendors for their clients’ purchases. 

However, throughout this process, it is the client’s expectation and incumbent upon the agency community to treat client money as client money, not its own.  Aside from routine billing errors, certain observed financial practices would suggest this expectation is not always upheld: 

  • Estimated invoicing not being accurately reconciled to actual expenditures
  • Inordinately long delays for reconciling actual expenditures
  • Securing and retaining prompt pay discounts and volume rebates offered by vendors
  • Delays in processing payments to 3rd party vendors 

Some agency practitioners operate as though possession is nine-tenths of the law, deploying advertiser fronted funds to their, rather than their clients’ advantage.  When client controls are lax in this area, abuses of the fiduciary relationship frequently go unnoticed.   

One aspect of an agency’s fiduciary responsibilities is to transact client business in an open and timely manner, fully disclosing all commitments, incentives, balances and risks. Further, the agency must be willing to open their books at the client’s request, allowing the advertiser to review the accuracy of the agency’s financial management practices along with their compliance to the terms of the client/ agency letter of agreement. Instances where an agency provides push back on a client’s request for open-book accounting should be dealt with directly and immediately to mitigate any further financial risk to the advertiser. 

Given the amount of an advertiser’s budget directed toward media, this is one area which requires a keen level of oversight on the advertiser’s part. The combination of the consolidation of ownership among media companies and the growth through mergers and acquisitions in the size of agency holding groups creates a concentration of power which may not always be applied in the advertiser’s best interest.  Clearly, “Big Media” and the agency holding groups have forged their own relationships and specialized deals involving data sharing, content development, inventory and financial incentives which are designed to benefit those entities, yet are reliant on the investment of funds by advertisers.  

Even when an advertiser successfully structures an agreement with their agency in which the advertiser believes that their business goals and the agency’s remuneration are aligned and clearly articulated, there is often more wiggle room than an advertiser would deem acceptable.  That is “if” they had a complete understanding of the agency’s use of funds in an estimated billing framework.  Net, net… it can be argued that agencies often make a higher level of profit than what the letter of agreement describes.  One source of this “incremental” profit being directly tied to the use of advertiser funds.  A week here, a week there when it comes to paying 3rd party vendors, one or two percentage points when it comes to treasury management, AVBs, intra-company purchases of services… it all adds up.  As Aristotle once intoned; 

“The least initial deviation from the truth is multiplied later a thousandfold. 

Advertisers provide financial inputs which allow the marketing communications industry to exist, to grow, to innovate and to prosper.  Therefore, it is the advertiser who should benefit from the financial gains tied to the use of their funds.

Perhaps it is time for advertisers to consider rethinking the estimated billing process, particularly with regard to media purchases.  Linking payment to the timely and complete reconciliation of media purchases would greatly reduce the likelihood of others profiting from the advertisers investment.  Additional benefits would include the likely improvement in the time required to reconcile invoices, account for performance and to pay 3rd party vendors.  This is in addition to the improved controls, reduction in A/P processing costs and treasury management benefits afforded advertisers in a move away from estimated billing.

 

Transparency is the Key to Agency Financial Accountability

17 Jul

agency financial management

A job estimate is generated. A purchase order is issued.  An invoice based upon the estimated job cost is generated by the agency and sent to the client.  This part of the advertiser/ advertising agency billing cycle is visible and clear. 

However, what happens with client funds once that invoice is paid is often anything but transparent.  For instance:

  1. How much does the agency actually pay third party vendors? 
  2. Which third party vendors are utilized?
  3. Do any third party vendors pass along prompt pay discounts or agency volume bonification (AVB) rebates to the agency (and is the agency passing these back to the advertiser)?
  4. Is the agency competitively bidding outside services purchased?
  5. What percentage of the advertiser investment is being directed to agency owned business units?
  6. Are jobs being closed and actual costs reconciled to estimate?
  7. What is the agency vouching process to insure that third party vendors have fully delivered on the products/ services owed for the investment made?
  8. How much time has the agency invested in the process?
  9. Did the agency adequately earn their compensation?
  10. Is the financial process and reporting efficient?

These are not trivial topics, yet strangely it is rare that an advertiser invests the time and or energy to pursue answers to these important financial stewardship questions.  Too often, payment of the initial estimate billing from the agency is the end of the client’s review process, rather than the beginning of an important accountability process, when it comes to billing management and contract compliance.  Ironically, even when advertisers establish processes, controls and reporting requirements within the client-agency letter-of-agreement these parameters often go unchecked.  Perhaps there is some redeeming value in the words of renowned educator, David Starr Jordan:

“Wisdom is knowing what to do next; virtue is doing it.” 

