Tag Archives: marketing

The Ad Industry is Metamorphosing

30 Jun

dreamstime_xs_83082522It was the best of times; it was the worst of times…” Most of us are familiar with the opening line from Charles Dickens in his epic work A Tale of Two Cities. Many marketers may even consider it an apt description of both the current state of the advertising industry and the challenges that they face in sustaining brand relevance and driving growth.

Phoenix risingSo, who will marketers count on to assist them with the tasks of deepening brand engagement with core target segments, revitalizing sales and profits in a low-growth environment and in differentiating their brands for competitive advantage?

Over the course of the last few years, many have opined on the viability of the ad agency model and what it portends for advertiser/ agency relationships going forward. And with good reason. Concerns cited include threats from non-traditional competitors such as management consulting and technology firms encroaching on their turf, talent recruitment and retention challenges and margin compression due to downward pressure on fees and expanded scopes of services.

It may be as some predict that management consulting firms will leverage their capabilities in the area of strategy and integration to pirate work from ad agencies and that ad-tech providers will enable marketers to take certain tasks in-house. The question remains, how will marketers adjust to this dynamic and the evolution of their agency networks to potentially include consulting, data and ad-tech firms? There are already very real challenges related to agency stewardship today due to under-resourced client marketing staffs.

The aforementioned challenges, combined with the rate of digitization and the emerging role of artificial intelligence occurring within the ad industry, certainly pose challenges for advertising agencies and could serve to lessen their stranglehold on the marketing and advertising sector. In a recent McKinsey article entitled; “The Global Forces Inspiring a New Narrative of Progress” the authors note that “disruption is accelerating.” They opine that this dynamic is raising serious concerns for many organizations relating to the question, “How long can their traditional sources of competitive advantage survive in the face of technological shifts?”

That said, in spite of these risk factors and other marketplace developments, ad agencies are doing just fine:

  • Agency holding companies have continued their aggressive acquisition drives, supporting both their horizontal and vertical integration strategies. While overall M&A activity is down from 2016 levels, WPP and Dentsu have consummated twenty acquisitions with a combined value of $700 million through the first 4 months of 2017. (Source: R3’s “State of Agency M&A report” for January – April, 2017).
  • While down from 2016’s 5.7% growth rate, global ad spending is projected to grow 3.6% in 2017 (Source: Magna Global, June, 2017). Of note, this is higher than the International Monetary Fund’s projected increase for global GDP growth.
  • Even though 1Q17 Advertising Industry gross margins fell to 44.15%, the industry itself is healthy. For instance, within the services sector, the Advertising Industry achieved the highest gross margins, net margins, EBITDA margins and pre-tax margins for the quarter (Source: CSIMarket.com).
  • Some 86% of mid-sized ad agencies are confident that this year will be better than last in terms of profitable growth (Source: Society of Digital Agencies (SoDA) survey).

Importantly, since the demise of the “good ole days” of full-service agencies and the fifteen-percent commission remuneration model, agencies have demonstrated a unique ability to not only keep up with industry changes, but to take the lead from both a thought leadership and innovation perspective. They have been able to scale, attracting more clients and deeper talent pools, they have invested in emerging technologies to deal with increasingly complicated, data driven processes and to pioneer the use of algorithms and artificial intelligence to efficiently execute deliverables ranging from digital media investment to creative adaptations… all while dealing with evolving client expectations.

Further, it bears noting that the publicly traded holding companies; WPP, Omnicom Group, Publicis Groupe, Interpublic Group of Cos. and Dentsu, had combined estimated worldwide 2016 revenue levels of $60.7 billion (Source: Advertising Age, June 2017). When one considers the pre-dominance of the estimated billing process and agency remuneration schema that includes direct labor and overhead cost reimbursement plus guaranteed profit margins of 14% to 17% or more, one must also respect the financial clout that these publicly traded entities wield.

Is there a need for near-term belt tightening to offset softer 2017 ad spending levels? Yes. Do the holding companies need to consolidate agency brands and realign capabilities to boost the efficacy of their service delivery models and generate much needed efficiencies? Yes. Will agencies need to improve their talent recruitment and retention practices, across a diverse range of specialties? Yes. But no business is immune from these challenges, including management consultants, ad-tech platforms and publishers.

The big question the industry in general and marketers will need to assess is related to whether these players will be able to boldly transform their current business models, repositioning their firms to deliver integrated, multi-specialist services in a nimble, cost efficient, on-demand manner.

