Tag Archives: client agency relationships

Is Your Contract Worth the Paper It’s Written On?

25 May

partnershipThe Association of National Advertisers (ANA) recently released its study on programmatic media. The study was conducted in conjunction with the Association of Canadian Advertisers (ACA), Ebiquity and AD/FIN.

While the study provided fascinating insights into programmatic media performance and costs at the transactional level, there was one particular item that stood out:

88% of the advertisers that were interested in and 75% of the advertisers that signed up to participate in the study could not or had to opt out.

Why was this? According to the study’s authors, “because of a myriad of legal, technical and process roadblocks put up by players in the ecosystem.” Long story short, those advertisers did not have contractual language providing them with clear data ownership or usage rights with their agency, trading desk and or ad tech partners.

The obvious question to be asked is, How can an advertiser’s programmatic media transactional data not belong to the advertiser? After all, it was their media investment that funded the buys. It was their agency partners who invested those funds on their behalf (or not). So, who could possibly own that data if not the advertiser?

What would you do if your agency partner denied your organization access to programmatic performance data that you had requested. Data that would shed light on your programmatic media performance and costs (i.e. third-party costs, agency fees, tech fees, data fees). It certainly seems short-sighted that an agency would deny their clients access to this data, both in the context of the ANA study and for providing transparency into how their programmatic investment is being stewarded to disclose what their true working media percentage is.

Sadly, this is but one example of Client/ Agency contract language omissions that create disclosure and accountability gaps, which can lead to legal and financial risks for advertisers. Other examples include:

  • No requirement for an Agency to disclose or competitively bid in-house production resources or affiliate companies.
  • Media arbitrage deals in which the Agency is marking-up media by an undisclosed amount on inventory that it owns stemming from principal-based buys it has made.
  • Agencies acting as principals, rather than agents, when investing the Client’s creative production funds. One example might be the Agency or its production studio filing for and retaining incentives offered by states and municipalities for shooting or post-production work completed in their geography.

Marketing spend is on the rise and is certainly considered a material expenditure, which can represent 12%+ of a marketer’s revenue base (source: 2015 CMO survey).

And yet too often, an advertiser’s contractual audit rights are not broad enough to ensure unmitigated access to the data files, records and reporting necessary to evaluate an agency’s compliance with the agreement and or their financial management performance. This can and should include:

  • An advertiser’s right to select an internal or external auditor of its choice (i.e. contract compliance, media performance, financial management).
  • The right to audit the agency and its related parties (i.e. holding company, affiliates, related entities, etc.).
  • Assertion of the advertiser’s right to limit or eliminate an agency’s non-transparent revenue (i.e. AVB’s, rebates, non-disclosed fees, mark-ups, float income).
  • The right to audit principal inventory and or mark-ups.

Contracts are also a great vehicle for communicating performance guidelines for items ranging from brand safety and viewability policies to fraud monitoring requirements and an advertiser’s policy on not paying for bot traffic, all of which are designed to safeguard an advertiser’s investment.

From our perspective, it makes sense for advertisers to engage in dialog with their agency partners to talk through contract terms and conditions, such as these, to secure their perspective and ultimately their buy-in. After all, the contract is a document that will govern most aspects of the Client/Agency relationship. Thus, open dialog that leads to a transparent relationship can form the basis for a trusting partnership that will last for many years to come.

As Stan Musial, the legendary baseball hall of fame member of the St. Louis Cardinals once said:

The first principle of contract negotiations is don’t remind them of what you did in the past – tell them what you’re going to do in the future.”

What is Missing in Client-Agency Relationships Today?

28 Dec

What's Missing Question Words Puzzle Holes Gaps Incomplete PictuOne can’t help but marvel at the length of some of the most enduring and successful client-agency relationships. Unilever and Lowe & Partners have been together for 117 years, Unilever and J. Walter Thompson for 114 years, General Electric and BBDO for 96 years and FCB and Levis Strauss for 43 years. In an age where the average lifespan of client-agency relationships is less than 4 years, you certainly have to tip your hat to these partnerships.

What is it that they know or are doing differently that has eluded others in their pursuit of long lasting, stable and productive relationships?

