Tag Archives: Contract Compliance Audits

If a Tree Falls in the Forest…

3 Jan

OversightThis past December the former COO/ CEO of global PR firm Weber Shandwick was sentenced to prison after pleading guilty to embezzling $16 million from the firm and ultimately its holding company, Interpublic Group, over a 9-year time frame. The fraud was perpetrated in part through the generation of “false and misleading invoices.”

This news should raise concerns for clients of the firm aside from the character of the individual. The lack of solid agency (and holding company) internal controls over a prolonged period raises an obvious question; “How do these lax controls impact our business and were any of these erroneous charges billed back to us?” Moreover, if it happened at one agency, could this be occurring elsewhere?

Given the nature of the marketing/ advertising industry’s use of estimated billing and the submission of invoices to clients, without accompanying third-party vendor invoices, it makes sense for marketers to conduct periodic contract compliance and financial management audits of their agency service providers to assess those providers financial stewardship practices, mitigate financial risks and allay potential concerns.

In the words of Norman MacDonald, author of Maxims and Moral Reflections: “Though we may not desire to detect fraud, we must not, on that account, endeavor to be insensible of it, for, as cunning is a crime, so is duplicity a fault…”

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4 Appropriate Limitations On Agency Remuneration

12 May

fourIt is our belief that agencies, consulting firms, contractors, employees and yes, even auditors, are entitled to earn as much money as they can in return for services rendered. Further, we are agnostic when it comes to the mode of remuneration, whether those fees are predicated on a resource based, outcome-based or value-based pricing model.

We also recognize that client organizations have the intelligence and wherewithal to negotiate professional services agreements that satisfactorily address both their needs and their budgets.

That said, experience has taught us that sound Client/Agency agreements should also place limitations on the revenue earned by an advertiser’s agency partners. In short, agency revenue should be limited explicitly to those forms and amounts of revenue that are intended and accordingly defined within the agreement, or otherwise agreed to in writing by the client. Period. The end.

Unfortunately, in our contract compliance audit practice, it is too often that we find agreements which don’t effectively restrict agency revenue to that which has been negotiated and memorialized in the contract between the parties. This can lead to misunderstandings and in rare cases bad behavior on the part of professional services providers seeking to unjustly optimize their revenue yield.

Below are four examples of appropriate contract limitations for advertisers to place on agency revenue, once the remuneration program has been negotiated:

  1. An agency should not be allowed to earn money on the handling or holding of client funds. Examples of this could include the earning of interest or “float” income and rebates or bonuses earned from the use of corporate credit or purchase cards to pay third-party vendors for purchases made on behalf of a client.
  2. All expenses, including those for third-party commitments and out-of-pocket expenses, should be billed on a net basis, at the agency’s cost, with no mark-up allowed.
  3. Discounts, rebates or any other benefits earned by the agency, its holding company and or related parties tied to the investment of client funds and or prompt payment to third-party vendors should be remitted back to the client upon receipt of such benefit.
  4. For direct labor based fees, the agency should not be allowed to charge for employee hours in excess of the full-time equivalent (FTE) standard (e.g. 1,800 hours per annum). Quite simply, once the FTE threshold has been met, the agency has fully recouped employee direct labor and overhead costs and realized the agreed upon profit margin.

One further measure of protection for advertisers is the addition of contract language requiring the agency to be transparent, to fully disclose all transactions and the flow of client funds along with the presence of any rebates or incentives received by the agency directly or indirectly.

Please note, that the “limitations” listed above are not meant to restrict an agency’s ability to earn a fee that is reflective of their delivered value. The intent is simply to limit agency revenue to those sources agreed to by both parties, thus providing the requisite protection to the advertiser.

“Confidence… thrives on honesty, on honor, on the sacredness of obligations, on faithful protection and on unselfish performance.” ~ Franklin D. Roosevelt

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Funding Accountability Initiatives

26 Aug

Accountability FinalThe desire on the part of many advertisers to extend their organization’s accountability initiative to marketing is high. This is due to the fact that marketing is both one of the largest indirect expense categories within an organization and, for those that believe in its ability to drive strategic outcomes, critical in driving brand value and demand generation.

One of the key challenges for Internal Audit and Procurement professionals in implementing accountability programs is that they typically do not have a budget to fund the projects. Rather, they are reliant on their peers in Marketing to “buy in” to the concept and to underwrite the investment associated with analyzing contract compliance, financial management and in-market performance across their agency networks. This dynamic can create a loggerhead that delays or prevents corporate scrutiny into marketing and advertising spending and its resulting business impact.

