Tag Archives: transparency

Is the 4A’s Action on “Transparency” a “Tipping Point” for Client/ Agency Relationships?

17 Feb

Tipping PointMuch has been written about the content of the American Association of Advertising Agencies (4A’s) recently released “Transparency Guidelines,” less about the potential impact of the 4A’s decision to break rank from the cross-industry task force with the Association of National Advertisers (ANA) and to act unilaterally.

For the record, from both an advertiser and agency perspective, we believe that the guidelines proposed by the 4A’s have the potential to do irreparable harm to client/ agency relationships. The guidelines appear to driven by greed and a certain naiveté about the source of agency leverage… namely their clients’ advertising budgets. Let’s face it, in the context of a principal-agent relationship there is no logical way to rationalize a guideline which states:

The agency, (agency group and holding company) may enter into commercial relationships with media vendors and other suppliers on its own account, which are separate and unrelated to the purchase of media as agent for their clients.”

One, the notion that the potential for financial gain would not introduce a level of bias that could influence an agency’s recommendations to its clients is unrealistic. Two, pooling client dollars to use as collateral in cutting side deals with media vendors and suppliers for its own benefit is inappropriate.

From our perspective, we believe that the 4A’s and any of its members that support the association’s guidelines on transparency have made a serious error in judgment. Yet, it should be noted, that not one agency has spoken out against the 4A’s action or the composition of its “Transparency Guidelines” nor has one agency seceded from the association. Thus, one might assume that all of the 4A’s members support the position taken.

At a time when issues such as transparency, trust, talent and compensation are posing serious challenges to the length and efficacy of client/ agency relationships, the 4A’s action on the topic of transparency will not serve their members well in the long-term. Why? There are, we believe two reasons.

First of all without clients, agencies have no means for existence. On the other hand, as it stands today, some may view agencies as a luxury, not a necessity for advertisers. Without agencies, clients still have a number of options for marketing their firms, brands and products. These options range from dealing direct with suppliers that are today considered “third-party vendors” such as; production companies, photographers, content developers and curators and media owners. Additionally, one must consider an advertisers option to create in-house capabilities rather than outsource all or some elements of their advertising.

The second reason is that absent an underlying level of trust, agencies can never hope to recover the coveted position of “strategic partner” that they once enjoyed. In our opinion, the 4A’s action has relegated their member agencies to “vendor” status whose goods and services an advertiser might choose to avail themselves of, without being beholden to the agency in a meaningful way.

In Malcolm Gladwell’s book; “The Tipping Point” he suggested to readers; “Look at the world around you. It may seem like an immovable, implacable place. It is not, with the slightest push – in just the right place – it can be tipped.” Think about that statement in the context of some of the trends our industry is experiencing today:

  • Growing impact of social media in shaping consumer views and behaviors
  • Rapid expansion of programmatic media buying
  • Advances in ad technology, impacting many facets of the message creation & distribution cycle
  • Increasing prevalence of advertiser/ publisher direct relationships
  • Rise of non-traditional alternatives to ad agencies (i.e. IBM, Deloitte, Accenture)

Surely the 4A’s is aware of the aforementioned trends and the moves in recent months by advertisers such as P&G, Facebook, Google, Netflix, Expedia, L’Oreal and Wal-Mart to either move certain aspects of their advertising in-house ranging from creative to programmatic media buying; or are purported to be actively investigating “alternative models.”

Do the 4A’s and their members believe that they are impervious to such trends? What were they hoping to gain by breaking ranks from the ANA and the joint transparency task force? Perhaps more importantly, are 4A’s members prepared for the potential impact of the association’s actions? According to Mr. Gladwell:

“That is the paradox of the epidemic: that in order to create one contagious movement, you often have to create many small movements first.”

For the sake of the advertising agency community, let’s hope that their recent action on the topic of transparency isn’t the “small movement” that fuels the “epidemic” which forever tips their once favored status as trusted confidants to alternative vendors of commodity like marketing services.

For Advertisers Concerned About Transparency, There is an Immediate Solution

4 Nov

transparency concernsLet’s face it the advertising industry is a complex, fast-moving and ever evolving marketing eco-system which at times can mystify even its most experienced participants.  The expansion in both the number and types of media channels combined with the technology revolution that has ushered in tools such as digital asset management systems and programmatic buying platforms have only served to fuel advertiser concerns about their advertising investment.

The Association of National Advertisers (ANA) has twice this year issued statements regarding their membership’s concerns about the “transparency crisis” enveloping certain industry practices.  In May they announced that they were stepping up their “scrutiny of media practices” with the goal of shedding some light on the “dealings” between agencies and publishers.  Based upon a study which the organization had completed in February, 2014 forty-six percent of the ANA members’ surveyed expressed concern over the “transparency of media buys.” This was followed by a blog post in October in which the ANA acknowledged concern over a position paper issued by the trade group AICE dealing with agency in-house production practices entitled; “A Push for Greater Transparency, Ethics, and Fairness.

The good news is that advertisers need not wait for the various industry associations and their members to form task forces or appoint committees to assess the risk and propose potential solutions to the “transparency crisis.”  While these are important steps to be taken, they are time consuming, the potential outcomes are uncertain and the proposed solutions will not be tailored to a specific advertiser’s needs.  So what can an advertiser do today to thoroughly vet these issues and reassure their stakeholders that any attendant risks have been mitigated and to validate that they are receiving fair value for the advertising investment being made?

The answer is as close as a copy of the executed contract which is in place between the advertiser and the agency.  Specifically, the solution can be found in the “Right to Audit” clause, which is a staple in an overwhelming majority of client-agency agreements.  In short, this important clause affords advertisers the opportunity to examine the agency’s records of expenditures pertaining to the agency’s billing to the client for the purpose of validating media bills, production bills, studio costs and reconciling agency fees.

Audit clauses are inserted into contracts because they are an important financial control.  Yet, too often advertisers treat their right to audit as a fall back option, which all too frequently is never acted upon.  When this clause is not acted upon, the advertiser forgoes the opportunity to implement standard compliance testing, which in turn limits their opportunity to validate agency billings and gain a certain level of comfort that comes with transparency into the agency’s financial stewardship of their advertising budget.

Once audit rights have been established, industry “Best Practice” would suggest that implementing periodic and routine testing is a must for introducing and maintaining ongoing preventative control measures.  The resulting testing which occurs as part of the audit process can help to deter wasteful practices, identify errant billing transactions and to monitor key financial metrics. All told, a well defined contract compliance audit program can help an individual advertiser address the “transparency crisis” while providing the organization the necessary legal and financial safeguards.

Of note, the agency community has come to accept independent audits as a normal part of an advertiser’s broader corporate or marketing accountability initiative.  Any pushback on this front should be viewed as a “red flag.”  For those agencies which have implemented sound financial stewardship practices there is nothing to fear from an advertiser’s review of their performance in this important area.  Quite the contrary, a well conceived, balanced independent audit process can yield insights and recommendations which also benefit the agency.  Lailah Gifty, a Ghaniaian and founder of the Smart Youth Volunteers Foundation, rightfully said:

“Never believe all that you hear. Always verify the original source of information.”

Those advertisers conducting business without a comprehensive “Right to Audit” clause are simply at risk, forgoing the most important control mechanism available to them to protect their interests.  For those advertisers, which have secured audit rights, but have failed to act upon this right, you are unnecessarily exposing your organization to legal and financial risks.

The “transparency crisis” cited by the ANA is a legitimate issue, which the industry will successfully address in due course.  The question to be asked of advertisers is; “Are you prepared to wait for a broad-based industry solution? Or do you leverage the contractual rights which you have already secured to address these concerns now?”

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.

Agency Charging Practices Questioned

9 Sep

ad agency charging practicesEarlier this week Digiday, a media company serving digital media, marketing and advertising professionals ran an interesting article regarding agency compensation and the “tricks” played by agencies to boost their bottom lines. 

In short, the article asserts that; “For ad agencies, it’s harder than ever to get paid. Their services are becoming increasingly commoditized, and their margins are getting squeezed as a result.”  According to the author, Jack Marshall, this in turn is “driving some to get creative with the ways they bill clients, as they exploit loopholes and tricks in an attempt to maximize their rewards.”  Examples of the bad practices employed by some agencies in this particular area include:

  • Artificially inflating the salaries of their employees when developing compensation programs
  • Double-charging clients by including items such as medical expenses in both salary costs and overhead calculations
  • Slow rolling projects and or throwing more people at a project than is required to boost billable hours

Andrew Teman, one of the agency executives interviewed by Digiday for the article suggested that;

“The problem with big agencies is they don’t make money being efficient; they make money billing more hours.”

For practitioners within advertising industry, the aforementioned revelations are not newsworthy.  Attempts to game the system have been ever present and serve as a reminder of the decades long struggle clients and agencies have had in structuring mutually beneficial agency remuneration programs in a post “15% commission” world. 