While there are certainly many contributing factors, I believe that the most important ingredient in these long lasting relationships is the principal of “fidelity.” In short, these organizations obviously share a commitment to the quality of being faithful to one other. This can be evidenced by their ongoing loyalty and mutual support for one another, an intangible but valuable trait that has served them well. As the late German actress, Lilli Palmer once said; “Fidelity is a gift, not a requirement.” But as can be evidenced by the length of these unions, this gift can yield meaningful benefits.

Experience has taught us that successful client-agency relationships are more often than not predicated on marketplace performance… building enduring brands, driving revenues and expanding market share. Great work and great outcomes are clearly an integral part of achieving success when it comes to enduring partnerships. Such work is also a byproduct of one of the keys to achieving and maintaining fidelity, a shared sense of purpose. This shared sense of purpose is truly the glue that holds relationships together. Whether that is between an organization and its associates or between advertisers their agencies and their third-party vendors.

In a complex, ever changing global marketplace the best way to instill a shared sense of purpose is to gain alignment on five key components of a client-agency relationship:

  1. Client Business Goals – For an agency, understanding the client’s overall objectives is a necessity for generating break-through ideas and developing work that will move the proverbial needle. It is also a pre-requisite to earning the respect of the C-Suite when providing strategic counsel and advice. The client organization also benefits exponentially when its personnel and business partners have a clear line of sight into the enterprise’s goals. Thus, client-side CEOs might benefit from the wisdom of George F. Burns, who said, “Define your business goals clearly so that others can see them as you do.
  2. Agency Deliverables – Establishing the agency’s role and overarching responsibilities is a necessary first step in identifying a specific set of deliverables, which in turn are designed to support the marketing objectives that will contribute to the attainment of the business goals. In turn, these deliveries will also provide the impetus for both the agency and the client to assess what level of resources they need to allocate to satisfy these expectations during the fiscal year.
  3. Resource Requirements – While we normally think about resource commitments in the context of agency time-of-staff, technology, data resources and the like, both the agency and client must ask themselves what level of resource investment is required to execute these deliverables in an efficient manner. Too often, client organizations may not be adequately staffed to provide timely and or relevant feedback on day-to-day decisions or in the context of providing sound strategic direction at the onset of campaign planning. Thus, both parties must carefully assess the amount of time and level of subject matter expertise each will require to support one another.
  4. Communication Protocols – One of the realities of client-agency relationships is the constant grind of daily tasks and unforeseen activities that sap resources, energy and potentially creativity. However menial these tasks might be, they are necessary. That said, it is equally as important to establish client-agency contact plans that allow for periodic contact between executives of both organizations to discuss business performance, opportunities and exchange ideas on how the agency can better assist the client in pursuit of its goals. Similarly, outside of the weekly status updates, monthly performance tracking discussions and financial management reporting it can be very helpful to establish regular quarterly business reviews (QBRs). These QBRs should be attended by cross functional representatives from each parties marketing, finance and procurement teams and should address both year-to-date status updates (i.e. project tracking, budget management, agency time-of-staff/ fee tracking) but also allow for meaningful discussion on potential shifts in strategy or tactical support to address competitive actions or market opportunities.
  5. Performance Measurement – Simply put, what criteria will the client use to assess the value of the agency’s contribution to the attainment of the organization’s goals… and the timely, efficient execution of its deliverables. Discussing these expectations upfront, monitoring progress on a monthly basis and making the requisite course change decisions if and when necessary can be helpful in driving consensus on how the agency and client teams are performing.

Focusing on these components of client-agency relationships will not only instill a sense of shared purpose and fidelity, but will strengthen the level of respect both organizations have for one another. In the end, this is the key to transcending the organizational changes that will inevitably occur on both sides of the aisle and nourish a long-term, mutually beneficial relationship.

When one considers the strains on today’s client-agency relationships there may be no truer words than those spoken by the 35th president of the United States of America, John F. Kennedy, when he said;

“Efforts and courage are not enough without purpose and direction.”

 

 

 

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.

 

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.

 

Advertiser Audit Rights: Omnipresent but Seldom Enacted

11 Apr

transparencyVirtually every contract that exists between advertiser and agency partner provides the advertiser with the “right to audit” agency books, records and accounting practices related to services rendered. However, oddly enough, advertisers seldom act upon these negotiated, protective contract provisions in spite of the significant dollars being spent in this area. This is unfortunate for both advertiser and agency alike.

Why? At a time when many client / agency relationships are strained, largely as a result of diminishing levels of trust and transparency concerns, contract compliance work represent an excellent tool for building clarity around and confidence in agency financial management practices, resource investments, and actual performance.