If an advertiser cannot readily answer the aforementioned questions, the associated lack of transparency and lax control environment increases an advertiser’s risk quotient… financial, legal and supply chain management related risks.  In our agency contract compliance practice, we uncover many recurring reasons as to “Why” advertisers fail to enforce the requisite level of financial accountability within their marketing supplier relationships.  These can range from staffing limitation issues (competence, knowledge, turnover, etc…) to organizational process gaps or cultural morays which simply don’t place the requisite value on accountability in this area.   

Experience tells us that once advertisers understand the monetary impact of “flying blind” on these key topics, attitudes toward marketing supplier accountability and contract compliance quickly change.  The financial impact of limited visibility and or lax controls in this area can put millions of dollars at risk, year in and year out.  This doesn’t have to be the case.   An in depth independent agency contract compliance review can yield valuable insight into the financial stewardship aspects of a client-agency relationship including industry “Best Practice” standards that can be implemented to enhance visibility, mitigate risks, boost marketing ROI and strengthen the client-agency relationship. 

“The time is always right to do what is right.” 

~Martin Luther King, Jr.

Interested in exploring the benefits of enhanced transparency when it comes to strategic supplier management in the marketing area?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at [email protected] for a complimentary consultation.

 

Have You Discussed AVBs With Your Media Agency?

6 Feb

agencies as resellersIf not, the obvious question is: “Why Not?”  More importantly, if your media agency hasn’t initiated dialogue with you on this topic don’t wait any longer; engage them directly to gain an understanding on their practices in this area and to share your organization’s perspectives on this complex topic.

What are agency volume bonification deals?  Commonly referred to as AVBs, agency volume deals, rebates or media kick-backs, these deals typically take the form of cash incentives offered to media agencies by media owners to incent them to spend more on their properties.  Long a part of the media landscape around the globe, there’s growing concern within the industry that the use of AVBs is more prevalent (and non-transparent) in the U.S. than had been previously thought.  Those were the findings of a 2012 survey conducted by the ANA in conjunction with Reed Smith on this topic. 

The value of AVBs, which vary by media, by spending level and by country, can be significant, ranging between 3% – 20% of an advertiser’s net media spend.  There are two primary issues with these deals.  The first concern regards the potential of this incremental revenue to unduly influence agency decisions on advertiser media placements, potentially allocating more dollars to a particular media or outlet than would be warranted based upon approved media strategies and or the media properties share of market.  The second has to do with the lack of transparency around these deals between the agency and their clients. 

Unfortunately, a lack of transparency into the presence of AVBs usually results in the advertiser not receiving their pro-rata share of any rebates secured by the agency as a result of the client’s media investment.  While the view regarding “who’s” entitled to the proceeds from AVBs varies somewhat depending upon the country and whether you’re speaking with an agency or an advertiser, one thing is clear… AVBs are earned as a direct result of the cumulative financial investment made by an agency’s client base.  Thus, it isn’t surprising that a majority of advertisers believe that they are entitled to their pro-rata share of any and all earned rebates by the agency brand and or holding company that they are working with.  In fact, in the aforementioned ANA survey on the topic, 85% of survey respondents believed that agencies “should remit all dollars to clients.”

As it stands, an advertiser’s contract with their media agency may not even address this topic, either specifically or in the broader context of any and all earned discounts, no-charge media weight and or rebates.  Thus, the best place to start is a review of the current Letter-of-Agreement that governs the client/agency relationship.  Additionally, direct open and candid conversations between senior members of the advertiser and agency teams are warranted to sort out whether or not the agency is in fact participating in AVB programs and, if they are, the resulting media allocation and or financial impacts on the advertiser.

A forewarning, do not get frustrated.  Too often when it comes to AVBs the first response back from an agency is often “What is an AVB?”  This is typically followed by a firm denial of the agency’s participation in any such incentive program.  To be fair, the day-to-day account team at the agency usually does not have insight into the agency or agency holding company’s practices in this area.  That is why it is best to engage senior representatives from the agency when it comes to this sensitive topic.  Let’s face it, if the agency is currently collecting and retaining any level of AVB rebates that goes directly to the agency’s bottom-line, they often keep this information extremely confidential.  Thus, clients requesting transparency into this practice and or demanding their pro-rata share of the AVB activity has the potential to significantly impact the agency’s income in a negative manner.  In the words of Winston Churchill:

“There are a terrible lot of lies going about the world, and the worst of it is that half of them are true.”

