Tag Archives: performance audits

3 Reasons Advertisers Should Audit Their Advertising Spend

29 Jun

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Virtually all client-agency agreements contain both an “audit” and “record retention” clause. The purpose of this language is to afford advertisers the ability to answer the question, “Are we getting what we paid for? Yet, few advertisers ever implement contract compliance, financial management or performance reviews of their agency partners.

There are multiple reasons why the marketing budget, a material expense, and the stakeholders responsible for stewarding those funds (e.g., advertising agencies) have not undergone more scrutiny. Few of those reasons make much sense when compared to the risks and costs faced by advertisers choosing not to periodically assess how effectively their funds are being managed.

Below are three key reasons why we believe that advertisers should exercise their audit rights:

  1. Flaws Tied to Estimated Billing Process – The ad industry operates primarily on an “Estimated” billing basis. Plans are approved by the client, purchase orders issued, and the agency then bills the advertiser in advance for the approved amount. In theory, estimated fees and third-party costs are reconciled to actual costs once a job is closed. However, this does not always occur in a timely or accurate manner. Experience shows that perils abound such as, approved but unspent funds are accumulated by the agency, unused funds are rolled over to other brands/ jobs/time periods for future use, unapproved and non-transparent mark-ups are applied, unbilled media balances are retained for inordinately long periods of time and aged credits are not always returned to the advertiser in a timely manner. In the end, left unchecked, agencies can hold and direct how and when client funds get applied to a greater extent than most client-side CFOs or Internal Audit directors would approve of.
  2. Review of Support for Agency Billings to Client – Because clients are typically billed in advance by their agencies on an estimated basis, and agency final invoicing almost never contains third-party or fourth-party invoice support, the only way an advertiser can evaluate whether agency billings are accurately supported is to conduct a financial review of all underlying billings being passed through from the agency to the advertiser. At a minimum, this includes validating billing costs from vendors to the agency and payments from the agency to the vendors. Further, for direct labor-based remuneration programs, which rely on the accurate entry and tracking of time by agency personnel, advertisers should independently review agency timekeeping system data and processes to validate any time tracking reports being provided. Such reviews should also include assessing the types of personnel logging time (i.e., full-time employees, temporary employees, freelancers, interns, etc.), the staffing mix relative to the approved staffing plan and agency employee turn-over rates on their business… data not always shared with clients.
  3. Performance Validation – Results matter. Whether in the context of compliance with contract terms, attainment of agreed upon goals and KPIs or delivery against planned spend levels advertisers stand to benefit from independent reviews of their agency partners’ performance. Given the increased pressure on CMOs to achieve results, it is imperative they have confidence in the outcomes associated with their and their agency’s stewardship of marketing funds. As importantly, their C-Suite peers routinely question the efficacy of an organization’s marketing investment and to what extent that expense is contributing to the attainment of company goals and objectives.

Audit is not a four-letter word. We have witnessed first-hand the positive impact that an independent review of an organization’s marketing investment can have on both safeguarding and optimizing those funds. These reviews yield solid learning as it relates to improved controls, risk mitigation and efficiencies tied to process improvements. Further, the identification and recovery of funds tied to billing errors, compliance violations, aged credits, rebates, and under-delivery (i.e., agency resources, media, etc.), when combined with the identification of cost avoidance strategies for the future, far exceed the cost of an audit.

Importantly, advertising agencies also benefit from these projects when client-side instructions, process inefficiencies and timing issues (i.e., ineffective briefing processes, disorderly client approval process, short project lead times, the timing of the release of funds, etc.) are brought to light and addressed.  As well, it’s always a great result when the clarification of the intent of certain terms included in client-agency contracts aligns with everyone’s future expectations.

In short, properly structured audit programs, which deal with both client and agency stakeholders in a candid and collaborative manner identify solutions and help to lay the groundwork for implementing the changes necessary to improve the client’s return-on-marketing-investment. As such, Chief Financial Officers and Chief Audit Officers should require marketing to allocate funds in their annual plan to cover this important transparency and accountability program. The cost? Tenths of a percentage of an organization’s annual spend, with financial returns that dwarf the outlay for implementing a formal audit initiative.

Agency Audits: An Advertiser “Right” Not Yet a Standard Practice

26 Jan

dreamstime_xs_7828625For most organizations, the “Right-to-Audit” is a staple in their advertising agency agreements. Worded properly, this important contract language provides the company an opportunity to periodically check ad agency compliance with contract terms, review financial support that should agree to agency billings and to otherwise evaluate various performance metrics.

Yet despite the inclusion of this vital risk management clause and the rights that it confers, far too few organizations actually follow through to perform the testing which would otherwise provide stakeholders with comfort that agency billings are accurate and true.

So, why don’t advertisers audit their agency partners?

One might logically deduce that all clients would periodically review agency compliance, financial management and performance given:

  • The materiality of spend levels.
  • Limited insight to whether agencies are accurately reconciling estimated invoices to actual costs.
  • The complex, multi-layered supply chains, especially in digital media.
  • The well-publicized news of the ad industry’s ongoing challenges with transparency and fraud.

Aside from mitigating financial risk that could be eroding marketing expense effectiveness, another benefit of agency compliance testing is that it can help allay client-side stakeholder (marketing, finance, internal audit, procurement) concern and further build trust. Trust is crucial, particularly clients are relying on agency partners to fulfill their fiduciary and legal responsibilities in stewarding their advertising funds.

In addition, the level of trust between advertisers and their agency partners has been under siege. Consider ID Comms 2018 Global Media Transparency Survey where only one in ten respondents indicated that their “relationship with their agency or advertising client was trusting.” Further, 40% of respondents believed that trust levels were “average” compared to 52% in ID Comms 2016 survey.

We see first-hand where contract compliance and financial management audits identify and address gaps in understanding, controls and reporting that negatively affect client spend effectiveness and erode agency margins. Whether financial definitions, billing basis, fee calculations, project briefing, the approval process, rework levels, custom reporting requests, and or payment timing issues, audits can provide a prescriptive for positive change to benefit all stakeholders.

In our practice we see three principal reasons why the right-to-audit is not employed often enough – and therefore has become much less effective as a control than necessary:

  1. No clear ownership who is responsible for the Audit function in the context of marketing.
  2. Lack of a formal budget allocation process for assurance and risk mitigation for marketing and advertising spend.
  3. Limited organizational understanding of risks related to the advertising category.

As a result, clients continue to invest billions of dollars annually through their agency partners in spite of never verifying whether there are proper controls and regulations to safeguard those funds and optimize the efficacy of their investment. The need is real. Building effective verification and monitoring tools into client-agency relationships cannot be viewed as an option, but rather a prerequisite.

Fortunately, if the will is there on the part of client organizations, the solution is relatively straight-forward.

  • Responsibility for the checking agency financial compliance cannot rest solely with the marketing team. Finance, internal audit and procurement each have a role to play in the process.
  • Setting up a rotational audit program for each of the organization’s audit partners is paramount. Funding the effort through marketing, finance or internal audit budgets can ensure that the program will be executed as designed.
  • Establishing direct relationships between client-side finance and agency finance personnel greatly enhances an advertiser’s line-of-sight into the disposition of their funds at each phase of the advertising investment cycle.
  • Develop a relationship with a co-source supplier with deep marketing audit expertise.

Enhancing an advertisers control framework to include the regular review of their agency partners’ client accounting practices and controls along with their contract compliance to contract terms will inevitably mitigate risks and lead to better management of this important investment. In the words of Simon Mainwaring, brand futurist and businessman:

“The keys to brand success are self-definition, transparency, authenticity and accountability.”

Do Perspectives Drive Outcomes?

4 Jun

By way of background, I have spent my entire career as a marketing professional.  Of note, I have both advertising agency and client-side experience in addition to having worked in the field of marketing accountability, auditing marketing spend and marketing agency performance.  Hence, I have always been perplexed by the notion that marketing executives were thought by some to be unwilling participants in working with their peers in procurement or finance to help them better understand and assess the stewardship of an organization’s marketing investment.

I don’t believe that anything could be further from reality.  The truth is that the vast majority of marketing professionals have an inordinate sense of obligation to go along with a fiduciary duty to invest their organization’s marketing budget in a manner that will yield the greatest possible return… whether that is brand positioning, revenue generation or market share increases.  To that end, marketers and their agencies work diligently and tirelessly to make every dollar invested work as hard as possible.

Of note, many industry pundits feel as though advertising agencies have fallen from their pedestal and position of respected “partner” to that of a “vendor” who does little more than sell their wares for the best possible price to the highest bidder.  In spite of the fact that the average client-agency relationship tenure is a few years rather than a decade or more as in the recent past, categorizing an agency as a vendor unfairly diminishes the role and contributions made by both the agency community and the client-side marketers that direct their efforts.

Thus, it was no surprise to see the results from CMG Partner’s recent survey that found CMOs had expanded their roles and perspectives within their organizations, becoming something akin to a “CEO of Marketing.”  The trying times related to the global recession and the downward pressure on marketing spend at a time when organizations sorely need to drive demand generation, while challenging, have forged a stronger breed of senior marketing executives.  The report also recognizes that while the marketing profession has made considerable gains in terms of greater corporate influence, it is on “the threshold, rather than in full flower.”  The report concluded that the CMO must “not only earn his or her place at the table” but also “his or her voice.”

So how can marketing executives take advantage of the upward corporate trajectory to achieve broader authority?  One answer would be to fully embrace the use of independent third-party compliance and performance audits to improve corporate transparency into all facets of the marketing supply chain and openly share how an organization’s investment is being stewarded by the marketing team and their agency network.  Transparency and recommended improvement opportunities can help to further the understanding that other corporate stakeholders have with regard to marketing plans, processes and outcomes.  Further, independent reviews of the efficiency and efficacy of the marketing spend can benefit marketers by building peer level trust in their resource decision-making framework and the competency of their agency partners.

An independent assessment of a marketing agency’s contract compliance and performance does not emanate from a lack of trust on the part of a client organization.  Advertisers that have embraced progressive corporate governance initiatives have an obligation to ensure that the large sums of money being invested in this important area are being managed capably and in concert with the terms and provisions of the client-agency agreement.  Thus, the agency community, like any good corporate partner, should both welcome and support a client’s efforts to hold marketing accountable to the same standards that other functions within the organization are held to.  Agencies can benefit from the process as well.  Both as it relates to the independent validation of the investment that they make in the relationship as well as to use the compliance audit process to better align their resource investment and remuneration with the client’s business objectives.

In the words of Michael Josephson, one of the United States’ most sought after ethicists:

“What you allow, you encourage.”

Interested in learning more about the potential benefits of a marketing agency compliance audit?  Contact Don Parsons, Principal at Advertising Audit & Risk Management for a complimentary consultation at [email protected].

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