Contract compliance work identifies gaps in understanding that can be negatively impacting client perceptions and agency margins. Whether related to the project briefing, the approval process, rework levels, mushrooming custom reporting requests, and or payment timing issues, independent testing work provides a prescriptive for positive change to benefit all stakeholders.

In our contract compliance practice, it is common to identify process and behavioral breakdowns that have crept into day-to-day activities between client and agency and that can be directly attributed to lack of oversight. Unchecked, bad habits whether accidental or intentional create financial risks that can be very costly to both parties. Periodic compliance work and ongoing performance monitoring can greatly provide new learnings that assist the advertiser to mitigate risks, optimize process, and eliminate unnecessary costs.

Independent audit work absolutely provides assurance and marketing spend governance. It drives in-market performance in a manner that improves the advertisers return-on-marketing-investment. An additional dynamic, born of a consistent marketing accountability program and contract compliance work, is a very real incentive for the parties to reform behaviors that are distracting an otherwise solid client / agency relationships predicated on trust and confidence.

A wise risk management practitioner once shared a somewhat comedic perspective on this dynamic by citing the following question and answer:

“What happens when you lock a wild hyena in a room with an Internal auditor? The hyena stops laughing.”

 Audits can be sobering and should be approached with a healthy and serious level of respect. However, they are not intended to intimidate or strike fear in the hearts of marketing team members or agency personnel. Further, sound audit methodologies should not interrupt client/ agency workflows, nor should they come with an onerous cost in terms of advertiser or agency resource investment required to participate in the process. The goal is to identify opportunities for improved transparency, controls, risk mitigation practices and financial management stewardship, and build long-term relationships.

We see relationships flourish and be strengthened when both parties embrace the process for what it was intended. That is why “Right to Audit” clauses exist and why they are so broadly represented in client / agency agreements in the U.S. and around the globe.

 

 

Linking Agency Fees to Outcomes

14 Dec

overheadThe topic of agency remuneration is one that the advertising industry has wrestled with for the last few decades, since the 15% standard agency commission went by the wayside. 

Agencies want to be paid fairly for their services and clients want to earn a fair return on their agency fee investment… at least theoretically. In reality, agencies want to earn as much money as possible on each of their accounts and clients want to pay as little in agency fees a they can. 

Unfortunately, both stakeholder groups’ true intentions can at a minimum negatively impact perceptions one side may have of the other and in a worse case scenario, drive bad behavior. This can include an advertiser focusing on continually ratcheting down agency fees, with little consideration for the relationship between agency fees and the scope of services. In turn, this is a perfect breeding ground for an agency’s decision to pursue non-transparent revenue sources to shore up perceived inequities at the expense of the advertiser. Ultimately, these actions can serve to undermine trust and eventually the stability of the client/ agency relationship. 

Thus the question remains; “How can both parties bridge the divide when it comes to the agency remuneration discussion?” 

The best solution, obviously, would be to structure a compensation system which is fully transparent, fair to both parties, encourages good behavior and fosters a relationship based upon mutual respect and shared goals. As Sam Walton, founder of one of the world’s largest companies once said; 

“We’re all working together; that’s the secret.” 

In our experience as contract compliance auditors, we have found that the most effective compensation programs link to agency fees to outcomes. We have seen more beneficial results when this is the case compared to fixed retainer fees that have no link to a mutually agreed upon foundation. Typically, these outcomes fall into one of three categories: 

  1. Agency deliverables
  2. Agency time-of-staff investment
  3. Qualitative and quantitative outcomes, those controlled/ influenced by the agency and KPIs tied to the success of the client in-market

It should be noted, that remuneration programs often combine elements from each of the aforementioned categories. In many respects, this is an ideal scenario, particularly in the context of agency-of-record relationships, where the nature of the client/ agency relationship is more akin to a partnership than a buyer/ vendor interaction. 

Regardless of the mode of compensation ultimately selected, value-based, direct-labor driven or performance based, we believe that there are two critical components, which must be negotiated in advance of focusing on the level of remuneration. 

First and foremost is the development of a tight scope-of-work (SOW) collaboratively constructed by the client-side marketing team and the agency account services team. At a minimum, the SOW should explicitly identify all projects, expected outputs, the quantity and timing of those outputs and some indication of whether those items must be created versus modified or adapted. Ideally, the SOW will also address issues with regard to project component complexity and the number of rounds of input/ review per project component to assist the agency in assessing the required time-on-task and to assist the client in establishing project briefing and approval processes which are consistent with desired project outputs. 