Ironically, advertisers and agencies want the same thing… a fair and efficient compensation program which incents extraordinary performance, good behavior among the stakeholders and which leads to a solid client-agency relationship.  To that end, neither party’s needs are being effectively served by the games and subterfuge described in the Digiday article.  The solution to the issue, which seems elusive, is actually rather straightforward: 

  1. Development of detailed scope(s) of work (SOW) to serve as the basis for agency resource investment modeling.  This is an important first step, since it is the SOW which will drive agency staffing and the resulting schedule of charging practices.
  2. Completion of a comprehensive agency staffing plan, with personnel names, titles, functions, utilization percentages and billing rates.
  3. Implementation of an agency remuneration program which aligns the client’s goals with the agency’s resource investment.  Of note, there should be full transparency into the various cost elements used to calculate agency fees, overhead and profit levels.
  4. Reporting and control mechanisms to monitor agency time-of-staff investment, performance and outputs to protect the financial interests of both clients and agencies. 

Unfortunately, as straightforward as the solution may appear, few clients and or agencies have effectively implemented the four steps suggested above at a sufficient level of detail as part of their continuous relationship management processes. 

Some would suggest that the real challenge has been in effectively scoping the work required on behalf of an agency.  According to Michael Farmer, Principal of Farmer & Company which specializes in assisting advertisers and agencies in developing and implementing accurate, effective Scope of Work practices and tools, “New metrics are required to track and measure workloads, prices and resource productivity. That’s the only way agencies can evaluate and negotiate changes in the fees they are paid in today’s marketplace — and halt the erosion in agency operational health.” 

We would suggest that putting in place an effective monitoring program in this area is long overdue at most advertisers.  If not addressed, the institutionalization of the bad behavior referenced in the Digiday article sets a dangerous precedent for treating relationship ailments with trickery rather than frank dialog between clients and agencies.  

 

 

Performance Integrity

18 Jun

In the world of athletics, independent performance assessments are the rule.  In baseball, umps call balls and strikes, in tennis linesmen determine whether a ball is in or out, in football referees call out players for rule infractions.  Given the competitive nature of athletic competition at all levels and the economic impact performance integrity can have in collegiate and professional sports, it is unfathomable to think that the governing bodies overseeing these entities such as the MLB, USTA, NFL or NCAA would allow athletes to self police their contests. 

Is business any less competitive?  When companies consider the value of a point of market share, the impact of positive sales on earnings-per-share or the investment level being made in marketing as a percentage of their selling-and-general-administrative expense the answer would most certainly be “No.”  So why is it that when it comes to marketing performance integrity, self-assessment is the rule rather than the exception? 

In business, as in sports, there are winners and losers.  There are several characteristics that impact whether an organization can be categorized as a “winner.”  These characteristics include, but are not limited to, a company’s market position, year-over-year sale’s increases, customer loyalty/satisfaction and return on shareholder equity.  An organization’s marketing investment and the resulting performance of that investment largely determines an organization’s in-market success.  Given the potential impact marketing has on company performance, don’t you believe that stakeholders (i.e. Share Owners, Board of Directors, Senior Management) would want to insure the integrity of that “performance?” 

Perhaps it makes sense for business to take a lead from their sporting organization counterparts and commit to the independent performance assessment of their marketing partners as a mechanism for optimizing this important investment.  This is certainly not a foreign concept in business – just as public corporations are required to utilize independent auditors to vet the accuracy of their financial statements it would be reasonable, and make good sense, to apply this concept by engaging 3rd party agency contract compliance and performance auditing firms to assist in assessing the efficacy of one’s marketing spend.  The learning and any resulting financial reconciliation related to the audit process would yield dividends on multiple fronts well into the future.  In the words of one of America’s founding fathers, Thomas Paine: 

“Character is much easier kept than recovered.” 

The practice of engaging agency compliance auditors to provide a fair and balanced look into the performance of an organization’s marketing agency network is relatively commonplace in Europe.  This movement has also been gathering momentum within the world’s largest advertising marketplace… the United States of America.  Employing independent auditors is not done to impugn the character of the agencies whose compliance and performance is being evaluated.  Rather, it is performed to validate that the advertiser has, in fact, the appropriate legal, financial and governance controls, fraud detection and performance monitoring processes in place and that the reporting and subsequent level of transparency which it affords the company are satisfactory.  

Given that we started this article with a sports reference, it is only appropriate that we end with a pearl of wisdom from one of major league baseball’s most accomplished players, Hall of Famer Yogi Berra: 

 “You can observe a lot by just watching.” 

Interested in learning more about the benefits of agency contract compliance and performance audits?  Contact Don Parsons, Principal at dparsons@aarmusa.com to schedule a complimentary consultation today.

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 dparsons@aarmusa.com.

Agency Trading Desks and the Issue of Transparency

9 May

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

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

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

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

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

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

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

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