Tag Archives: client-agency contract

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 ccampeau@aarmusa.com to schedule a complimentary review.

Marketers; “Are your agency contracts relevant?”

20 Aug

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

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  Too often they are outdated, invalid and or untraceable.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

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

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

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

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it is not uncommon to discover that the client-agency letters of agreement (LOA) have either expired and or are simply out-of-date.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

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

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

As another consideration, if you would like to gain the benefit of what we’ve learned through first-hand experiences and would like to schedule a complimentary consultation on “Client-Agency Contract Trends,” please contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com.

 

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