Tag Archives: billing reconciliation

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

24 Feb

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

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

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

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

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

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

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

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

 

 

 

Advertisers, Did You Get What You Paid For?

2 Dec

contract compliance auditingGiven the complexity and opacity of the advertising ecosystem, at least from a billing and reconciliation perspective, it can be very difficult for an advertiser to assess if their organization received full value for their advertising investment.

Consider that most agency billing to clients is done on an estimated basis, that supporting invoice detail is often limited and that seldom is 3rd party vendor invoice documentation contained with an agency’s billing to the advertiser. Not to mention the fact that production jobs can take several months to close, that media post-buy analyses typically occur three to six months after a campaign’s initial month-of-service billing or that agency time-of-staff summaries may only be provided semi-annually or at year end… if at all. 

Many advertiser/ agency agreements provide guidelines to help mitigate some of the concerns that may arise with regard to the notion of receiving full budgetary value.  Document retention clauses, expense billing detail requirements, accounts payable timing parameters and audit rights language are examples of the terms and conditions which are negotiated into agreements to safeguard advertisers. Ironically, very few advertisers take advantage of these contractual protections to conduct detailed reviews of the billing and financial stewardship portion of their respective agency partners’ performance.

However, pressure has begun to mount from stakeholder groups within client organizations that are not directly involved in the agency relationship management loop to provide a higher level of accountability when it comes to the disposition of their marketing funds.  Further, functions such as finance, internal audit and procurement have even stepped up to provide funding and or personnel support to help their counterparts in marketing implement billing, financial management and contract compliance reviews of their agency networks.

This type of testing and analysis should be welcomed with open arms by both the Marketing Team and an advertiser’s agency partners. Let’s face it, marketing teams, which are often resource constrained, have their hands full with their primary responsibility… demand generation. Further, some of the competencies and experience which best lend themselves to conducting financial testing may not be represented on staff within the marketing group. Similarly, agency finance teams have become both accustomed to and quite adept at entertaining advertisers and or their audit partners in conducting billing reconciliations and contract compliance reviews.

If such support is not forthcoming, marketers may want to actively solicit the involvement of their corporate services peers to implement a marketing accountability initiative. Inviting this type of internal scrutiny has more benefits than negatives. Consider the words of Edward Coke, the noted English barrister, judge and politician:

“Certainty is the mother of quiet and repose, and uncertainty the cause of variance and contentions.”

Removing any uncertainty regarding the organization’s advertising investment and the efficacy of each agencies billing and reconciliation processes has asset value for marketers which extends well beyond answering the basic question; “Did we get what we paid for?”

 

 

The Problem with Focusing on Payment Terms

24 Jun

agency floatNever one to forgo an opportunity to harangue client-side Procurement and Finance professionals, Sir Martin Sorrell couldn’t help but single out those two groups during a session at the Cannes Lions International Festival.  While the topic was client payment terms, Mr. Sorrell suggested that their influence on marketing decisions is putting pressure on the system and the supply chain.

For the record, I am not an advocate of marketers extending payment terms.  The reason is simple, the savings are illusory as those costs simply get factored into the “cost of doing business,” it incents bad behavior and the trickle-down effect of such policies negatively impacts a range of marketing suppliers in the creative, production and media sectors. 

However, for the agency community in general, and Mr. Sorrell in particular, to rail on the client-side procurement and finance teams for the actions of a handful of advertisers who have extended payment terms to their agencies seems disingenuous.  Why?  For years agency holding companies, such as WPP have exerted their influence which is a bi-product of their increased size and clout to arbitrarily extend their payment terms to 3rd party vendors.  The difference between advertisers such as P&G, Mondelez, AB-InBev and Johnson & Johnson and their counterparts in the agency community is that they at least went public with their policies. 

Agency income from float, the interest earned on the agency’s  between the time a vendor invoice is due and when funds are actually dispersed by the agency to pay that vendor, can be significant.  As part of our contract compliance auditing practice, AARM conducts billing reconciliation and days-payable-outstanding analysis pertaining to agency payments to 3rd party vendors.  It is not uncommon to see average day’s payable levels in excess of 75 to 90 days.  When one considers that most agencies bill their clients upfront, on an estimated basis, the interest income that can be 

earned by agency holding companies on their use of client funds is rarely, if ever, openly discussed or factored into agency remuneration.  Unfortunately, save for a small number of large multi-media conglomerates, suppliers downstream simply have no recourse when agencies extend their days-payable-outstanding.  