In our experience, a discussion regarding AVBs will likely lead to a broader conversation regarding agency remuneration, scope of work, agency staffing and deliverables.  It is our opinion that advertisers and agencies alike should welcome this conversation with open arms.  Why?  This represents an opportunity to put everything on the table ranging from billable rates, overhead rates, overhead components and guaranteed profit levels so that both parties can discuss the financial aspects of their relationship in a comprehensive, transparent and open manner. 

Finally, one of the more startling findings in the ANA research on this topic was that 40% of the advertiser organizations surveyed were “not sure” if their agency agreements had language dealing with AVBs.  If you harbor any doubt about the appropriateness of the language governing behavior in this area within your agreement, now would be a great time to review the document with your legal team. 

Interested in a second opinion of the soundness of your client/ agency agreement or whether your agency has been remitting any AVBs due your company?  Contact Cliff Campeau, Principal at AARM via email at [email protected] to schedule a complimentary review.

When Agencies Become Resellers

26 Nov

agencies as resellersEase of access, streamlined delivery, cost-efficiency and enhanced profitability are all viable bi-products of vertical integration.  There is no arguing that businesses can realize value by minimizing their own costs, while simultaneously influencing market rates and their competitors’ costs. 

But what if that business is an advertising agency?  Viewed through the eyes of an agency holding company and its shareowners, vertical integration is quite intriguing.  On the other hand, from the perspective of the clients they serve, the concept raises some moral and fiduciary concerns that should be addressed in the context of a client-agency agreement.

Some would argue that it is never appropriate for an agency to become a reseller of goods and or services.  Others might suggest that as long as it allows the agency to deliver better-than-market values or efficiencies, why not, the client is the beneficiary.  Where one stands on the issue is no longer material.  Why?  The proverbial “train has left the station” as agency holding companies have continued to rely on vertical integration strategies as an important means of driving agency revenues and profits. 

From a client perspective, the phrase; Caveat Emptor or Buyer Beware comes to mind.  When an advertiser hires a full-service advertising agency, media, digital or creative services shop or a specialty agency, they do so with the implied understanding that the agency will always act in the client’s best interest.  Is this a realistic expectation for agency holding companies whose acquisition strategies have directly fed vertical integration strategies that often generate significant below-the-line revenue opportunities? 

Unfortunately, too often there is a lack of transparency regarding how an agency holding company deploys certain services, their ownership position in those resources and or the nature of the remuneration they receive from “owned” or independent sellers.  It’s been our experience, that transparency is the fundamental issue when it comes to advertisers’ rights and agencies’ fiduciary responsibilities.  What has been divulged can be discussed.  In turn, these discussions can form the basis for negotiating terms of use and responsibilities that can then be laid out in the client-agency agreement, providing the requisite levels of transparency and control to protect both parties.  In the words of the German philosopher Friedrich Nietzsche, who wrote critical texts on morality:

“There are no facts, only interpretations.”

Surprisingly, too few contracts address the reality of agency brand and holding company inter-connectedness or the mode and level of compensation derived from the reselling of goods and services.  At a minimum, the following protections should be built into a letter-of-agreement:

  1. Advertiser “right to audit” clause
  2. Extension of contract terms and obligations beyond the agency brand to include the holding company and its subsidiaries along with wholly and or jointly owned entities
  3. Clear language regarding agency remuneration, sources, amounts and limits
  4. Assertion of advertiser rights to its pro-rata share of any and all discounts, rebates or incentives earned by the agency on the advertiser’s behalf
  5. Require agency to fully-disclose any commitments made to parent/sibling agency resources or to sellers offering agency incentives beyond commission
  6. Assertion of intent with regard to the agency’s obligation to competitively bid all creative, production and or media services
  7. Require agency to fully-disclose when services covered as part of a retainer or commission structure are sub-contracted to a parent/sibling agency or third-party.  To protect an advertiser from paying an agency for services it is not performing or is only partially performing, clear contract language needs to be established to address the circumstances that either reduce agency remuneration or reallocate unearned funds to other areas.

It is important to bear in mind the extent to which agencies have extended their supply chain “reach” with their vertical integration efforts.  These include ownership in: in-house studios, barter firms, broadcast production companies, ad exchanges, ad networks, media rep firms, staffing firms, original content production companies, and the like.

From an advertiser’s perspective, the goal is to establish contractual responsibilities and controls that will shape agency behaviors and performance in a manner that insures a level of objectivity and resource investment desired by the client.  Simple.  Right?  Not so much.  In the words of M.C. Escher one of the most renowned graphic artists of the twentieth-century:

Are you really sure that a floor can’t also be a ceiling?”

Interested in learning more about the benefits of compliance auditing as a means of improving transparency into your marketing investment and control over the stewardship of those funds?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at [email protected] for a complimentary consultation on the topic.

 

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