Tag Archives: letter of agreement

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.”

 

 

 

 

 

 

 

 

 

 

Why Contract Definitions and Demonstrations are Important

1 Feb

contract complianceFor as long as there have been advertisers and agencies, there have been Client-Agency agreements. Contractual instruments, which are often referred to as “terms of divorce.” This is likely because one of their primary roles is to spell out the guidelines governing how each party must conduct themselves and identifying their respective obligations in the event a relationship is terminated.

The fact of the matter is, a contract is much more than that. It is a binding agreement between advertisers and their agencies which should identify the terms and conditions that will govern all facets of the relationship, ranging from how an agency is to be compensated to the level of staffing that an agency will deploy on a client’s behalf, to the scope of work to be undertaken by the agency. An effective contract also asserts both parties expectations for how they will conduct themselves while providing a mutual understanding for how the agency will steward a client’s marketing investment from a performance, financial and legal perspective.

Unfortunately, when it comes to contracts, there are too few “industry standards” within the advertising marketplace, varied definitions for descriptive terms and too often a lack of clarity around what is being represented by certain aspects of the agreement language. These gaps create gray areas which are seldom understood, much less agreed to by both parties. Unchecked, these gaps can be costly, particularly to advertisers that aren’t supported by knowledgeable industry experts and attorneys with solid industry experience.

As contract compliance auditors we have reviewed hundreds of Client-Agency agreements and have sat across the table from advertisers and agencies to help mediate gaps in understanding over even the most basic terms or representations. Examples include the definition of “Gross Media,” the assumption that individuals listed in an agency “Staffing Plan” are full-time employees of the agency (rather than contractors or part-timers) and or whether or not the awarding of work to agency affiliates is allowed, let alone how that activity is to be billed.

Let’s examine the financial impact of one of these items. Hypothetically, an advertiser with a $100 million media budget engages a media buying agency. The agreement indicates that media is to be placed on a net basis and that the agency will be paid a commission of 2% on that activity. This appears to be a relatively straightforward description. So the question is; “How much commission should the agency earn?”

  1. $2,000,000
  2. $2,040,000
  3. $2,353,000

It would not be unusual for a lay legal or procurement advisor assisting an advertiser in drafting or reviewing contract language to assume that the answer was 1) $2,000,000. Their assumption in this instance is that the agency’s commission would be calculated by multiplying the net media spend by the agreed upon commission rate.

On the other hand, a seasoned agency finance executive would advocate that the correct answer is 3) $2,353,000. How did they arrive at this figure, which is $353,000 higher than the prior scenario? By “grossing up” the net media spend by 17.65% and then multiplying that total by the agreed upon commission rate. Why would they do this? The answer would likely be; “that is the standard methodology used in the industry.”

This view has its roots in the golden days of advertising, when agencies delivered “full-service” and earned a 15% commission on their clients’ gross advertising investment. In that era, a biller would have to mark-up a net expenditure by 17.65 % in order to account for the 15% commission rate:

  • 15% divided by (100% – 15%) or 85% = .1765
  • If the net expenditure was $85, the total cost would be calculated by multiplying or “grossing up” the net amount by 1.1765 to arrive at a total cost to the advertiser of $100.
  • On the $100 gross expenditure the agency would earn $15 or 15%.

One might legitimately question why an agency would gross up a net expense by 17.65%? After all, it has been many years since full-service agencies were compensated at that rate. Should not the mark-up amount be specific to the negotiated commission rate? Using this approach for the 2% commission example could suggest that the correct answer to the aforementioned question would be 2) $2,040,000:

  • 2% divided by (100% – 2%) or 98% = .0204
  • $100,000,000 net media “grossed up” would be calculated by multiplying the net amount by 1.0204 to arrive at a gross amount of $102,040,000.
  • The agency’s commission on the grossed up media total would be $2,040,000

So which methodology represents the proper approach for calculating an agency’s commission in this example? Unfortunately, there is no definitive answer. This is a classic case where had a term such as “Commission” or “Gross Amount” included an example of how such formulas were to be applied, it would have clarified the intended agency remuneration, staving off a potentially difficult conversation between client and agency long after the ink on the agreement had dried. We can all learn from the words of the 18th century Scottish philosopher, Thomas Reid:

There is no greater impediment to the advancement of knowledge than the ambiguity of words.