Secondly, with a mutually agreed upon SOW, the agency should be asked to provide a detailed staffing plan, one which identifies the names, titles and functional responsibilities of the specific individuals who will work on the business along with their utilization rates. The staffing plan should also identify the base number of hours utilized to calculate a full-time equivalent (i.e. 1,800 hours per year) and at a minimum, a blended hourly rate by department or by function for use in pricing out-of-scope work and or in reconciling fees relative to the agency’s time-of-staff investment if and when necessary. 

The time invested by both parties on the front-end to clearly establish the client’s desired outputs, timing requirements and qualitative expectations and to assess the resource investment required by the agency to deliver on those anticipated outcomes will yield significant dividends. 

Additionally, tracking monthly progress project status and the agency’s time-of-staff investment will allow both parties to stay on track and within budget… while eliminating any surprises. 

In the words of Henry Ford; “Coming together is a beginning; keeping together is progress; working together is success.”

 

 

 

 

 

 

 

 

 

 

Building a Relationship and Managing to Scope Are Not Mutually Exclusive

4 Aug

project scopeAdvertisers are comfortable paying their agency partners for services performed and the work product which they deliver. Conversely, agencies are comfortable billing for the services provided and work which they complete. More often than not, advertisers and agencies have contractual agreements, which specify how the agency is to be remunerated for such work.

So what is the root cause contributing to continued industry concerns over agency compensation and profitability?

Consider that, most agency compensation systems establish guaranteed profit ranges of between 10% and 20% with the opportunity for additional incentives tied to performance. Further, most client-agency relationships begin with fairly well defined “Scopes of Service” and “Agency Staffing Plans” which serve as the basis of the agency remuneration program. The obvious answer has to be that regardless of both parties good intentions, actual practice must not mirror the agreed upon contractual terms.

From our perspective, the answer comes down to one key aspect of any professional service provider’s business model… the ability to align staff investment with the scope of services required by their clients. As a contract compliance auditor and marketing accountability consultant we have had the good fortune to analyze a broad range of client-agency relationships, across industries and around the globe. In virtually every scenario where an agency asserts that they are not being adequately compensated on a given client these two items are misaligned. The only acceptable instances that we have come across are in the context of an agency knowingly investment spending to assimilate a new client or a particular aspect a client relationship.

The primary issue for ad agencies is that their time-keeping practices are less than optimal and their systematic ability to accurately track time at a project or task level is often times poorly set up or woefully lacking in capabilities. This is frequently compounded by inadequate controls and reporting, making it extremely challenging for agency management to have the proper information necessary to course correct on a timely basis. Finally, even if the agency does have the tools and is aware of a shortfall, they often aren’t comfortable engaging their clients in meaningful discussions surrounding; project burn rates, inefficient processes demands exceeding the original agreed upon scope or variances in planned staff utilization levels. Consequently, these issues are often left unresolved until the year-end relationship evaluation meeting, leaving the only option for the agency but to approach their client with a plea for additional remuneration to offset its over investment of time. Not surprising, the timing of these discussions are such that it is often too late for the client to even consider such a request. In the words of Roman statesman and philosopher, Seneca:

“When a man does not know what harbor he is making for, no wind is the right wind.”

Fortunately, this scenario is easily remedied through improved controls and good communications. 

For starters, agencies must educate their employees and contractors on the purpose and importance of accurately tracking their time by client, project and or task, in fifteen minute increments and the need to submit their time sheets on a weekly basis. Ideally, these guidelines along with any other agency or client specific requirements should be published and reviewed periodically with the agency staff.

Secondly, time-of-staff reports should be issued to clients on a monthly basis and should incorporate staff investment detail by person, by department and should be compared back against the total hours and utilization rates identified in the staffing plan along with an explanation of noteworthy variances. This should be supplemented with a quarterly meeting between agency and client executives to review progress against the contractual Scope of Services and to discuss the agency time-of-staff investment to-date and, if necessary, any actions required to realign the two going into the next quarter.