Thus when the chairman of one of the world’s largest agency holding companies intones that client-agency relationships are  “in danger of being eroded” due to a handful of advertisers extending payment terms it rings shallow.

Regardless of whether an advertiser views their ad agency suppliers as “partners” or “vendors” is immaterial in the context of this discussion.  One thing everyone should agree on is that the ad agency should never be put in the role of “banker.”  Clients should structure payment terms so that their funds are on hand for the agency to pay 3rd party vendors when those invoices come due.  To extend this concept further, client-agency agreements should contain language requiring agencies to promptly reconcile all 3rd party vendor activity and to process payment to that community within a pre-determined timeframe.

There are numerous opportunities for advertisers to improve treasury management practices when it comes to the handling of their marketing investments.  However, issuing edicts to extend agency payment terms is short-sighted and belies the ripple effect that this practice can have on inflating the cost of doing business for those advertisers.  It is time for advertisers and their agencies to deal with the issue of payment terms; client to agency and agency to 3rd party vendors, in a constructive and transparent manner.  The fact that either side would look to achieve a financial edge at the other’s expense when it comes to the disbursement of funds is not where the focus should be.  As Voltaire, the noted French philosopher once said;

“When it is a question of money, everybody is of the same religion.” 

The focus, lest we forget should be on leveraging that marketing investment to build brands and drive consumer demand for the client’s product and service offering.

Interested in learning more about improved treasury management practices when it comes to agency stewardship and 3rd party vendor payment processing?  Contact Cliff Campeau, Principal at AARM at ccampeau@aarmusa.com for a complimentary consultation.

Contract Compliance Matters

3 Jun

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

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

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

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

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

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

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

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

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

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

What is the #1 Advertising Agency Control Oversight?

24 Jan

spreadsheetIn our experience as contract compliance auditors, the answer to this question is unequivocally an advertiser’s failure to reconcile agency billing activity.  Whether we’re talking creative services, digital production or media, advertisers are simply not vouching for the accuracy or completeness of either the agency’s or the 3rd party vendors billing efforts.

Given that “Estimated” billing remains the predominant form of agency billing to advertisers this lack of oversight creates tangible risks and the potential for financial loss that could be eliminated with the implementation of some fairly simple controls.  These risks include the potential for billing errors to go undetected and aged credits, earned discounts and rebates not being returned to the advertiser and lost interest income opportunities tied to agency float.

The principal stop-gap measure that could allay this problem is frequently overlooked by too many advertisers.  What is that measure you ask?  Simply requiring agencies to provide copies of all 3rd party vendor billing with their bill-to-client invoices. 

In two recent examples, one in North America for a multi-channel direct marketer and one in the middle east for a pan-Arabian conglomerate, the client had put significant funds at risk, which had it not been for an independent audit, would surely have been lost.  Each client was billed on an estimated basis by their agency, and each agency routinely failed to reconcile billing to actual expense.  In both instances there were incremental agency remuneration activities identified that were not supported by the client/ agency agreements.  These came chiefly in the form of AVBs, or volume-rebates, provided by media properties based on large expenditures made by each of the respective advertisers.

Had the requisite bill-to-client “back-up” data been available, client-side Accounts Payable personnel would have had the opportunity to review and challenge the billing and to secure financial true-ups along the way.  Ironically, both advertisers had incorporate “Right to Audit” and “Document Retention” clauses into their agency agreements.  However, as is typical across the industry, neither had previously enacted those clauses to engage an independent auditor to review the accuracy and timeliness of the agencies billing and 3rd party vendor payment processing efforts.

When advertisers take a lax posture on billing reconciliation and vouching, invariably two other areas are frequently impacted.  The first represents a risk to the advertiser in the form of approved purchase order (P.O.) balances and earned, but not yet processed, credits being managed “off-book.”  While these practices seem innocent enough on the surface and often involve client-side marketing personnel, the risks are very real.  The notion is a simple one, the agency and client teams identify credits or unspent budgets and accrue these funds for future use on unexpected new initiatives or for planned projects that exceed budget.  Harmless, right?   Perhaps, until the client-side marketing representative is transferred out of their position or leaves the company altogether.  This usually creates a knowledge gap that allows these “off-book” funds to remain undetected by the advertiser.  Thus, in this scenario the agency is the only entity with knowledge that these funds even exist.