Broadly speaking, all participants are facing challenges as the ad industry undergoes its current metamorphoses. We believe that it is too early to predict winners and losers or to suggest that marketers adapt an attitude of empathy toward any of their marketing supply chain partners. After all, it is their marketing spend that has built this sector into a $457.4 billion global machine in 2017 (Source: Statista, 2017). And they must vigilantly safeguard and optimize that investment.

Below is one of the closing lines from A Tale of Two Cities, one that many may not be as familiar with:

“It is a far, far better thing that I do, than I have ever done…”

With this parting thought, Dickens’ suggests that the main character in his novel and the city of France will be resurrected, rising above their present strife and “made illustrious.”

Here’s hoping that the ad industry achieves similar transformative success.

 

 

Funding Accountability Initiatives

26 Aug

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

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

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

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

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

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

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

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

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

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

Interested in learning more about marketing accountability programs? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management| AARM at ccampeau@aarmusa.com for a complimentary consultation on the topic.

Video: “The Truth Crisis: Marketing’s Biggest Challenge”

16 Aug

Interesting video from Campaign magazine … Click Here to watch.

transparency

Two Words That Represent Accountability’s Biggest Obstacle; “Who’s Budget?”

24 Feb

Accountability FinalMany organizations want to implement an accountability program. Virtually all Internal Audit directors would like to extend that accountability initiative across the enterprise and most certainly want to provide coverage for categories with a significant spend, such as marketing.

Yet, in spite of the good intentions, U.S. companies have been slow to embrace independent compliance and performance auditing of their marketing supply chain partners. Ironically, the reason emanates from the answer to a very simple question, “Which departmental budget will be tapped to fund the initiative?” More often than not the answer to that question, in the context of a marketing and advertising spending review, is “Marketing.”

Given this dynamic, it is often a challenge for companies to implement an “unbudgeted” audit project once the fiscal year planning process has been completed, even if results dwarf its cost. Additionally, while many CMO’s have come to value the feedback and insights provided from the independent testing of supplier contract compliance and performance, there are others that still do not embrace audit or accountability initiatives. As a result, unless mandated by the C-Suite, independent accountability testing may never make its way into the budget, causing a huge assurance gap governing that company’s multi-million marketing investment.

There is good news however for procurement, finance and audit executives seeking to remove these obstacles and manage associated risks. Namely, that in addition to the opportunity for process improvements, performance monitoring, contract language enhancements and better controls, these engagements yield hard dollar returns resulting from various financial true-ups and future savings opportunities; far exceeding the fees necessary to conduct the review.

Positive financial returns aside, the costs associated with an audit of an advertiser’s agency network partners is miniscule when compared to the tens of millions or hundreds of millions of dollars being expended in this area.

Perhaps best of all, independent assessments of marketing agency compliance and third-party vendor billings sets a tone of the desired financial stewardship and accountability behavior that the client would like to see employed across its marketing supplier base. In turn, the very act of performing an independent audit, provides a powerful incentive for an agency to diligently self-police itself by tightly adhering to the processes and guidelines agreed to and memorialized in the Client/ Agency Master Services Agreement. In the words of the noted English author and speaker, Simon Sinek:

Actions speak louder than words. All companies say they care, right? But few actually exercise that care.

Interested in learning more about fielding a marketing agency network accountability initiative at your company? Contact Cliff Campeau, Principal at AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com to for a complimentary consultation on the topic today.

 

 

 

Advertisers, Did You Get What You Paid For?

2 Dec

contract compliance auditingGiven the complexity and opacity of the advertising ecosystem, at least from a billing and reconciliation perspective, it can be very difficult for an advertiser to assess if their organization received full value for their advertising investment.

Consider that most agency billing to clients is done on an estimated basis, that supporting invoice detail is often limited and that seldom is 3rd party vendor invoice documentation contained with an agency’s billing to the advertiser. Not to mention the fact that production jobs can take several months to close, that media post-buy analyses typically occur three to six months after a campaign’s initial month-of-service billing or that agency time-of-staff summaries may only be provided semi-annually or at year end… if at all. 

Many advertiser/ agency agreements provide guidelines to help mitigate some of the concerns that may arise with regard to the notion of receiving full budgetary value.  Document retention clauses, expense billing detail requirements, accounts payable timing parameters and audit rights language are examples of the terms and conditions which are negotiated into agreements to safeguard advertisers. Ironically, very few advertisers take advantage of these contractual protections to conduct detailed reviews of the billing and financial stewardship portion of their respective agency partners’ performance.