The irony is that relative to the millions of dollars invested in marketing, the cost of implementing an accountability program for this corporate function is much less than one-percent of total spend. As we know, applying the skills and capabilities of audit and procurement teams and outside consultants typically results in improved controls that mitigate financial and legal risks to the organization. Further, these efforts often uncover historical errors and overbillings, and always generate future savings and improved marketing return-on-investment opportunities that more than offset the cost of the program.

It has always been a mystery as to why more advertisers simply don’t formalize and legislate the marketing accountability program and establish the requisite budget to be administered by the CFO / Finance organization. A minority of our clients operate in this manner, but clearly a “win, win” situation is created where internal audit and procurement provide their support and apply their resources pro-actively and marketing doesn’t feel as though funding is coming at the expense of critical business building programs within their budgets.

From our perspective, the source of funding for extending a corporate accountability initiative to marketing is the last hurdle. The reason is that we have seen marketing’s appreciation for accountability support grow along with their respect for the audit and procurement functions and a recognition that such programs can improve the efficiency and efficacy of the organization’s marketing spend.

The advertising industry is a complex; rapidly changing, technology-driven sector fraught with opacity challenges and risks such as digital media fraud and non-transparent revenue practices employed by agencies, ad tech providers, ad exchanges and media sellers. In light of these dynamics, organizations truly understand the benefit of monitoring the disposition of their marketing investment and the performance of their advertising agencies and third-party vendors.

It has been over 140 years since Philadelphia merchant John Wanamaker offered the following perspective on his ad spend:

“Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”

Yet, with the passage of time it would be difficult for the industry to suggest that much has changed with regard to a marketers ability to accurately assess the efficacy of their advertising spend.

There is no time like the present to proactively develop; implement and fund transformative accountability programs that can optimize planned business outcomes, while safeguarding marketing spend at every level of the advertising investment cycle.

Interested in learning more about marketing accountability programs? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management| AARM at [email protected] for a complimentary consultation on the topic.

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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.

 

 

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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.

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Are Agency Relationship Managers a Luxury or Necessity for Advertisers?

26 Jul

madison avenueIn the “good ole” days of full-service ad agencies, 15% commission and powerful, independent ad agency brands… responsibility for an advertiser’s agency relationships was typically limited to a handful of executives within the organization, up to and including the CEO. 

Over the course of the last 30+ years, agencies decoupled, remuneration programs evolved, ad agencies went public, and agency holding companies rose to power and the number of agency partners on a client’s roster have greatly increased.  Unfortunately, as agency rosters grew in breadth and their interaction with client personnel expanded across the organization, there was one area that was overlooked.  Simply, “Who” would be responsible for these important relationships?  Factor in CEO and CMO turnover rates and one can begin to understand why client/ agency relationship lengths are now measured in years rather than decades.   

For those who believe that advertising agencies play vital strategic roles in building and positioning brands for long-term success, driving near-term demand generation and in furthering an advertiser’s understanding of their customer base, agency turnover is a risky and expensive proposition.   

“Remember upon the conduct of each depends the fate of all.” ~Alexander the Great 

In order to stabilize client/ agency relationships and to optimize performance across their agency network, many advertisers have invested in the addition of Agency Relationship Management specialists.  Working across an advertiser’s organization to assist Marketing, Procurement, Legal and Finance with the various nuances of effective agency stewardship this position can be a vital component of any supplier relationship management initiative.   

From contracting for agency services to developing remuneration programs and performance evaluation processes to overseeing contract compliance assessments and cost benchmarking audits there is much work that goes into maintaining an effective and efficient marketing supplier network which may include dozens of agencies.  The Agency Relationship Management specialist brings the subject matter expertise to counsel internal stakeholders on industry “Best Practice” and the experience to help shape decisions pertaining to key aspects of the organization’s agency stewardship efforts. 

As importantly, from an agency perspective, this position can and should serve as an advocate and an ombudsman providing an objective perspective when it comes to resolving issues or mediating disagreements.  By further providing unambiguous, consistent two-way communication between the partners and their respective stakeholders coupled with the establishment of clear expectations regarding agency performance the odds of building strong, enduring relationships are greatly enhanced.

This service can either be maintained internally at the client (by appropriate personnel with both broad and deep advertising experience – client and agency side) or the service can be outsourced to a select qualified and dedicated specialist or group. 