The second area impacted is an advertisers treasury management practices.  With estimated billing, clients are often invoiced by their agency at the time of project approval, with payment due in 15 to 30 days.  However, the agency may not be billed by 3rd party vendors until costs are actually incurred (i.e. calendar month following the month of service) and remittance may not be due for another 30 to 45 days.  Finally, the agency may take an excessive amount of time to reconcile the vendor billing and hold off on processing payment until the charges are fully reconciled.  While that all makes sense, the advertisers funds have been in the agency’s possession and not in an interest bearing account generating interest income for the advertiser. 

Billing reconciliation is too important a task not to have a rigid oversight process and controls in place.  Agencies handle anywhere from several dozen to thousands of 3rd party vendor invoices on the advertisers behalf.  The sheer volume of billing activity can in and of itself create an environment that is ripe for mistakes.  As noted twentieth-century American author Paul Eldridge once said;

“In the spider-web of facts, many a truth is strangled.”

Having a process that provides billing analysis redundancy makes good sense and will likely be welcomed by the agency.   If you’re interested in learning more about independent billing reconciliation audit support, please contact Jim Bean, Principal at Advertising Audit & Risk Management at jbean@aarmusa.com for a complimentary consultation on this important topic. 

 

The Flip Side

1 Oct

compliance auditingRather than focusing on how the client / agency relationship is out of alignment as the basis for a financial compliance audit… consider this.  Proactive marketers, with highly satisfactory advertising agency / media buying relationships use “best practice” compliance auditing as a mechanism to maintain a good relationship and to support staying with their current marketing partner. 

One AARM client example.  The client’s marketing department recently (together with procurement’s support) initiated an agency media performance and billing compliance audit.  The stated audit objective was to confirm Marketing’s past experience and opinion that their agency has done an exceptional job over the last 6 years.  The audit was an agreed-to preemptive strike.  

The client’s procurement group is required, via corporate policy, to initiate a competitive RFP process every 5 years on each material vendor’s services.  Stakeholders engaged the audit process with full expectations that their agency would be found to be in compliance in all the requisite and important financial / stewardship areas.  Results were then to be used to support an ongoing relationship with the Incumbent, and as a means to avoid the potentially disruptive and costly RFP cycle. 

There was a catch.  The audit could not be a “wand-over” quick-check with sampling or haphazard testing procedures.  And could not be conducted by the company’s internal audit group, or by an external generalist firm.  Management required a specialist firm be engaged, to enable an unbiased assessment as to the health and clarity of the agency’s financial treatment.  A software enabled deep-dive data auditing capability was to be employed, industry best practices were to be compared and all agency billing areas were to be covered; including retainer-fee basis, commission application, labor charging practices, and pass-through costs. 

From a service provider’s perspective, it is refreshing to see the client / agency relationship being considered, in more than a neutral fashion but as a basis to inspect and a rationale to stay the course.  Agency change is disruptive and not guaranteed to meet expectations.  The time (market opportunity and real) it takes to bring any new agency partner up to speed and integrate them into the corporate fold is material.  We always suggest, where possible, an advertiser exhaust all reasonable effort to remedy a relationship with the existing service provider in the marketing area, rather than make a knee-jerk or non-required change. 

Our client in this case is doing it right.  They have set expectations, they are testing against those expectations as a good control practice, they plan to adjust process or control issues that come out of the review, and they will go forward with an even stronger proven relationship.  The agency is on-board, clearly has a vested interest in cooperating with the inspection, and will also benefit from any new level of financial transparency and understanding derived from the work. 

Audit should not be primarily about suspicion, gotcha, cost recovery, or selective issues.  Audit is about consistency, learning, strong financial awareness, compliance and continuous improvement. 

An additional benefit from a consistent / proactive audit program is the ability to challenge any new CMO’s suggested agency changes.  If industry statistics serve, it is likely that any given large advertiser will have a new CMO within the next 12 to 18 months, and they may want to change agency partners – what can you do? 

Go audit, stay happy!

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