However, pressure has begun to mount from stakeholder groups within client organizations that are not directly involved in the agency relationship management loop to provide a higher level of accountability when it comes to the disposition of their marketing funds.  Further, functions such as finance, internal audit and procurement have even stepped up to provide funding and or personnel support to help their counterparts in marketing implement billing, financial management and contract compliance reviews of their agency networks.

This type of testing and analysis should be welcomed with open arms by both the Marketing Team and an advertiser’s agency partners. Let’s face it, marketing teams, which are often resource constrained, have their hands full with their primary responsibility… demand generation. Further, some of the competencies and experience which best lend themselves to conducting financial testing may not be represented on staff within the marketing group. Similarly, agency finance teams have become both accustomed to and quite adept at entertaining advertisers and or their audit partners in conducting billing reconciliations and contract compliance reviews.

If such support is not forthcoming, marketers may want to actively solicit the involvement of their corporate services peers to implement a marketing accountability initiative. Inviting this type of internal scrutiny has more benefits than negatives. Consider the words of Edward Coke, the noted English barrister, judge and politician:

“Certainty is the mother of quiet and repose, and uncertainty the cause of variance and contentions.”

Removing any uncertainty regarding the organization’s advertising investment and the efficacy of each agencies billing and reconciliation processes has asset value for marketers which extends well beyond answering the basic question; “Did we get what we paid for?”

 

 

A Perspective on Evolving the Agency Stewardship Model

1 Jul

marketing control environmentSmart Marketing is critical for most businesses to thrive. 

Smart Marketing Investments are significant and material. 

So who, within the organization, should be responsible for keeping the marketing smart and for effectively managing the important shareholder / stakeholder financial investment in marketing?  Can the Marketing group do an effective job alone?  Should a Marketing Operations group be formed?  Should Finance be involved?  How about Procurement?  Internal Audit?  Legal?   

Believe it or not, in our view, a smart and effective Marketing Control Environment is created and maintained through well-coordinated interaction between each of the functional groups mentioned above. 

Who does what, and when, then becomes the question.  Each of the groups mentioned (jointly lets call them the Marketing Effectiveness Group) has at least four (4) necessary critical inputs and ongoing oversight roles to produce a well managed marketing control environment.  One example for each group is as follows: 

Marketing – Core:

Drives the demand generation process, but is required to follow financial control structures established to safeguard corporate assets. 

Marketing – Operations:

Should be led by a Manager with a technically strong financial accounting background.  Interact externally with agency finance to set up reporting template(s) and timelines. 

Procurement:

Owns Financial Terms, Definitions, and Understanding; Coordinates with Marketing Operations to review Quarterly Agency reporting. 

Legal:

Deals with all contracting language work in tandem with Procurement and Marketing to incorporate business knowledge and definition into agency agreements. 

Finance:

Owns the highest-level understanding in areas of proper accounting financial calculations. 

Internal Audit:

In order to gain comfort, controls IA will want to ensure are in place and operating effectively (at a minimum):

  • A well written, approved, and up to date agency agreement
  • A well structured agency financial reporting process
  • Agency oversight provided by Marketing Operations & Independent Experts
  • Agency oversight provided by Legal 

As Marketing contract compliance consultants, at review onset our teams rarely see a Marketing Control Environment that that is wholly optimized.  Too many silos and politics are built up creating a lack of coordination between the parties and or the company simply does not focus in on this important area.  Given the materiality of most Marketing Budgets, investing a fraction to ensure risk is mitigated and investments are optimized.  If you are interested in further discussion on this, or related topics, please feel free to reach out to Don Parsons at dparsons@aarmusa.com.

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

3 Dec

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

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

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

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

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

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

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

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

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

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

 

The Future of Marketing is Now. How Will You Optimize ROMI?

9 Oct

key to marketing futureWe’re all familiar with the key trends that have shaped the last several years within the advertising sector; media convergence, fragmentation, consolidation, data proliferation and emerging media.  Now that it is clear that these are not passing fads, the question faced by marketers across the globe is “How can we focus our efforts and resources in a way that acknowledges the fundamental changes which have occurred and leverages our opportunities?” 

In a recent article in AdAge entitled “Marketing’s Next Five Years: How to Get from Here to There” author Matthew Creamer shares a compelling perspective on how marketers can use the knowledge gleaned in the recent pass to chart a path forward.  When one considers the growth of internet and mobile as a percentage of ad spending, much of it at the expense of traditional media, marketers will need to adjust both their resource allocation decisions as well as their performance expectations with regard to crafting and delivering their brand messages to the intended target audience. 