For those advertisers who view their agencies as partners rather than vendors, and who want to foster increased involvement, contribution and interactivity, a strong case can be made for the addition of the Agency Relationship Manager role.  Responsibilities would entail being the “hub” of all things related to agency stewardship, developing a marketing agency database cataloging all aspects of the client/ agency relationship and agency performance, disseminating information to all stakeholders and sharing industry “Best Practice” insights on this important area.  It is a role which requires a tremendous amount of patience and tact, but one where the value provided far outweighs the salary investment outlay required to improve an organization’s agency stewardship and financial management practices. 

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Advertising Financial Monitoring

30 Dec

????????????????????????????????????????What is it?  Should a marketer consider it?  Should it be done out-sourced or done in-house?  Three great questions as it relates to a growing aspect of marketing accountability.  

Let’s start with a brief overview of the advertising financial monitoring function and its role.  Marketers have historically made significant investments in advertising ranging anywhere from 1.5% to 5.0% of gross sales, depending on their category, market position and growth posture.  Many organizations have struggled to establish a causal relationship between this investment and in-market performance results; overall, by product, by marketing mix element and or by agency partner.  The goal of advertising financial monitoring is to provide timely, relevant feedback on the stewardship of advertising investment across geographies, brands, agencies and disciplines. 

An effective advertising financial monitoring program provides a streamlined framework for timely capture and analysis of data to yield insight into handling of the organization’s marketing budget and performance of agency partners.  Corporate strategy and accountability protocols serve as the basis for developing the processes to be employed.  And the advertiser’s individual contracts with agency partners establish the performance metrics to be tracked and reported on.  

How many marketing services agencies does your company employ?  It is not atypical for an advertiser to utilize dozens of agencies to formulate and execute the advertising and marketing plan; Full-Service Agency-of-Record, Creative Services Shops, Media Agencies, Diversity Shops, Digital Agencies, Public Relations Firms, Social Media Shops, Regional Marketing Firms, Shopper Marketing Specialists, Event Marketing Agencies, Direct Response Shops, Sale Promotion Agencies, etc…   

In our contract compliance, fee reconciliation / billing, and agency performance review experience, one of the biggest shortcomings is a lack of clarity around “Who Owns” the agency relationship.  A weakness often resulting in overlapping agency responsibilities, limited agency oversight or control, lack of performance monitoring and limited transparency into an agency(s) stewardship of client resources.   

What is your annual marketing spend?  $75 million?  $650 million?  What would efficiency gain in the range of 1.5% to 9.0% mean to your organization?   This is a typical return-on-investment for improved and focused accountability.  Beyond financial yields, benefits are derived from a streamlined data gathering process and a constant flow of process improvements.  Most importantly, advertising financial monitoring will positively shape agency behavior for resource investment and in-market performance.  In the words of Michael Josephson: 

“What you allow, you encourage.” 

Outsource or Build?  It’s the same old discussion – most organizations don’t have the requisite technology or resources to architect, implement and manage such programs in-house.  As well, there is the significant benefit of having access to niche counsel which compliments in-house marketing, procurement, and finance team knowledge. 

As a result, each stakeholder in the marketing planning and investment cycle becomes awakened to the potential for achieving heightened levels of performance.   That is a good thing. 

Interested in learning more about the benefits of an “Advertising Financial Monitoring” program?  Contact Don Parsons, Principal at Advertising Audit & Risk Management at [email protected] for a complimentary consultation on this topic.

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Deadlines Don’t Make Great Partners When It Comes to Marketing Procurement

3 Dec

hThe economic forecast for 2013 can be summed up in one word, “uncertain.”  One of the results of this uncertainty will likely be downward pressure on corporate budgets…. including marketing spend.  Whether this results in budget stagnation or enterprise expense reduction initiatives, companies will be looking to balance their revenue generation efforts with the need to contain expenditures.

Point-in-fact, a recent study released by the UK advertising agency group IPA, found that as of the end of October 2012, marketing budgets “had been reigned in during the third quarter of this year to a greater extent than at any time since 2009.”  Of note, 23% of survey respondents “reported a reduction in marketing spend” with only 18% indicating that their budgets had increased.  According to the group, that -5%+ differential “represented a dramatic fall” when compared to the -1.1% in the second quarter and +1.0% in the first quarter of this year.  

In light of this challenging environment, it is highly probable that corporate procurement will be asked to expand their involvement with marketing to identify potential cost savings for the coming year.  These types of corporate edicts complete with succinct timetables and “hard” cost-reduction targets can create challenges on both sides of the aisle.  If procurement and marketing haven’t already forged a close working relationship and a base level of understanding of the role that each group plays and the expertise that they bring to the task at hand, then the risk exists that the process will be fraught with anxiety and tension.  Clearly Bill Phillips had it right when he intoned:

“Stress should be a powerful driving force, not an obstacle.”

