Tag Archives: right to audit clause

Advertisers: Contract Compliance is Easier to Secure Than You Think

19 Apr

EasyIf you’re an advertiser, we have three brief questions for you to consider:

  1. Does your organization have contracts with its ad agency partners?
  2. Do those contracts contain right to audit clauses?
  3. Has your company ever enacted its right to conduct contract compliance and or performance audits?

Chances are your answer to the first two questions is “Yes” and very likely “No” to the third question. Why is this? Why would the majority of advertisers negotiate audit rights into their marketing supplier agreements and not take advantage of such an important control mechanism? This is particularly perplexing given the materiality of marketing spend and the many publicized challenges confronting advertisers and their relationships with advertising agencies. Challenges such as waning levels of transparency into agency financial management practices, lack of a direct line-of-sight into the rates paid by its agency partners, agency resource constraints and personnel turnover.

After years of conducting advertising agency contract compliance audits, our experience shows the agency community wants to do the right thing in most instances. Are there bad actors? Sure, as there are in any business sector. Are there lapses in oversight or judgment? Certainly. This is a people business and people make honest mistakes. Do errors occur? Of course, as in every organization… no entity is perfect in that regard. Beyond common lapses in judgement, follow-through and or mistakes the primary compliance challenge is often a sub-standard or outdated client/ agency agreement which does not supply an advertiser with the requisite legal safeguards and financial controls.

It is for all of these reasons that “Right to Audit” clauses exist and why it is considered “Best Practice” to engage independent audit support to assess an agency’s contract compliance and financial performance. The benefits of auditing are meaningful and many, with the resulting financial true-ups, identification of process improvement opportunities and new learnings in general, providing substantial contributions to future efficiencies.

These outcomes can have significant financial impacts for both stakeholders. For agencies, who have made oversights, misinterpreted or misapplied certain contractual conditions there is the obvious impact of correcting those items and reconciling their fee and or third-party expense billings. Advertisers benefit from the collection of past due credits, trueing up financial matters, identifying and eliminating unauthorized, non-transparent agency revenue and realigning its scope of work and agency resources on a go forward basis.

It is true that the consequences of an audit can sometimes cause an agency some discomfort and even be outside an advertiser’s comfort zone. However, these important accountability programs are more than offset by the positive outcomes that ultimately drive compliance with the agreement and motivate more effective financial stewardship. To this end, it was with interest that I read a recent article entitled, “Mix Enforcement with Persuasion” by Lucia Del Carpio, Assistant Professor of Economics with INSEAD. Professor Carpio wrote about the topic of improving compliance with laws and regulations. One of his observations had particular relevance to our compliance auditing experience and crystalized what we often profess:

“Compliance sometimes requires nothing but enforcement.”

 The cost to conduct agency contract compliance auditing is nominal relative to the benefits yielded by these initiatives. In our experience, we have never seen an instance where the financial and operational benefits of an audit didn’t provide a return multiple times its attendant cost. Factor in the notion that compliance auditing actually incents agency contract adherence and it is easy to understand why “Right to Audit” clauses exists in client/agency contracts to begin with.

Interested in learning more about agency contract compliance auditing? Contact Cliff Campeau, Principal at AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com for your complimentary consultation on this topic.

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.

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