One of the most intriguing changes is in the area of audience measurement and media attribution and the role it will play in influencing marketing strategy.  Consider for example television, which is and will remain the largest ad spending category.  Today, it is estimated that less than 2% of the advertising on television is “data-denominated with guarantees of GRPs and sales attribution.”  As second-by-second audience ratings data continues to proliferate, the impact on addressable TV will be profound.  The role of TV will shift from a cost-efficient means of reaching the masses to that of a media which has the ability to micro-target specific consumer segments to delivery specific or niche product messages in a very direct manner.  

Needless to say, defining the roles of each medium in an ever evolving media set will require the ability to process and analyze “big data” to generate insights that drive an advertiser’s creative and media delivery decisions.  Data analysis will also factor heavily into the establishment of campaign performance criteria, which will likely be more “outcome” focused and the real-time monitoring of progress toward an advertiser’s demand generation and brand development goals.  

These trends will clearly impact the client-agency relationship and the subject matter expertise that will be required of an advertiser’s marketing services agency network.  The clear delineation of roles and responsibilities, the need to harness technology and tap the services of data and consumer strategy and insight specialist and, yes, how agencies are compensated will be seminal issues that need to be addressed within client-agency letters-of-agreement. 

That being said, it is an exciting time to be in marketing whether on the client-side, at an ad agency or working in the marketing accountability field.  According to Mr. Creamer; “even the worst-case forecasts have our economic malaise nearing an end” and a “true recovery taking shape with low unemployment and revitalized consumers.”   Interested in learning more?  Check out the article in its entirety in AdAge.

There Were Two Glaring Omissions from AdAge’s “Top 100” LNA List

7 Aug

the white houseAs you know, Advertising Age publishes a list of leading National advertisers (LNA) based upon their annual U.S. advertising spending levels.  In reviewing the publication’s most recent “Top 100” LNA list, it occurred to me that there were two well known, billion dollar plus advertisers who should be recognized based upon the size of their U.S. advertising investment.  Intrigued?  Perhaps you have already ventured a guess as to the identity of these two “Leading National Advertisers?”  Without any further intrigue, when these two advertisers are incorporated into the LNA list, the rankings would look this:

  1. P&G ($4.18b)
  2. Verizon Communications ($3.02b)
  3. AT&T ($2.79b)
  4. Presidential Candidates ($2.51b)*
  5. GM ($2.20b)
  6. Pfizer ($2.10b)
  7. Johnson & Johnson ($2.06b)
  8. Walt Disney ($2.00b)
  9.  Time Warner  ($1.85b)   
  10. L’Oreal ($1.83b)
  11. Kraft ($1.75b)     

*Sources: Center for Responsive Politics, Smart Media Group, Federal Election Commission 

That is correct, based on current projections, Mitt Romney will spend $1.35 billion and President Obama $1.16 billion on their respective runs for the White House.  Looked at another way, they will each spend more than top brands such as Chevrolet at $923 million, Lipitor at $247 million or Cover Girl at $205 million.  Further, projected total spending for all Federal election campaigns in 2012 is $5.8 billion… a staggering amount of money by any measure. 

What lessons can be gleaned from a political process where a sitting president must spend over $1.0 billion on a re-election campaign rather than running on the merits of their first-term job performance?  What can marketers learn about the viability of negative advertising in trying to build their brand by deriding the competition?  How does the market benefit from the lack of transparency which shrouds a Political Action Committee’s source of funds?  Admittedly, there is probably little in the way of practical insight that one could take away from political campaigns that would be of any value to marketing, financial, procurement or audit professionals. 

Political positions aside, the infusion of federal campaign spending has been a boon for the U.S. advertising market, with expenditures having grown 87.1% since 2000.  Who benefits?  Media property owners, ad agencies, PR firms, digital marketing shops, consumer research organizations and tchotchke manufacturers to name a few segments of the marketing world that participate in this “every-four-year” bonanza. 

In light of the largesse of politics as a force within the marketing world, it caused this marketing professional to ponder on a few topics: 

  • Are President Obama or Mitt Romney members of the ANA?
  • Do the campaigns conduct media post-buy analysis?
  • Do they conduct 3rd party vendor billing reconciliations?
  • What are the campaign’s days-payable-outstanding vendor payment averages?
  • Are agency employees who work on campaigns required to fill out time sheets?
  • Are the campaigns marketing services firms required to complete “non-disclosure/ non-compete” forms? 