While the agency will usually be the direct beneficiary of this approach, clients will genuinely appreciate and respect the timeliness and thoroughness of this “no surprises” process.  Simple? Yes. Straight forward? No doubt. Who’s responsible for taking the first step… the agency. This methodology is part and parcel of every professional services provider’s responsibility to their clients and shareowners. Importantly, it allows agencies to effectively build rapport and manage their client relationships on a profitable basis.

 

Do Advertisers Value Their Agencies?

4 Aug

client - agency relationshipsThis question came to mind when reading the results of a recent survey conducted by the Institute of Advertising Practitioners in Ireland (IAPI) dealing with the state of the advertising industry.  One of the survey respondents expressed an opinion that clients were “much more aggressive and much less loyal.” Further, the representative from a creative agency stated that clients were “aggressive on cost and expectation and less committed to supporting their agency in their efforts to deliver excellence.” 

Subjectively speaking, many of us involved in the advertising space would likely answer this question with an unqualified “no, not as much as they once did.” 

The reasons for holding such an opinion may be many and varied, but the evidence manifests itself in the fact that client/ agency relationships simply are not as enduring as they once were.  There have been a number of studies conducted over the last half-dozen years which have pegged the average relationship length in the 3 – 5 year range.  If advertisers truly valued their agencies surely this would manifest it in longer, more productive relationships.  Wouldn’t it? 

Once full-service ad agencies “unbundled” this set the stage for advertisers to expand their agency rosters to address their “specialized” marketing needs.   In turn, this created bench strength and ultimately allowed advertisers to more readily re-allocate brand assignments across their stable of agencies, which certainly accounts for some percentage of client/ agency change.  Over time, the notion of transitioning work from one network partner to another became more acceptable and perhaps led advertisers to view going outside of their current agency rosters as less of an issue. 

Change costs.  Whether measured in terms of the time required to effectively transition an agency or the opportunity costs tied to a “new” agency’s learning curve on the business.  This in turn creates risks with regard to an advertiser’s demand generation and market share accretion efforts.  Yet in spite of the cost of change, advertisers continue to change out agencies at an alarming rate.  

One cannot place blame for this trend solely on advertisers.  The actions and behaviors which precipitate the termination of a client/ agency relationship both parties have a shared responsibility.  Similarly, clients and agencies each hold the keys to extending both the length and productivity of their relationship.  It begins with a simple, but powerful concept… mutual respect.  After all “respect” is an important proof point of the extent to which one organization values the contributions and support of another. 

Advertisers can take the lead in this area with a series of simple, yet meaningful processes which will demonstrate the extent to which they value their agency partners:  

  • First and foremost, advertisers can and should align agency compensation with desired agency outputs, measured both in terms of detailed statement of work outputs and the resource commitment required by the agency to deliver on those expectations.  
  • Minimizing project reworks and the number of start / stops in the planning and execution phases of creative and or media development will go a long way to demonstrate the regard in which advertisers hold their agency partners.
  • Look for opportunities to improve the briefing process.  Advertisers who can effectively and succinctly prepare their agency partners at the start of a project provide a huge morale boost for their agencies and greatly enhance the odds of producing great work.
  • Reinforce the fact that as a client, you value the input of your agency partners.  Encourage candid, two-way communication among all stakeholders involved in the Client/ Agency relationship.  To be effective, this concept must extend beyond the annual 360° performance review process.
  • Encourage full transparency when it comes to agency reporting and financial management.  Supplement this with periodic (i.e. quarterly) business reviews so that both sides have a clear understanding of where everything stands, both as it relates to budgets/ project completion as well as with the relationship itself. 
  • Consider rewarding successes with incentive programs tied to the efficacy of the agency’s marketing efforts, using brand relevant milestones as the guideposts (i.e. awareness, sales, market share).

As Henry Ford once said: “Coming together is a beginning.  Keeping together is progress.  Working together is success.” 

Taking these proven steps will go a long way toward demonstrating the extent to which advertisers value their agencies, as well as the respect which they have for the art of crafting and delivering effective marketing communications.  In the end, they can also represent an important building block in extending the length and productivity of their agency relationships. 

Agency Agreements Require Adequate Audit Rights

14 Apr

Advertising Audit is an important financial control process – not an optional luxury.

Any large company conducting business with an advertising agency or media buying firm without comprehensive Audit Rights is simply at risk. The marketing supplier may refuse to cooperate with (or significantly restrict) even very reasonable audit requests.