Unfortunately, this is not always the case.  One has to look no further than the political gridlock in Washington D.C. over the “Fiscal Cliff” to see that time-constrained processes designed to address challenging financial issues are difficult, to say the least.  Stakeholders tend to become more entrenched in their views and focus on defending budgetary “sacred cows” or attacking perceived “excesses” rather than working together to map out a balanced approach. 

Marketers, let’s be honest, whether you’re managing a $15 million budget or a $500 million marketing budget, there are always opportunities for improved efficiency’s.  The key to success in working with procurement on a near-term expense reduction initiative is to help identify the “nice to have” budgetary line items versus the “need to have.”  Remember, it is still marketing’s obligation to optimize the organization’s revenue potential during uncertain times.  Prioritizing areas to explore to achieve the organization’s expense reduction goal will be a significant help to the procurement team and will provide the catalyst necessary to jump-start the process.

One area often overlooked by marketing and procurement teams when seeking hard cost savings are the dollars that can be generated from a historical review of the organization’s marketing investment.  Agency contract compliance audits and billing reconciliation reviews can yield significant financial true-up opportunities as well as potential future savings.  In our experience, it is not a-typical for a contract compliance audit to return between 2% – 9% of audited billings in the form of financial returns and or future savings to the advertiser. 

Best of all, by engaging an independent contract compliance auditor this process can take place concurrently with the efforts of marketing and procurement in reviewing the existing/ proposed budget for potential savings.  Further, given the historical, data-driven approach which should be the hallmark of a contract compliance audit, the process requires little time on the part of the marketing and procurement team members and virtually no time on the part of the agency account teams that often play a critical support role in working with the client to identify potential budgetary savings. 

Every dollar’s worth of saving is generated from historical rather than future expenditures and the risk to the organization demand generation efforts are significantly lessened. This is precisely the type of scenario in which all stakeholders can find grounds for agreement.

Interested in learning more about the benefits of compliance auditing and its role in an enterprise expense reduction initiative?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at [email protected] for a complimentary consultation on the topic.

 

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Do Advertisers Get What They Pay For?

17 Sep

do advertisers get what they pay forToo often, the answer is “No” advertisers do not get what they’ve paid for.  These shortfalls typically manifest themselves in two camps: 1) Lackluster service levels and work quality; and 2) Financial stewardship missteps.  Needless to say, both can have a negative impact on the efficacy of an organization’s marketing investment.

How can this be?  You ask.  There is a truism in the advertising world that what is inspected is respected.  Organizations that don’t apply this standard to their agency partners and third-party vendors are, quite simply, at risk. 

There are a number of factors that can impact service levels and work product.  These can include excessive agency staff turnover, deficient levels of involvement by senior agency personnel on the business, process limitations that squander time or fail to produce “memorable” work that is on strategy.  These items can result in high levels of project rework, scope creep, relationship dissonance and, if not kept in check, can negatively impact an advertiser’s demand generation efforts.  Make no mistake about it, this carries economic consequences that limit an advertiser’s return on marketing investment (ROMI).

Sound financial stewardship of an advertiser’s funds by their agency and third-party vendors is the fiduciary responsibility of each and every supplier.  However, an advertiser cannot leave anything to chance.  Tight contract controls regarding agency staffing, scope of work, remuneration parameters and reconciliation and reporting guidelines are a must and represent the first line of an accountability defense. 

Additionally, advertisers should require their media agency partners to conduct thorough post-buy analyses, conduct regular third-party billing reconciliations and to secure compensatory media weight and or cash for audience under delivery on a timely basis.  In the creative services arena, agencies should be monitored to insure adherence to the organization’s cost controls, production management and third-party accounts payable guidelines to insure that an advertiser’s billing and accounts payable expectations in these areas are being met. 

The financial impact of shortcomings in any of these areas can be significant.  In our agency contract compliance auditing practice it is not unusual to identify one-time errors or systemic oversights that can represent between 1.0% and 9.0% of an advertisers budget.  So what can an advertiser do to insure that they are securing maximum value for their advertising expenditure?  In the words of noted businessman and author Albert E.N. Gray:

“Inspect what you expect.”