Idle musings of a contract compliance auditor to be sure. 

One can certainly debate the need for political spending reform, the resulting impact on the electorate or the need for tighter regulatory oversight on campaign funding sources or message accuracy.  However, there is no debate about the positive impact federal election campaigns have on the U.S. media market.  From a marketing perspective, when it comes to political spending, if a little is good, more is certainly better, or as John Quinton so aptly said: 

Politicians are people who, when they see light at the end of the tunnel, go out and buy some more tunnel.

Auditor Compensation Should be Aligned With Client Objectives

15 May

audit compensationAt the recent ANA “Agency Financial Management” conference in Boca Raton, FL there was much conversation around the topic of “contingency” auditors and the relevancy of recovery based compensation models for media and contract compliance audit firms.  This perspective was largely fueled by presenters representing fee-based firms and associations.   Whether their perspective was driven by a desire to pander to their association members, the agency representatives at the conference or somehow believing that being a fee-based auditor was somehow the lesser of two evils is unclear.

In our opinion, this is a largely irrelevant, self-serving position that masks the true benefits of third-party independent marketing audits and reviews.  Our position is that audit compensation models should be treated no differently than those of other professional services firms… including advertising agencies.  Compensation should be tied directly to a scope of services.  These deliverables drive the value of the audit including; contract compliance, process improvement, agency performance assessments, improved reporting/ transparency and or financial reconciliation.  The notion that compensation methodologies somehow skew audit results is a direct affront to the integrity of the advertiser.  The fact is that it is the historical agency billings/ advertiser payments and their basis that determines whether or not the advertiser is entitled to a financial true-up, not the manner in which an auditor is compensated.

If an audit determines that an agency owes their client money due to billing errors, earned but unprocessed credits, rebates and discounts or time-of-staff under-delivery, the findings have nothing to do with how the advertiser has funded an audit.  Like performance based compensation systems espoused by agencies, a combination fee plus performance incentive compensation approach is equally valid and viable for auditors.  The key is to align auditor compensation with the advertiser’s business objectives and culture.  Encouraging their professional services partners to have “skin in the game” as it relates to the financial efficacy of the audit, whether based upon recoveries or future savings is a standard, professional approach for advertisers to employ.

Importantly, performance based compensation systems provide the requisite incentive for audit firms to look beyond the time-capped limitations of fee-based approaches to ensure a thorough assessment based on a comprehensive data review rather than sampling.  Further, the need to audit, whether part of an enterprise accountability initiative, tied to marketing agency turnover or simply following best practices related to enterprise-wide financial risk management protocol, often requires financial flexibility when it comes to funding the initiative.  Thus, a blended compensation system which includes a base fee and performance incentive can enable the advertiser to advance their audit program within the current budget year, without jeopardizing Procurement’s, Internal Audit’s or Marketing’s other initiatives.

During the aforementioned ANA conference, it was suggested by one client-side marketer that “those types of audits,” referring to contingency audits, are frequently initiated by procurement, not by marketing.  Let’s be honest, virtually all third-party audit activity emanates from finance, internal audit or procurement.  Unfortunately, in spite of the fact that an organization’s marketing spend represents one of the largest components of an advertiser’s selling and general administrative expense, U.S. marketing executives have yet to fully embrace their organization’s accountability initiatives.  Focusing on auditor compensation is simply a misguided attempt to further delay any third-party scrutiny.  And if this is not the case, ask those marketing executives to underwrite the cost of a fee-based audit and gauge their reaction to the request.  In the words of noted American author, Katherine Brush:

“Most passport pictures are good likenesses, it is time we faced it.”

At AARM we conduct contract compliance and agency performance audits for a broad-range of multi-national advertisers, many that are represented on AdAge’s “Top 100” advertisers list.  For the record, we are compensation agnostic.  Our goal is simple – to structure a compensation approach that aligns our efforts with the client’s business objectives, culture and audit deliverables.  Of note, in AARM’s process all audit observations are vetted with the agency prior to being shared with the client.  Therefore, if there exists any erroneous findings or the agency feels as though they can share additional information to clarify the findings represented in the audit, the opportunity exists for the agency to address those items before the audit report is published.  In the end, the facts are the facts, regardless of the manner in which an audit firm is compensated.  If an advertiser doesn’t feel as though they can trust the results of the audit, then we would suggest the real issue was the screening process employed on the front-end to select the audit partner, not the compensation program.

%d bloggers like this: