Tag Archives: Featured

Effectively Managing Agency Transitions

22 May

The purpose of this article is not to analyze “why” the average tenure of client – agency relationships have declined precipitously over the last few decades.  Sadly, research conducted by Michell and Sanders in 1995 indicated that a majority of these relationships lasted “no more than” five years.  Many speculate that the average tenure today is less than three years.  Rather, I would like to focus on an advertiser’s post-termination rights.

Much time is spent on the front end of a relationship negotiating the Letter of Agreement (LOA), often referred to as the “terms of separation” document.  Virtually all of these agreements contain “right to audit” clauses that provide the advertiser access to financial documentation, invoices, 3rd party reimbursement data, time-of-staff investment detail, fee reconciliation data, etc… to vouch for the accuracy of the billing process.  However, once a relationship has been terminated, very few advertisers refer back to the LOA or take action on  protections which it affords their organizations.

The reasons for this lack of attention on the LOA governing the “old” relationship are many and varied: Marketing is focused with on-boarding their new agency partner, Procurement and Legal are engaged in finalizing the LOA for the incoming agency and Finance is supporting their Marketing and Procurement peers on the compensation system analysis/negotiation.

Whether or not an advertiser has enacted their right to audit during the relationship, failing to enact this clause once a relationship has been terminated is a financial risk regardless of whether it was the advertiser or agency that initiated the termination. Conducting exit audits is not intended, nor should it be conducted as a vengeful act imposed by an advertiser on an outgoing agency partner.   Auditing in a post Sarbanes-Oxley world is a corporate governance best practice, part of an organization’s fiduciary responsibility to its shareholders. It is simply a means of formally closing out the relationship and mitigating any attendant financial and or legal risks associated with the transition from one agency to another.  In the words of American humorist and writer Finley Peter Dunne:

“Trust everyone, but cut the cards.”

So the question remains: “Why do so few advertisers audit their outgoing marketing suppliers?”  In our practice, we typically come across two primary reasons, the first is related to the investment in on-boarding the new agency referenced above.  The second is a feeling of empathy for the outgoing agency, particularly if the advertiser has terminated the relationship.  Conducting an exit audit in this instance is sometimes viewed by advertisers as the ultimate indignity for a business entity that was once a valued partner.

It has been reported that fewer than one-in-ten incumbent agencies retain an advertiser’s account once it has gone into review.  So what happens once a review has been announced?  Well, if you’re on the agency side and there is a 90%+ chance that you are going to lose the business, you may immediately begin paring back your resource investment, reassigning agency personnel to other accounts or reducing staff, replacing senior personnel with junior level staffers, delaying or holding earned but unprocessed credits, discounts and rebates rather than passing them back to the advertiser, extending 3rd party vendor accounts payable timing, reducing their stewardship efforts over the client’s advertising investment, etc…

Exit audits can mitigate the risks associated with these practices and can yield valuable insights and process improvements that can be applied to other relationships… while insuring that all billing and fees have been properly reconciled and that all intellectual property rights and assets have been properly transitioned.  Conducting an exit audit is an industry “Best Practice” designed to protect the advertiser and ensure a clean transition.  Implemented in a fair, even-handed and respectful manner they are not intended to punish an outgoing agency partner.

Agency Trading Desks and the Issue of Transparency

9 May

With the rise in digital advertising budgets and the dramatic expansion in the level of inventory available from publishers, advertising agency holding companies have developed a viable alternative to ad exchanges for securing a portion of their clients’ digital media inventory needs.  This is being done through the use of agency trading desks.

Simply put, a trading desk is a separate holding company service entity that integrates a demand-side platform with other technology and a wealth of consumer data to deliver targeted audiences at scale.  While primarily focused on display advertising, this dynamic method for purchasing media on a real-time basis is expanding to the buying of online video, search, mobile and social media.   This approach leverages an auction based model to buy unsold publisher inventory at efficient rates relative to pre-procured media.

The benefits to the advertiser can be significant when it comes to audience buying and ad impression optimization relative to content/ context based digital media buys or purchasing packaged buys through an ad network.   Given the relative newness of this approach combined with the complexity of the service offering and the limited understanding of trading desks among advertisers there remain concerns about the approach tied primarily to what is perceived as a lack of transparency.  This in turn has resulted in questions ranging from how agencies are compensated for this service (“Are advertisers  double paying their agency partners?”) to the potential for an agency’s objectivity to be compromised as they become both a buyer and seller of inventory (buy from publisher at one price, resell to clients often at a premium).

There are a number of ways for advertisers to enhance transparency into the trading desk operations of their agency partners.  The first is to check your agency letter-of-agreement to determine if there is language related to the agency’s trading desk operation.  If not, check to determine if a separate agreement with the trading desk operation was executed and read through the agreement carefully.  Secondly, engage your agency in dialogue about whether or not they are currently using buying digital media on your behalf through their trading desks and if so, what percentage of your overall digital buy is being channeled through the trading desk.  If the agency is not utilizing their trading desk for your digital media buying, ask whether or not it would be appropriate for your business model and what percent of your digital media buy would be a candidate for this approach.

With the answers to these questions in hand, it is time to discuss how the agency expects to be compensated for this service.  Compensation could include any or all of the following; commission on executed media buys, fee for service, incentive compensation tied to performance (i.e. cost per action, cost per lead, cost per acquisition) and mark-up on the media purchased by the trading desk and sold to the advertiser.  Further, inquire whether or not the trading desks earns rebates or discounts from publishers or technology partners tied to volume and if so, how is your pro-rata share calculated and passed through to you.

It is important to note that the trading desk model employed and the approach taken will vary by agency, so asking questions and establishing guidelines on how to evaluate both the efficacy and efficiency of this approach is critical before allocating a portion of your digital media budget to this channel.   While questions remain with regard to this emerging agency service, the level of risk represented is no more than that represented by ad networks.  Having direct conversations with your agency about the approach, costs, reporting and performance metrics will go a long way to ensuring that you have a sound understanding of how your investment is being handled.

Finally, incorporate a “Right to Audit” clause into the agreement which you execute with the trading desk operation to contractually insure your organization access to the date required to support your desire for full transparency. If you would like to learn more about this area and or how AARM can assist you in assessing the relevance of this approach or analyzing the performance of your agency’s trading desk, contact Cliff Campeau, Principal at ccampeau@aarmusa.com for a complimentary consultation on the topic.

Can Procurement Add Value by Focusing Solely on Cost?

26 Nov

improved agency performanceWhen it comes to Marketing Services sourcing, the short answer is no. Driving costs down is an important element of strategic sourcing but not at the expense of brand building, customer acquisition and revenue growth.

Procurement professionals must take a broader view of their role in the marketing services supply chain if they are to optimize their enterprise value in this important area. Yes, there are a plethora of opportunities for improving an advertiser’s cost basis, streamlining vendor networks and enhancing their agency stewardship controls through the application of sound procurement practices. However, these efforts must be complemented by pragmatic processes designed to leverage an organization’s marketing resource investment in driving the demand side of the business. For example, contracts which provide the organization with the requisite legal, financial and intellectual property controls, creative remuneration systems which incent extraordinary effort, vendor performance monitoring systems which provide transparent reporting on a near real-time basis and the use of an analytics based vendor network benchmarking program to gather intelligence on time and material costs at a task level across the supplier network to inform future resource allocation decisions.

Further, as advertising agencies look to evolve their own procurement efforts, advertiser organizations can realize significant value by providing assistance to their partners in collaborating to determine how strategic sourcing can drive cost efficiencies across the strata of 3rd party vendors that represent an important element of an advertisers marketing supply chain. Remember that while an advertisers marketing services vendor network might number a few to a few dozen agency partners, those agencies represent the advertisers interest to thousands of 3rd party vendors ranging from illustration studios to talent agencies to production houses to media properties. By focusing efforts in these areas Procurement will realize their near-term cost reduction targets and build a system for driving marketing performance for many years to come.

As the old Chinese proverb goes; “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.” Interested in reading more on this topic? Check out the article by David Rae on the Procurement Leaders Blog

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