Tag Archives: contract compliance

Advertisers Beware: Agency Margin Optimization Efforts

19 Apr

Traffic LightIt was with great interest that I read an article on Digiday dealing with “key issues” facing ad agencies and, ostensibly, the “agency model” ranging from transparency to in-housing.

Masked behind the author’s perspective that transparency comes at a high cost was the reality that marketers remain at risk to the predatory non-transparent revenue practices applied by certain agencies.

Why? With marketers demanding more transparent ad buying practices and transitioning certain tasks and or ownership of elements of the tech stack in-house, agency gross margins are under pressure. In turn, this has created an environment where agencies attempt to make up for the margin shortfall from clients that don’t actively monitor agency contract compliance, financial management or media performance.

Of note, one anonymous agency executive went so far as to suggest that some agencies use a “traffic-light system to determine how knowledgeable the procurement teams at clients are.” This guidepost allows the agencies to assess how much margin they can make on a given account.

This certainly reinforces the reality of the old adage; “Where there is mystery, there is margin” and signals the importance for all marketers to get up to speed on both the potential benefits and the pitfalls related to their digital and other advertising investments. For client organizations, most of which do not have the bandwidth or subject matter expertise in-house, engaging an independent contract compliance or media performance auditor or consultant could greatly help to mitigate risks in this area.

In spite of the potential for efficiencies that fueled the rise of programmatic media buying, what we have all come to realize is that the costs related to algorithmic, machine-to-machine buying have far outweighed these efficiencies. One dynamic, which drives costs is the number of agent firms involved in a typical programmatic digital media buy and the fees that each charge for their role. Below is an overview of typical fees or mark-ups that are charged by those on the demand-side of a programmatic transaction.

Digital Dollar

Source: Industry Experts

As is readily apparent, the dollar dissipation that occurs between the advertiser’s initial investment and the money that actually ends up with the publisher is significant. Industry studies have consistently shown that less than forty cents of each digital dollar invested makes its way to the publisher.

To combat this trend, rightly or wrongly, marketers have focused on reducing the number of intermediaries and the fees charged by each, with the goal of improving working media ratios and ultimately the performance of their digital campaigns. Thus, the agency margin squeeze.

That said, the agency practice described in the aforementioned Digiday.com article of taking advantage of unsuspecting, less knowledgeable clients to make up for the margin lost on those that have moved to transparent buying models, is neither appropriate nor sustainable. Agencies conducting themselves in this manner may want to reflect on the words of the renowned physicist, Stephen Hawking:

Intelligence is the ability to adapt to change.”

This is particularly true given the competitive inroads being made by the management consultant and tech consultancies that are focusing on the digital media segment of the market. The best path forward for agencies is to actively engage their clients in an open dialog about mutually beneficial remuneration methodologies.

In our opinion, it is right and just to eliminate the potential for media arbitrage, non-disclosed fees, no charge media weight and volume-based rebates that often accrue to agencies, and much of the time without the advertiser’s knowledge. Further, we also don’t believe that clients are obligated to make up the gap in lost agency revenue tied to transparency reforms. That said, we are fully supportive of an agency’s right to earn a fair and reasonable profit and to have the potential for incremental gains tied to extraordinary performance.

Near-term, the best way to balance an advertiser’s quest for transparency and an agency’s ability to generate a reasonable profit will likely be a compensation schema that incorporates a base fee using a direct-labor or cost-plus methodology with an outcome-based performance incentive. This approach is particularly apropos for advertisers that are leaning toward a managed-service model. With this approach, ownership of the tech stack and or tech platform licensing agreements transition from agency to advertiser; and the agency is then engaged to oversee the digital planning, buying and ad operations chores associated with programmatic media.

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.

 

Will Transparency Concerns Undermine Trust?

17 Mar

transparencyAt the 2014 ANA “Agency Financial Management” conference, representatives from the Association of National Advertisers, Association of Canadian Advertisers and the World Federation of Advertisers each presented member survey results which indicated that their advertisers were concerned about the lack of transparency which existed into the financial stewardship of their advertising funds.

In their February, 2014 study, the ANA found that forty-six percent of the members’ surveyed expressed specific concern over the “transparency of media buys.” As contract compliance auditors, we know from our dealings that the resulting lack of clarity and in some instances, honesty surrounding issues such as data integrity, audience delivery, trading desks, reporting and financial reconciliations creates financial risks for advertisers. Sadly, the lack of transparency ultimately can serve to undermine attempts to improve trust levels between clients, agencies and media sellers. 

Fast forward one-year and two events come to light, which raise serious issues regarding trust.

The first was a speech made by Jon Mandel, former CEO of WPP’s Mediacom unit at the ANA’s “Media Leadership Conference” in early March, where he alleged the widespread use of volume based rebates or kickbacks from media sellers to agencies. He suggested that these practices, which have the potential to negatively affect advertisers, had migrated from cash advances to no-charge media weight which an agency can then deal back to clients or liquidate in barter deals. Mr. Mandel specifically stated that media agencies “…are not transparent about their actions. They recommend or implement media that is off strategy or off target if it works for their financial gain.”

The second event, which coincidentally involves Mr. Mandel’s former employer, Mediacom, deals with revelations regarding the use of “value banks” and the falsifying of media campaign reports by its Australia operation. For those not familiar with the term value bank, this is where media sellers provide a certain level of no-charge media weight to agencies based upon their aggregate client spending with that entity.

In a story which broke in Mumbarella, a media news website, it was reported that media “discrepancies” were found in late 2014 in an audit of Mediacom. The audit, conducted by EY was actually commissioned by Mediacom once it had learned of the problems. Among the findings of EY’s investigation were that Mediacom personnel had “altered the original demographic audience targets to make it appear as though the campaigns had reached the official OzTam audience ratings numbers.” Further, the review found that the agency had been taking “free or heavily discounted advertising time given to it by TV stations” and selling it back to its clients in violation of its parent company’s (GroupM) policy.

While Mediacom terminated several of the employees allegedly involved in these matters and pro-actively engaged an auditor, it should be noted that the audit found that the aforementioned fraud had been taking place undetected for a period of “at least two years.” This certainly raises questions regarding the efficacy of the controls that were in place at the agency to safeguard advertiser funds. The combination of lax controls and limited transparency had a negative financial impact on some of the agency’s largest clients (i.e. Yum! Brands, IAG, Foxtel).

As an aside, following Mr. Mandel’s comments to the ANA conference attendees, Rob Norman, Chief Digital Officer at WPP’s GroupM stated that; “In the U.S., rebates or other forms of hidden revenue are not part of GroupM’s trading relationships with vendors.” Sadly, in light of both Mr. Mandel’s revelations and the Mediacom Australia situation U.S. advertisers will likely take little solace in these reassurances from WPP. Worse, given the levels of advertiser concern about the lack of transparency within the industry, there is a high likelihood that other agencies will be painted by the same broad brush and assumed to be engaged in similar practices… whether they are or aren’t.

For an established industry with estimated 2014 global ad expenditures of $521.6 billion (source: MAGNA GLOBAL) it is amazing that some of the aforementioned practices would take place and that the industry would continue to deny rather than acknowledge their existence in an overt manner. Unchecked, the murky dealings of some media owners and a handful of agencies may ultimately push trust, not transparency to the fore of advertiser concerns and that is not a healthy dynamic when it comes to client/ agency relationships. The words of American humorist and journalist Kin Hubbard may serve to synthesize the crux of the issue:

“The hardest thing is to take less when you can get more.”

Interested in learning how you can improve your transparency into the financial management of your organizations marketing investment? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com.

 

 

 

 

Is the Failure to Comply with Contractual Terms Cheating?

3 Feb

contract complianceHaving been involved in developing marketing accountability systems and monitoring supplier compliance for the last decade or so, this is a question which has been posed many times, in many ways: 

 

  • Was this action or inaction an oversight or an ethical breach? 
  • Did they know or should they have known? 
  • Was their behavior consistent with industry standards? 
  • How could their interpretation of the agreement vary so wildly from ours? 
  • Were they intending to cheat us?
  • How could we have prevented this?

Long a subscriber to the principle of “caveat emptor” or “let the buyer beware”, I have long felt that advertisers need assistance to level the playing field when it comes to the financial stewardship of their marketing investment.  The fact of the matter is that “sellers,” which include marketing services agencies, media publishers and the myriad of third-party vendors whose goods and services are being procured on an advertiser’s behalf by their agency partners are better informed than their client-side counterparts or “buyers” when it comes to the intricacies of these transactions. 

Establishing sound Master Services Agreements with well defined terms and conditions designed to guide agency behavior and provide the requisite legal and financial safeguards are a great first step in any client-agency relationship.  Integrating a performance monitoring system with contract compliance testing further enhances a client’s controls, while yielding greater transparency into the financial management of their marketing spend.  Some may still ask; “But is this enough?”

Thus, it was with great interest that I read an article on the Knowledge@Wharton website entitled; “Cheaters… Win? Why Systems to Prevent Deception Don’t Work.”  Conventional wisdom among psychologists has held that “unethical behaviors” typically “evoke a negative emotional response after the event – if the mere promise of feeling guilt or remorse doesn’t stop the individual from doing it in the first place.”  However, a new research study conducted by Maurice E. Schweitzer of Wharton and colleagues from the HarvardBusinessSchool, LondonBusinessSchool and the University of Washington’s Foster School of Business suggests that there are other forces at work.  The study found that unethical behavior may not create a negative emotional reaction but conversely may “trigger positive feelings” among cheaters.  Why?  Mr. Schweitzer suggests that “part of the cheater’s high comes from a sense of accomplishment when an elaborate system is defeated.”

We’re all familiar with the euphemism, “Gaming the System.”  Could it be that some questionable behaviors in the minds of some “cheaters” are perfectly acceptable in this context?  The aforementioned research would suggest that this is the case.  Sadly, given the size of the global advertising ecosystem, which Magna Global estimates will reach $515 Billion in 2014, and the complexity of the marketing supply chain, this mindset raises the risks to advertisers when it comes to insuring that they are receiving value commensurate with what they have paid for. 

Farfetched?  Not really.  Just consider the steady stream of concern raised about the various ways in which digital media advertisers are defrauded.  You may recall the October 2013 story from Adweek’s Mike Shields entitled, The Amount of Questionable Online Traffic Will Blow Your Mind: The Worldwide Rip-offin which Wenda Millard, President of MediaLink purported that “a quarter of the online ad market is fraudulent.”  According to the article, Millard categorized actions such as, “piracy, non-viewable ads, ads stacked on top of one another, inappropriate content and, of course, deliberate malicious behavior” as fraudulent.  This is but one relevant example of the impact of cheating within the marketing sector.

The fact of the matter is that cheaters exist and always will.  They exist in every walk of life, in every industry, within every organization and at every level.  The best course of action to be taken to insulate an organization from cheaters has always been to find effective and efficient means to incent ethical behavior within one’s organization and across its supplier base.  Supplemented of course by an accountability initiative that includes ongoing oversight, performance monitoring and in the case of contract compliance, independent audit support.  In the oft cited words of President Ronald Reagan: “Trust, but verify.”

Interested in finding out what an advertiser can put into action to reduce its exposures to these kinds of abuses?  To learn more, contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation.

How Do Agencies Do It?

13 Feb

ad agency profitsEarlier this month the Japanese agency holding company Dentsu announced quarterly financial results.  For the nine-months ending December 31, 2012 revenues were up 4.5% and net income was up 48.1% year-over-year.  Impressive?  Certainly, but not inconsistent with other players in the ad sector; WPP achieved a 43.3% increase in net income on a 7.4% revenue gain and Omnicom Group reported a percentage net income increase which was twice that of its revenue growth. 

A healthy advertising sector represents good news for clients and agencies alike.  Growing, profitable advertising agencies are able to invest in; infrastructure, personnel and research which ultimately allows them to better serve their clients.

There are two interesting observations with regard to the aforementioned agency financial reporting; 1) the recent results fit a pattern of extraordinary net income growth for the category, relative to revenues. 2) In a professional services business, the ability to generate net income growth of 2X to 10X that of revenue can only be achieved through a combination of significant expense reductions and or dramatic increases in direct margin.

Let’s be clear.  Like most other professional service providers whether in the financial, legal or consulting sectors, payroll makes up a disproportionately high percentage of an advertising agency’s expense base.  The publicly traded agency holding companies break out salary expense within their financial reports, allowing for a review of this cost center.  In a 2010 review of agency expense structures, Adweek reported that for the top five agency holding companies, expenses represented between 83% and 94% of revenues.  Salary expenses ranged between 59% and 72% of revenues.  The difference between the two is largely made up of real-estate and overhead costs.

Thus it is unlikely that agencies are relying on expense reduction as the primary source of net income accretion.  This would have a dramatic, negative impact on the caliber of work, service levels and ultimately, client retention and would be unsustainable over any prolonged period of time. Therefore margin growth would appear to be the primary contributor to the extraordinary net income gains.  But how you ask?  After all, industry compensation surveys consistently report that the average agency profit level identified within client/ agency agreements is 15%.   

Unfortunately the answer is clear, while not altogether transparent to advertisers.  A portion of the improved margin is tied to the provisioning of agency-owned services such as in-house studios, trading desks, poster specialists, barter firms and production companies. These services have tremendous margin upside for an agency because there is limited disclosure to the advertiser of the rates paid to the ultimate media seller and or the fees earned by the agency in the form of incremental commissions, spread between planned and purchased costs or volume rebates paid by the media.  Then there are sources of agency revenue which are seldom discussed and rarely audited which contribute to an agency’s bottom line profits.  These include but are not limited to AVBs, interest income from float, earned but un-processed discounts, rebates and no-charge media weight.

These practices are neither good, nor bad they simply represent the nature, albeit murky, of the global advertising industry today.  In the end, knowledge is power.  For example, the agencies that have been smart enough to vertically integrate and to leverage non-transparent income “opportunities” have generated solid bottom line performance. 

For advertisers the answer is simple, extend your knowledge of what is clearly a dynamic and often opaque marketplace: 

  1. Revisit your agency contracts to make sure that the requisite legal and financial controls have been incorporated to protect your interest. 
  2. Make sure that your agency contract extends to the parent company and any sister divisions which may be engaged as part of your agency’s service offering.   
  3. Examine your agency performance evaluation process and remuneration methodology to ensure that you are incenting the behavior and outcomes which you desire.
  4. Engage an independent auditor to assess your marketing service agencies contract compliance and performance to make sure that the requisite level of transparency is always maintained.

In the words of Sir Edward Coke, the renowned seventeenth-century English jurist;

Precaution is better than cure.”

If you’re interested in a second opinion of the soundness of your client/ agency agreement or would like to discuss the benefits of an agency contract compliance audit, contact Cliff Campeau, Principal at AARM via email at ccampeau@aarmusa.com.

What is the #1 Advertising Agency Control Oversight?

24 Jan

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

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

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

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

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

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

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

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

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

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

 

“What’ll You Have …?”

14 Dec

pabst blue ribbonRead on to learn the answer to this iconic brand jingle lead-in. 

“The Giants are at the Patriots’ six yard line, Manning hands off to Bradshaw who punches it in for a touchdown as the Giants take the lead…”  Time for a beer and bathroom break, or do the assembled masses remain glued to their seats to be regaled by the much anticipated commercials?

The world’s greatest advertising spectacle, the Super Bowl, is rapidly drawing near.  With the prospect of reaching 100 million+ viewers, some 35 to 40 advertisers will line-up to pay on average $3.7 million for a 30 second TV spot… exclusive of production costs. 

After all, everyone remembers Apple’s “Sledgehammer” spot, Coca Cola’s “Mean Joe Green” commercial and the ever popular Budweiser “Frogs” execution.  Maybe so, but are these and a handful of other examples simply the anomalies from 46 years of Super Bowl advertising?  Let’s face it, the Super Bowl is a time to gather with friends and family to enjoy a few libations and perhaps even to watch a little football. 

As much as Madison Avenue would like to think that the event has evolved to be as much about the commercials as the game, practical experience might suggest otherwise.   Fact check time;  Does anyone remember  Miller Lite’s  “Evil Beaver” spot from the 1998 Super Bowl or the 2nd Story Software “TaxAct”  commercial from 2012?  Thought so.  Just because an advertiser coughs up millions of dollars for a 30 second shot at reaching a fraction of the 100 million+ potential viewers or in creating a pop-culture phenomenon doesn’t mean they are guaranteed that their efforts will succeed.

Legalized gambling.  A reference often used in the context of the ever popular state lottery games, is an apt description of Super Bowl advertising.  The house, in this case the network, certainly wins and sure a few advertisers (gamblers) will let their annual budgets roll on one high profile execution that may even pay off.  If you’re GM with a marketing budget of $4.5 billion or Anheuser-Busch Inbev at $1.5 billion, the risks are minimal.  On the other hand, for some of the smaller advertisers such as Master Lock, McIllhenny Co. or Soda Stream who have braved these proverbial waters the potential consequences of failure are substantially greater.

We all recall the Monday at the office water cooler where everyone is re-living the prior evening’s game, the athletic performances, scoring highlights and yes… the commercials.  The conversation typically starts out with “did you see the one with…” and frequently ends with everyone with trying to recall the advertiser’s name.   To suggest that advertising recall is an unattainable goal would be an overstatement to be sure.  However with a viewing environment marked by sensory overload for a sports and entertainment spectacle such as the Super Bowl, breaking through the clutter is damn challenging.   Diligence and luck certainly play a role in realizing this objective.  In the words of the bard of Avon, William Shakespeare:

“Fortune brings in some boats that are not steered. “

Taking calculated risks is a component of every marketing resource allocation decision, precisely because there are no guarantees and the linear relationship between stimulus and response remains so nebulous.  It is for this reason that advertisers should seek to mitigate the risks associated with the performance of their advertising investments on a year-round basis, once resource allocation decisions have been made.  Unfortunately, too many organizations are willing to “roll the dice” when it comes to assessing contract compliance or vetting performance when it comes to their agency network and third-party vendor relationships.   The irony is that the link between cause and effect is more certain when it comes to contract and performance auditing than it is with any other facet of the advertising investment cycle.

Here’s hoping that you enjoy the 2013 Super Bowl and all of the attendant festivities.  But don’t be surprised when your guests or the bar patrons next to you respond to the question of; “What’ll You Have?” with an answer of Pabst Blue Ribbon as they’re being entertained by the spot with the Clydesdales or taking in the Bud Bowl.  And when the Super Bowl has come and gone and the buzz surrounding this year’s “Top Spots” has faded into memory, take a moment to reflect on how your organization can take the requisite steps to boost its chances for marketing success by embracing a comprehensive accountability initiative.  In the end, you will be glad that you played the odds and didn’t “let it ride.”

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 dparsons@aarmusa.com for a complimentary consultation on this topic.

 

 

 

The Flip Side

1 Oct

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

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

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

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

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

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

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

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

Go audit, stay happy!

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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