Based on years of experience and observation, it is clear that a sub par or non-existent audit clause often limits an Advertiser’s ability to implement standard compliance testing which therefore limits their opportunity to validate agency billings and gain comfort. Important learning opportunities are also lost – clearly an undesired outcome.

An example of a healthy financial relationship between parties – there are cases to note where even lacking clear audit documentation, the marketing supplier has complied with audit requests, but these cases are few and far between.

Pushback is a “red-flag.” Good financial practices should have nothing to fear from thorough scrutiny. The more pushback the higher the risk meter should rise.

Verification of billing accuracy / support would seem an innate right of any large company spending millions of dollars with a vendor (yes, even in Marketing).

What should you do? (1) in the near term amend the current Client-Agency Agreement to add a Right to Audit clause – and make it retroactive for at least 3 years; (2) add a Right to Audit clause within an ancillary document such as a Statement of Work (SOW) or an annual amendment to the Master Client-Agency Agreement; or (3) create a new document signed by both parties creating a Right to Audit and adding it to the vendor master file.

Ensure the audit clause is
well-defined and comprehensive.
For a guide, contact AARM at info@aarmusa.com

Once Audit Rights are established, a best practice and preventative control measure is to implement periodic and routine testing to deter wasteful practices, to identify errant billing transactions and to monitor key financial metrics. Testing should be performed at least annually, and always in cases where an agency relationship has been terminated (“transition audit”).

The audit concept also applies to systematic (or continuous) monitoring processes. A systematic monitoring program measures agency financial transactions, reporting and timing against a predetermined set of tolerances. Metrics are compiled and delivered at least monthly to stakeholders. Systematic monitoring is generally performed by an independent third-party with specialized software, and the Advertiser often chooses to share results with the agency – to support incentive compensation goals of and or a basis for behavior modification.

Right to Audit is a necessary safeguard in today’s business environment. Determining a schedule, methodology, and defined approach that encompass at some level each vendor in the organization’s marketing network will provide necessary assurance to management that adequate oversight and preventative controls are in place to catch errors, drive efficiencies and enhance ROI.


Managing Controllable Spending

9 Apr

The ANA recently released the results of its sixth annual spending survey of 250 marketers regarding their 2012 budgets.  Not surprisingly, budgets are not going up much, if at all.  In fact, half of those surveyed indicated that budgets would be flat and one-third stated that budgets would be reduced from prior year levels.  As part of their budget management efforts, more than 8 out of 10 marketers are being asked to “tightly manage” their controllable spending.  Not surprisingly, the focus on controllable expenses is being extended to the organization’s agency partners as well with more than half of those surveyed indicating that they would ask their agencies to cut internal costs.

The not so good news is that some of the categories of expense reduction being targeted ranging from the elimination of employee training and development to shifts in media mix to lower cost media channels can negatively impact a marketer’s effectiveness in the near-term and over the long-haul.

What if there was an option available for a marketer to meet their organization’s budgetary guidelines, without sacrificing their ability to build brands and to profitably drive sales and market share?

It might surprise some to learn that the ability to boost available budget and drive efficiencies is closer than they think.  The answer comes in the form of a contract compliance and performance audit of an organization’s marketing agency partners.  In a majority of client/agency relationships the right to audit is specified within the master services agreement.  However, most marketers don’t avail themselves of this legal provision, which yields both improved financial controls and recoveries while leading to improved agency efficiencies and performance.

When was the last time your organization conducted an agency fee reconciliation or conducted an independent billing reconciliation that included actual versus estimated costs along with 3rd party vendor remittance data?  Have you recently checked to determine whether early pay discounts, annual volume rebates or your pro-rata share of agency group buying discounts were being captured and returned to your organization?  Do you currently review your agency partners’ monthly time-of-staff investment reports?  Reconcile them quarterly?  Engage in dialogue with your agency partners to evaluate ways to streamline processes that can reduce your costs and bolster their margins? If the answer to any of these questions is “no” then you could be leaving money on the table.

How much money you ask?  In our experience, it is not uncommon for a compliance audit to yield financial recoveries, future savings and risk avoidance benefits in the 3% to 9% of audited dollar range.  While periodic compliance audits make good legal and financial sense, they can also serve as the impetus to strengthen the client/ agency relationship by establishing and tracking performance criteria while identifying mutually beneficial process improvement opportunities.  Interested in learning more about the ANA survey results? …  Read More

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