Clients that have clearly articulated their expectations regarding agency staffing, deliverables, performance criteria and reporting have a much better chance to achieve their objectives and ensure they’re getting their “money’s worth.”  However, an advertiser must go beyond this important first step and incorporate a transparent process for auditing agency contract compliance and assessing performance relative to their stated goals.  The notion of an audit inspection should not send a negative message.  To the contrary, it is respected aand understood as a necessary control process like any other, such as balancing the cash-register daily in retail.   Call it what you would like (review, continuous monitoring, compliance testing, advertising audit), it’s simply a thorough way to ensure the millions of dollars spent on advertising are tracked appropriately.  Too many large marketers do not have such a process in place.  The combination of these actions will afford an advertiser the opportunity to drive each of the stakeholders that comprise their marketing supply chain to extraordinary performance.

It should be noted that supplier accountability management is not a one-and-done proposition.  Implementing and executing a system which has an ongoing monitoring component, often utilizing independent auditors, is necessary to ingrain the requisite processes into the culture of the advertiser and each member of their marketing services agency network.  In the words of the great philosopher Aristotle:

“We are what we repeatedly do.  Excellence, then, is not an act, but a habit.”

Interested in learning more about marketing accountability and how to implement the appropriate controls and transparency?  Contact Don Parsons, Principal at Advertising Audit & Risk Management at [email protected] for a complimentary consultation on this topic.

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It’s Your Money and Your Reputation

26 Jun

advertiser's reputationDo you know what happens to your organization’s money, once it has paid the advertising agency?  If you’re like most advertisers you probably don’t know and may not even care.  Perhaps you should. 

Advertising agencies, regardless of the contractual definition of their role (agent vs. independent contractor), act on an advertiser’s behalf to procure and pay for services, space, time, etc… purchased from third-party vendor organizations that are related to producing and distributing the client’s advertising and communications messaging.  In turn, the advertiser is billed by the agency, typically upfront on an “estimated” basis for those goods and services with payment due to the agency in 15 to 30 days from receipt of invoice.  Terms between agency and client are usually set to insure that the agency has the client’s funds prior to the time third-party vendor invoices are presented for payment. 

For most advertisers, there is little transparency into the financial transactions between their advertising agencies and their third-party vendors, which number in the hundreds, if not thousands.  This lack of transparency results in diminished advertiser control and increased risks associated with third-party vendor reconciliation and accounts payable management.  Risks typically fall into four areas: 

  1. Clear and unambiguous title to any and all intellectual property/ work product
  2. The advertiser’s reputation among 3rd party vendors
  3. Treasury management “opportunity” costs
  4. Exposure in the case an agency became unable to pay its creditors 

AARM conducts agency contract compliance and financial audits of advertising and marketing agencies on behalf of advertisers.  In our experience it is rare to see a client-agency contract that identifies clear terms and conditions for the agency’s handling of third-party vendors or in establishing processes and controls to allow the advertiser to monitor performance in this area.   Don’t advertisers want to know if and when third-party vendors have been paid?  If vendors were paid at the agreed upon rate or something less?  If the reconciliation process resulted in credits, discounts or rebates that are due back to the advertiser?  Who are the vendors being utilized? 

Based on our financial audit experience, there has been a clear trend in recent years of agencies stretching out disbursements to third-party vendors well beyond their payment terms, as measured by “Days Payable Outstanding” or the time lag from vendor invoicing to agency payment to the vendor.  There can only be two reasons for this performance and neither is particularly sound.  Firstly, the agency may have flawed vendor reconciliation processes and or they are putting inadequate resources against this “non-revenue generating” area of their business.  Secondly, the agency is seeking to maximize interest income from float.  Simply defined, “float” is the amount of money that the agency has collected from the advertiser but has not yet disbursed to a vendor.  In almost all instances, agencies both earn and retain the interest income on this float. 

Within the agency community it is often joked that interest income (from float) is an agency’s best client; “It pays on time and never complains.”  However, when it comes to the advertiser’s reputation the risk of being labeled a “slow pay” is no laughing matter.  Whether deserved or not, such a reputation can carry both opportunity costs and economic costs in the form of vendors charging higher rates to compensate for their “carrying costs” or not offering preferential treatment.  Nor do many client-side CFO’s find much humor in lost interest income opportunities, aged vendor credits or delayed earned but unprocessed discounts and rebates.   

When the size of an advertiser’s budget is considered and the fact that this investment is being managed through a small group of agencies, who in turn handle purchases and payments on behalf of the advertiser with hundreds of diverse third-party vendors ranging from media property owners to production studios to third-party ad-servers, it may be time to perform an independent assessment of performance in this important area. 

After all, we’re all familiar with the adage: “What is inspected is respected.” 

Interested in learning more about the financial portion of an agency contract compliance audit?  Please contact Don Parsons, Principal at AARM at [email protected] for a complimentary consultation.

 

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