 Interested in a securing a second-opinion regarding the clarity and soundness of your organization’s agency agreements? Contact Cliff Campeau, Principal of AARM at ccampeau@aarmusa.com.

4 Common LOA Oversights

2 Dec

client agency contractsWithout question, the single most important relationship management instrument for both advertisers and agencies alike is the letter-of-agreement (LOA).  At its most basic level, the LOA establishes the ground rules for each party along with their respective responsibilities during the relationship and afterwards, identifies agency deliverables and staffing commitments and spells out how the advertiser will compensate and evaluate the agency.

From an advertiser’s perspective, the LOA establishes critical legal and financial controls. These controls are designed to provide a level of protection and transparency required to assist the advertiser in effectively monitoring the agency’s stewardship of their advertising investment.  However, in spite of the importance of LOAs in safeguarding advertiser interests it is an area in which many advertisers fall short when it comes to securing their rights and protecting their interests.  The reasons for this range from insufficient industry specific experience among an advertiser’s legal and procurement team to the lack of an advertiser-centric agency contract template for utilization across an advertiser’s agency network.

In our agency contract compliance audit practice we have had the opportunity to review several hundred client-agency contracts including those that incorporate industry “Best Practice” language and others that limit an advertiser’s rights and leave them legally and financially exposed.  Over the course of this experience we have identified four common LOA oversights that advertisers should be mindful of when negotiating their agency agreements:

  1. Lack of a viable “Right to Audit” clause
  2. Failure to require the agency to track and report on their time investment and to reconcile fees
  3. Inadequate definitions surrounding agency remuneration models
  4. Failure to legally extend the agency’s obligations under the agreement to their affiliates

Without a comprehensive Right to Audit clause an advertiser is forgoing the single most important control mechanism available to protect and monitor their interest.  Advertisers would be well served to heed the words of Ralph Waldo Emerson;

“All promise outruns performance.”

Thus, advertisers should secure their right to review any facet of the agency’s compliance to the LOA and or their stewardship of the client’s advertising investment.  This would include, but not be limited to; fees/ commissions paid to the agency, the accuracy of agency time-of-staff reporting, assessing the accuracy and timeliness of third party vendor billing activities or reviewing the agency’s compliance with competitive bidding requirements.  Importantly, the Right to Audit clause should survive the termination of the relationship for a period of two to three years.    

Regardless of whether an agency is compensated based upon staffing investment levels, retainer fees tied to a statement-of-work (SOW), project fees or commissions it is imperative that the advertiser require the agency to track their time.  Ideally, time should be tracked by person, by day in quarter-hour increments by project/ task and reported back to the advertiser on a monthly basis.  This allows both client and agency the opportunity to assess the efficiency of the processes that are in place to guide project workflow and to identify means to refine and improve those processes.  Similarly, whether the remuneration is tied to an agency’s direct-labor investment or commissions tied to advertising spend the LOA should require that the fees/ commissions paid be reconciled on a quarterly basis.  Further, the LOA should specify how differences in planned activity or resource levels (over or under) will be squared up at the time of the quarterly reconciliation.

As agency compensation models have evolved over the years, so to have the number of components that go into the calculation of agency remuneration.  Of note, none of these components have standardized definitions.  Thus it is critical to clarify client-agency intent and understanding within the LOA by specifying what constitutes a full-time equivalent, what comprises direct labor or indirect overhead, is the commission rate established off of a gross or net base, etc…  Additionally, when and where possible, incorporate the use of examples to show the method to be utilized to calculate specific outcomes.

Finally, with the proliferation of agency holding companies and the myriad of mainstream agency and specialty services providers which they own it is likely that an advertiser is being served by many of those firms, with or without their knowledge.  Beyond creative, media, and digital resources these could include research firms, barter companies, production companies and trading desks.  The LOA should require that an agency fully disclose all intra-company transactions and assert that the LOA terms and conditions apply to and bind each of those affiliate companies as well as the agency-of-record.  This will insure full transparency for the advertiser while enhancing financial controls.

If you’re interested in learning more about how you might improve your agency contracts or the benefits of advertising agency contract compliance audits contact Cliff Campeau, Principal with Advertising Audit & Risk Management at ccampeau@aarmusa.com for your complimentary consultation.   

 

There Must Be a Reason Agencies Do What They Do…

14 Oct

deliverables based compensationI just finished reading an excellent AdAge article entitled;How Much Longer Can Agencies Afford to Undersell Themselvesby Syracuse University Associate Professor of Advertising, Brian Sheehan a long-time advertising agency executive which deals with the notion of basing agency remuneration on “deliverable units.”  Of note, I wholeheartedly agree with the Mr. Sheehan’s premise regarding the efficacy of this approach and its ability to strike the requisite creativity/ profitability balance so often referenced in the context of agency compensation discussions.

The core issue, however, is less about the path forward and more about the reasons for agency resistance to this concept, which also serves as the root cause of the challenge with valuing agency delivery… the lack of systematic controls, processes and a disciplined commitment to accurately tracking time-of-staff investment and agency outputs in a timely and transparent manner to enable all parties to correlate agency resource investments to delivery.

Let’s be fair.  No agency ever signed a contract it didn’t choose to.  While client procurement teams may be wired to push for advantageous terms and pricing, agency-side negotiators are no less clever or determined in their approach to insuring their profitability when sitting down at the negotiating table.  The issue isn’t what is negotiated into the letter-of-agreement (LOA), but how (or whether) the agency delivers against the statement of work and or staffing plan agreements.  To be sure, this is necessary for clients to have confidence in the agency’s performance vis-à-vis the LOA.  However, it is even more important to the agency in assessing its return on their resource investment.

As Mr. Sheehan rightly points out, “other” professional services providers, such as management consultants have been able to bridge this gap.  Thus, the issue appears to be rooted in culture rather than a technology or methodology.  Agency holding groups, which represent a disproportionately high share of sector revenues, are publicly traded organizations, run by some of the most astute management and financial executives in the business.  That being said, there must be a reason for agencies “deep aversion to regular tracking of their scope of work” as the author suggests.  This can be evidenced by the fact that there has been little movement to change current charging practices and begin attaching value to agency deliverables. 

Part of the reason, I believe, is that agencies have done an excellent job of integrating technology into their work processes to enhance efficiencies which have boosted outputs per salary dollar invested.  When combined with guaranteed profit levels of between 12% – 15% (which are typical of most LOAs), incremental intercompany revenue yields on core client business, the non-transparent revenue generation opportunities being realized and the agency community’s unquenchable thirst for new business, one might assume that agency bottom-lines aren’t under stress at all. 

With regard to agencies being rewarded for the “value” of their work and or their ability to “completely transform business performance,” how are they any different than other professional services providers such as management consultants?  It can easily be argued that the technological, logistical, financial and marketing strategies which emanate from a management consultant are no less transformative than the creative ideas generated by the advertising community.  Too often we forget that for every “Aflac Duck” success, at the other end of the spectrum, there is a Schlitz beer, a Lisa computer or an Edsel automobile.  Advertisers are the ones who are financing these brands and incurring the risks associated with the marketing and advertising campaigns which support them.  When there are successes, today’s LOAs provide incentive compensation opportunities which reward agencies for their contribution.  And let’s not forget the most important financial reward of all… the opportunity to continue working with an advertiser to insure a future revenue stream.

Take Stock of Your Marketing Supplier Network

26 Apr

marketing agency networkWhether viewed in the context of the marketing dollars that flow through an advertiser’s marketing services agencies or their respective roles in building an organization’s brands and driving revenue, a marketing supplier network is a valuable corporate asset.  So how much do you know about the agencies which comprise that network?

Boosting supplier visibility within the C-suite of an organization can yield significant strategic and economic benefits.  The process begins with taking an inventory of those suppliers, their corporate lineage, resource offering, skills, pricing and historical performance on behalf of the company.  Without this knowledge it will be a challenge to optimize the investment made in maintaining this network.  Constructing a database with pertinent details on your supplier organizations is a pre-cursor to assigning roles and responsibilities across an advertiser’s agency base and for determining internal oversight responsibilities.

If this is an activity the organization has yet to undertake, there is a high likelihood that there is a significant degree of overlap across the supplier base and a less than optimal utilization level within a select group of marketing agencies.  Why should an advertiser care?  Because there is an attendant cost to contracting with marketing agencies and to retaining them on the advertisers agency roster… whether those agencies are being effectively utilized or not. 

Additionally, it is quite likely that the controls that are in place vary greatly from one supplier to the next.  This begins with the master services agreement (MSA) that is in place, whether or not such contracts have been executed and or kept current and extends to the resulting statements-of-work (SOW), agency staffing plans and remuneration programs.  While there is an obvious need for customizing MSAs and SOWs by agency type, there are certain terms and conditions ranging from “non-disclosure” and “non-compete clauses” to “right to audit” clauses, “document retention” policies and “intellectual property rights” assertions which provide critical controls that should be present in each MSA.  The question is; “Are they?” Further, once an MSA and or an SOW has been reviewed, updated and executed these documents should be retained in a central database for “ready access” by authorized representatives from Marketing, Procurement, Legal, Finance and Internal Audit.

Cataloging agency costs is another important step in constructing a marketing supplier database.  Armed with a deeper understanding of agency bill rates, overhead rates, direct and indirect expenses and multipliers an organization will be able to construct agency remuneration packages that are fair to the agencies and which generate savings for the advertiser.  One of the important bi-products of this information is the ability to benchmark supplier costs across agencies and makes for some interesting comparisons for those advertisers working with multiple agencies owned by the same holding company.

Implementing a systematic marketing supplier performance review program to be followed by the advertiser’s marketing department and marketing suppliers will provide a layer of qualitative data to further assess the effectiveness of each agency and to proactively identify potential weak links within the network.  Laggards can be targeted for performance improvement actions and or replaced in the event of continued sub-par results.

Ironically, the most valuable benefit of a marketing supplier database is the role it can play in advancing an organization’s collaborative supplier management (CSM) initiatives.  Aside from boosting agency performance and marketing ROI a well-orchestrated CSM program will enhance supplier satisfaction, longevity and fuel supplier motivation to invest in the client-relationship.  In the words of former Federal Reserve Chairman, Alan Greenspan;

“I have found no greater satisfaction than achieving success through honest dealing and strict adherence to the view that, for you to gain, those you deal with should gain as well.”

Interested in learning more about supplier visibility systems?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation. 

 

Are Advertising Agency Performance Assessments Disruptive?

4 Mar

disruptionThe answer to this question will be as diverse as the background and experience readers have with corporate accountability initiatives in general and marketing services agency audits in particular.  However, the question shouldn’t be whether or not these assessments of contract compliance or performance are disruptive but; “are they beneficial?” 

As a former agency account director and client side marketing executive, I have had the benefit of seeing the marketing accountability process from both perspectives.   As such, in my humble opinion, performance assessments and contract compliance audits are neither disruptive to the advertiser’s or the agency’s workflow, nor do they place any undue strain on the relationship.  Quite the contrary, in my experience performance monitoring and compliance testing serve to better align advertisers and agencies and more often than not lead to process improvements which are beneficial to both parties.

What is puzzling is that there are individuals on both the client and agency side that continue to rebel against the prospect of a comprehensive, independent assessment of their collective performance and adherence to the terms of the relationship.  After all, both parties were actively involved in negotiating their letter-of-agreement (LOA), which most likely contains a statement of work, an agency staffing plan, a schedule of charging practices, 3rd party vendor management parameters and a clause detailing the advertisers “Right to Audit.”   It occurs to me that accepting independent assessments is much akin to accepting the truth.  In the words of the 19th century German philosopher Arthur Schopenhauer :

“Every truth passes through three stages before it is recognized. In the first, it is ridiculed, in the second it is opposed, in the third it is regarded as self-evident.”

More importantly, there isn’t a member of the C-Suite in any client organization who is not wholly on board with the notion of accountability.  While not initially the case in the context of marketing, those days are clearly in the rearview mirror.  It is not uncommon for corporations to spend between 1.5% and 5.0% of their revenue on marketing.  Whether the goal is to build brands, create short-term demand and or to grow market share, marketing is an important component in the success of an organization.  Thus, it is imperative that executives have confidence that their staff, their partners and their 3rd party vendors are making good resource allocation decisions with the company’s marketing investment. 

Performance reviews and compliance audits provide a measure of control to an advertiser to ensure that there is transparency into the decisions being made with regard to their marketing investment.  These initiatives have the added benefit of providing a mechanism to review personnel, processes and resource investment on the part of the agencies so that adjustments can be made along the way to improving their return on marketing investment (ROMI).   Independent audits also yield an excellent opportunity for client and agency to engage in a candid, comprehensive dialog regarding the audit findings and recommendations which frequently contain normative benchmarks or industry “Best Practice” insights.  This type of approach fosters partnership and strengthens relationships.  Everything is on the table, no surprises, with the simple goal of identifying various means of improving performance.

From a workflow perspective, audits should not disrupt an agency’s critical role in the demand generation process.  Is there a modicum of time required of the account team and or the subject matter experts on the agency side?  Most definitely, but not at an onerous level.  Further, this can be an incredibly worthwhile investment of time if the agency is willing to provide feedback and share insights into the relationship and thoughts that they might have on changes that can be made to strengthen that relationship and in turn boost performance.  Other than those qualitative interviews, it is the agency financial team that is typically “on point” for providing the requisite data and or reports required to support the audit.  The nature of the information request is straightforward is typically detailed within the LOA and can be readily accessed from the agency’s financial system, thus requiring little administrative time… unless of course the agency has neglected their “housekeeping” duties along the way (i.e. lax time-of-staff controls, failure to reconcile fees, delays in reconciling 3rd party vendor fees, etc…). 

In our opinion, it makes sense for both parties to view the accountability process as a sound “preventative” care practice that can preserve the health of the client / agency relationship… not to disrupt it.  Marketers who invite an independent assessment of their performance and that of their agency network are embracing an excellent opportunity to showcase their commitment to corporate accountability and a desire to maximize ROMI.   

Interested in learning more about marketing accountability and how to implement the appropriate controls and transparency?  Please contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on this topic.

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.

Have You Discussed AVBs With Your Media Agency?

6 Feb

agencies as resellersIf not, the obvious question is: “Why Not?”  More importantly, if your media agency hasn’t initiated dialogue with you on this topic don’t wait any longer; engage them directly to gain an understanding on their practices in this area and to share your organization’s perspectives on this complex topic.

What are agency volume bonification deals?  Commonly referred to as AVBs, agency volume deals, rebates or media kick-backs, these deals typically take the form of cash incentives offered to media agencies by media owners to incent them to spend more on their properties.  Long a part of the media landscape around the globe, there’s growing concern within the industry that the use of AVBs is more prevalent (and non-transparent) in the U.S. than had been previously thought.  Those were the findings of a 2012 survey conducted by the ANA in conjunction with Reed Smith on this topic. 

The value of AVBs, which vary by media, by spending level and by country, can be significant, ranging between 3% – 20% of an advertiser’s net media spend.  There are two primary issues with these deals.  The first concern regards the potential of this incremental revenue to unduly influence agency decisions on advertiser media placements, potentially allocating more dollars to a particular media or outlet than would be warranted based upon approved media strategies and or the media properties share of market.  The second has to do with the lack of transparency around these deals between the agency and their clients. 

Unfortunately, a lack of transparency into the presence of AVBs usually results in the advertiser not receiving their pro-rata share of any rebates secured by the agency as a result of the client’s media investment.  While the view regarding “who’s” entitled to the proceeds from AVBs varies somewhat depending upon the country and whether you’re speaking with an agency or an advertiser, one thing is clear… AVBs are earned as a direct result of the cumulative financial investment made by an agency’s client base.  Thus, it isn’t surprising that a majority of advertisers believe that they are entitled to their pro-rata share of any and all earned rebates by the agency brand and or holding company that they are working with.  In fact, in the aforementioned ANA survey on the topic, 85% of survey respondents believed that agencies “should remit all dollars to clients.”

As it stands, an advertiser’s contract with their media agency may not even address this topic, either specifically or in the broader context of any and all earned discounts, no-charge media weight and or rebates.  Thus, the best place to start is a review of the current Letter-of-Agreement that governs the client/agency relationship.  Additionally, direct open and candid conversations between senior members of the advertiser and agency teams are warranted to sort out whether or not the agency is in fact participating in AVB programs and, if they are, the resulting media allocation and or financial impacts on the advertiser.

A forewarning, do not get frustrated.  Too often when it comes to AVBs the first response back from an agency is often “What is an AVB?”  This is typically followed by a firm denial of the agency’s participation in any such incentive program.  To be fair, the day-to-day account team at the agency usually does not have insight into the agency or agency holding company’s practices in this area.  That is why it is best to engage senior representatives from the agency when it comes to this sensitive topic.  Let’s face it, if the agency is currently collecting and retaining any level of AVB rebates that goes directly to the agency’s bottom-line, they often keep this information extremely confidential.  Thus, clients requesting transparency into this practice and or demanding their pro-rata share of the AVB activity has the potential to significantly impact the agency’s income in a negative manner.  In the words of Winston Churchill:

“There are a terrible lot of lies going about the world, and the worst of it is that half of them are true.”

In our experience, a discussion regarding AVBs will likely lead to a broader conversation regarding agency remuneration, scope of work, agency staffing and deliverables.  It is our opinion that advertisers and agencies alike should welcome this conversation with open arms.  Why?  This represents an opportunity to put everything on the table ranging from billable rates, overhead rates, overhead components and guaranteed profit levels so that both parties can discuss the financial aspects of their relationship in a comprehensive, transparent and open manner. 

Finally, one of the more startling findings in the ANA research on this topic was that 40% of the advertiser organizations surveyed were “not sure” if their agency agreements had language dealing with AVBs.  If you harbor any doubt about the appropriateness of the language governing behavior in this area within your agreement, now would be a great time to review the document with your legal team. 

Interested in a second opinion of the soundness of your client/ agency agreement or whether your agency has been remitting any AVBs due your company?  Contact Cliff Campeau, Principal at AARM via email at ccampeau@aarmusa.com to schedule a complimentary review.

A New Year’s Resolution for Marketers

27 Dec

new year resolutionInevitably, as 2012 draws to a close our mind turns to the New Year and we begin to reflect on things that we are thankful for, ways that we can better ourselves as individuals and how we might contribute more broadly to our families, companies and communities.

Having survived the Mayan “Doomsday” prophecy we can all breathe a sigh of relief and focus on the future with a renewed sense of vigor and commitment.  So what will it be?  Shall we resolve to give up caffeine, drop fifteen pounds or go the “I’ll be a better person” route?   Based upon our past resolutions, how should we handicap our chances for success in 2013?   Should we share our resolutions with others, or heed the words of the renowned 16th century English statesman John Selden:

“Never tell your resolution beforehand, or it’s twice as onerous a duty.”

Looking to mix it up a little and try a different approach?  Here’s an idea that will take less than 30 minutes of your time and can yield financial benefits and productivity gains that will benefit your organization throughout the year.   Go to the “Legal” drawer of your marketing services agency filing cabinet and pull out a copy of the letter of agreement for your firm’s agency of record, creative services partner or media agency.  If you’re feeling ambitious, pull all three.

When was the last time you reviewed these contracts?  In our advertising agency contract compliance audit practice too often our clients answer is, “It has been years” or “I have never seen them.”  Sadly, from time-to-time the advertiser cannot even locate a copy of their agency agreements, or at least an executed version of the contracts that govern their supplier relationships in this important area.

Whether your budget is $50 million or $500 million an annual review of your agency agreements is a worthwhile investment of an organization’s time and resources.  After all, the intent of these instruments is to provide the legal and financial safeguards required to protect the organization’s marketing investment, intellectual property and brand assets.   As importantly, they set the tone for the Client/ Agency relationship, establish performance expectations and provide the framework for shaping supplier behavior and resource investment.

The brief review will yield insights into statement-of-work deliverables, agency’s staffing plan and agency compensation methodology.  You might also notice a looseness of terms or that important controlling language is missing.  Once identified, you can set about fine-tuning the document to reflect the current nature of the relationship with that particular supplier and shoring up the language that will afford your organization the level of protection, transparency and control that it desires. 

An initial Client/ Agency agreement review is exactly the first step in any AARM advertising agency contract compliance audit process – a high level risk assessment based solely on agreement terms based on having tested hundreds of such agency agreements on behalf of our clients.  It is this experience and knowing where, in actual practice, financial and performance controls have fallen short of client expectations that set the stage for an expanded assessment of supplier contract compliance. 

Next steps then expand out to stakeholder discussions, agency data analysis, discrepancy identification and on-site audit work.  The net result of the discovery and analysis conducted around contract compliance involves financial true-ups, process refinements, improved reporting and controls and future efficiency gains. 

So as you consider your New Year’s resolutions for 2013, you may want to add a review of your advertising agency agreements to the list.  To assist on the path to improved agency stewardship, AARM is offering a “Free Agreement Based Risk Assessment” to any advertiser who reaches out prior to close of business on January 4, 2013.  Contact Don Parsons, Principal at AARM via email at dparsons@aarmusa.com  and we’ll follow-up to discuss scheduling.

The 3 Keys to Successful Agency Relationships

4 Sep

There are a lot of very capable advertising agencies and no shortage of experienced, intelligent marketing professionals on the client-side.  So what distinguishes successful client-agency relationships from those that fail to yield the desired results?  Based upon my experience it comes down to three key elements: People, Process and Perspective.

Other than scale and talent, often there is little that distinguishes one advertising agency’s service offering from the next.  They offer a comparable array of resources delivered through professionals representing a consistent range of agency functions.  Yet some client-agency relationships withstand the test of time, producing memorable work and significant in-market results, while others struggle to synchronize their efforts that result in failure to produce the desired results.    As a rule, individuals and business entities enter into relationships committed to the notion of success.  However, in a people business such as professional services, achieving success requires more than commitment and good intentions.

Constructing an effective team begins with assembling the right people with the cumulative experience and skills necessary to address the client organization’s market challenges and opportunities.  Assigning roles and responsibilities to each team member will assist in improving the group’s efficiency and productivity while minimizing conflict.  Over time, it is important to hold a team together to leverage the group’s shared learning, brand knowledge and market insights to achieve incremental gains year-over-year.  As we all know, in an industry marked by high employee turnover, this is often easier said than done.

Implementing a sound process to guide both the team’s efforts and resource investment decisions is a critical component to a successful relationship.  The process plays an important role in assisting the team in executing their tasks in an efficient manner, maintaining a goal orientation and providing feedback on the team’s progress to key agency and client-side stakeholders.  In the end, an effective process will mitigate risks (i.e. legal, financial, in-market performance) and improve transparency for all members of the team while enhancing the cumulative contributions of each team member.

“A bad system will beat a good person every time.”  – W. Edwards Deming

Having a shared perspective is a necessary component of all successful relationships.  This does not mean that the client and agency must agree on everything.  Differing opinions and the ability to discuss the merits of disparate points-of-view is an essential element of producing break-through work.   Undoubtedly, a shared perspective involves clarity around a brand’s position, its target audience and an understanding of what moves the needle when it comes to demand generation.  However, it also involves a knowledge of and respect for each organization’s culture and values.  These crucial insights help drive team interactions and assist in resolving conflict when disputes inevitably arise.

Of note, client-agency agreements represent the ideal venue for establishing the “rules of the road” for aligning people, process and perspective.  A well-constructed letter-of-agreement (LOA) will clearly define an agency’s roles and responsibilities, identify key deliverables and layout the criteria for assessing performance.  Additionally, LOAs should incorporate an agency staffing plan which identifies agency personnel by name and title with their utilization levels.  This is a pre-requisite for assembling and “locking-in” a team and, in conjunction with the scope-of-work, forms the basis for the agency remuneration agreement.  The LOA should also establish the processes and controls that will govern all aspects of the relationship thus providing both parties with clarity around the advertiser’s expectations, particularly when it comes to accountability and transparency.

Finally, it is important to remember that the LOA is a living document which must be socialized among key constituents within the client and agency organizations and must be reviewed and reconciled on a regular basis to insure that both parties are conducting themselves in an appropriate manner.  Many advertisers consider it astute to engage an independent consultant to conduct a contract compliance audit to assess agency performance and gain valuable insights that  improve both the return on advertising investment and the relationship.

Interested in learning more about the “3 P’s” and their role in “Building a High-Performance Agency Network?”  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com to schedule a complimentary consultation.

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