Marketing Math Blog

Jul 13
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Ad Agency Financial Challenges Require a Balanced Approach

By Advertising Agencies No Comments

ad agencyA recent article from The Drum, a UK based trade publication, raises interesting questions being faced by agencies as they look to the future.

Importantly, balancing the need to attract, develop and retain talent with the pursuit of their organization’s financial goals. It is the author’s belief that the pressure to reduce costs is being felt primarily at the networked agencies.

If accurate, the holding companies may need to get serious about consolidating their agency brands, reducing duplicative resources, trimming overhead and investing in front line employees that are responsible for servicing clients and doing the work … Read More 

Jul 04
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The Opacity of Programmatic Media Poses Risks to Advertisers

By Digital Media, Digital Trading Desk, Programmatic Buying, Working Media No Comments

RiskThe steady drum beat of warnings regarding the risks of programmatic media to advertisers has been omnipresent for the better part of the last decade.

Recent studies conducted by the ANA, ACA, WFA, ISBA and PwC have reinforced the cost being borne by marketers as it relates to the complex, multi-layered and often murky programmatic marketplace. Below is an excellent article by Keri Bruce of Reed Smith LLP on the opacity of programmatic media, the cost to advertisers and suggestions on how to remedy the issues that exist.

From an advertiser’s perspective, the time for action is now as programmatic continues to command an increasing percentage of media spend. As the studies have found and the author rightly points out “Billions of dollars are being wasted and brands are funding an opaque ecosystem and need to help fix it.” … Read Article

Jun 29
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3 Reasons Companies Should Audit Their Advertising Spend

By Advertisers, Advertising Agency Audits No Comments

audit

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.

May 28
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Marketing Procurement Delivers Value

By Marketing Procurement No Comments

ValueA decade ago, agencies and marketers winced at the idea of procurements involvement in their space. The relationships between stakeholders were often contentious. Stakeholders on both sides felt that procurement was singularly focused on cost reduction, did not understand the marketing space and was unable to comprehend, if not measure the quality of outputs delivered by high performing marketing/agency teams.

Have these sentiments changed? Yes, for the better. Have advertisers and their agency partners fully embraced marketing procurement? Yes, in many organizations. That said C-Suite executives at most marketing organizations are comfortable with and comforted by procurement and its role in providing oversight for and optimizing marketing spend.

The good news is that marketing procurement teams have done an excellent job evolving their subject matter expertise and furthering their understanding of the needs of marketing teams and their agency partners. Coupled with procurement’s expertise in all facets of supplier management including sourcing, onboarding, contracting, negotiation and risk management, procurement teams deliver significant value to their marketing peers.

Out of necessity, marketers are increasingly focused on brand building and demand generation. For those fortunate enough to have access to a developed marketing procurement team, the opportunity to drive efficiencies while strengthening relationships across their agency network is significant.

According to the Association of National Advertisers (ANA) better than 80% of marketers utilize procurement to review agency compensation. However, that is just scratching the surface of successfully deploying marketing procurement.

In our agency contract compliance practice, we have seen the benefits to marketers of collaborating with procurement. These include support in the following areas:

  • Supplier sourcing, RFP management and on-boarding
  • Supplier diversity management support
  • Agency performance monitoring and financial management support
  • Contracting and annual statement of work support
  • Deduping of agency roles and overlap across agency network members
  • Agency service consolidation including digital asset management and studio
  • Decoupling of production
  • Fostering enhanced collaboration between network agencies and in-house resources

From our perspective, the success realized by marketers and their peers in procurement is greatly enhanced when the procurement team has direct interaction with agency finance personnel. This must go beyond contract, SOW, and fee negotiations to include ongoing interactions regarding monthly fee and budget tracking reporting and the preparation for quarterly business reviews (QBRs).

In the end, all stakeholders desire the same outcome, attainment of the organization’s marketing goals with the greatest efficiency. Achieving this aim is best done through open, transparent supplier relationships, which the successful marketing procurement teams recognize. As American businessman Harvey Mackay once said, “A smart manager will establish a culture of gratitude. Expand the appreciative attitude to suppliers, vendors, delivery people, and of course, customers.”

May 02
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Advertisers: Did You Get What You Paid For?

By Advertising Agency Audits, Billing Reconciliation, Contract Compliance Auditing No Comments

QuestionPlans are approved, purchase orders are issued by the advertiser to their agencies who then invoice the advertiser on an estimated basis for the approved activity. Reconciling invoices are then submitted by the agency once jobs and campaigns are closed out are submitted. However, these invoices come sans any third-party vendor invoice detail.

So, how is it an advertiser can state with confidence that it received what it paid for?

The simple fact is that unless an advertiser conducts financial audits of its agency partners or it pays on a final billing basis (which is rare), they don’t know if value commensurate to its payments was received.

Think about that. Advertising spend is a material expense and there is little, or no billing support documentation provided by agencies to their clients to substantiate that expense. Given this approach it is fair to ask; “How comfortable should agency CFOs be that their organizations got what they paid for?” Typically, the only window into an advertiser’s approved expenses is agency invoice totals relative to approved purchase orders… not reconciled final billing support from agency affiliates and third-party vendors to the agency.

Along the way, marketing may receive agency reporting in the form of time-of-staff tracking and fee burn reports or job status summaries, but these are best used to generally track spend levels, not to verify purchases. The only way to vouch for the accuracy of an agency’s billing to a client is to conduct a financial management audit.

Unfortunately, the time lag between an agency’s initial billing to a client and final reconciled billing, where estimates are trued up to reflect actual costs can be several months – or sometimes not at all. That is a long time for an advertiser not to have a direct line of sight into the disposition of their funds.

This is the reason that Client/ Agency agreements contain guidelines governing agency financial reporting, time tracking, job and campaign reconciliation and acceptable billing practices (e.g., cost to be billed on a pass-through basis, net of any mark-up). As importantly, it is also why all such agreements contain record retention and audit rights clauses that provide advertisers with the ability to conduct contract compliance and financial management audits.

Based on experience, client-side CFOs should not place a blind level of trust in agency partner billings and financial reporting. Verifying actual costs and time-keeping relative to estimate, and independently vouching agency support is a sound practice – yielding solid learning that forms the basis of process improvements, enhance reporting, and improved controls. This in addition to financial true ups in the form of historical recoveries that more than cover the cost of the audits themselves.

As the saying goes: “In God we trust, all others we audit.”

Apr 05
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Are You Paying Competitive Rates for Agency Studio Services?

By Production, Production Services, Studio Services No Comments

Low RatesFlexibility, responsiveness, and competitive rates were once the hallmarks of ad agency studio services.

Over the last several years many agencies have expanded their resource offering as the demand for content development, repurposing and sizing has increased in the multi-billion-dollar production sector. Today, agency capabilities include traditional studio services, broadcast production, video, and digital editing. No one can argue the convenience of being able to tap an agency partner to assist in this important area.

The question for advertisers is “How do the rates being charged by agencies truly compare to the market?”

In our experience conducting agency contract compliance audits, advertisers that do not employ the services of a production consultant likely cannot answer this important question. The reason for this assertion is twofold. First, most agencies do not competitively bid these services on a regular basis. Secondly, the agency is typically the one overseeing the bidding process, which could potentially skew the objectivity of the process. Further, most advertisers have not taken the step of centralizing production services with one agency partner. Accessing studio services through multiple agency partners makes it difficult to truly optimize efficiencies and limits their ability to monitor agency adherence to bid protocols… assuming such guidelines have been developed and communicated.

The best place to start is for advertisers to review their client-agency agreements to make sure that certain safeguards have been incorporated. Below are some examples:

  • Requirement for the agency to competitively bid production services at pre-determined intervals (i.e., quarterly, annually, job by job).
  • Language requiring prior, written client approval for waiving any competitive bidding requirement.
  • Incorporating studio “rate sheets” containing hourly bill rates by position and or piece rates for certain outputs (e.g., color proofs) into the agreement and or annual statements of work.
  • Listing of each agency department and or related entities providing studio services.
  • Language requiring agency to secure written client pre-approval for cost over runs.
  • Requirement for the agency to separate studio fees and hard costs on both estimates and invoices.
  • Staffing plans, with estimated hours by position/ person should be required for all projects over a pre-determined spend level (e.g., $25,000).
  • Establish bid protocols and append them to the agreement and annual statements of work.
  • To avoid any doubt, require the studio to maintain support for billings accessible for review (timekeeping and actual output records) to substantiate costs/ activity.

As with any agency service, advertisers would benefit from conducting periodic compliance and financial reviews to ensure that bid guidelines and resource commitments are being followed and applied. These precautions will allow advertisers full transparency into the costs of their agency partners studio offerings.

Apr 01
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Help Wanted – Media Professionals

By Media, Talent No Comments

Media Agency RevenueHiring, training and retaining media talent is and has been a significant challenge for the advertising industry. While initiatives such as funding a scholarship program at one university and the training of 60 refugees as profiled in the following article are a nice gesture, this is not enough to address the issue. From an advertiser perspective, stewardship of their $710 billion in global media spend requires a more immediate and broad reaching set of solutions. Action is clearly required … Read More

Mar 23
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Evolving Role of AdTech in Programmatic Inventory Curation

By AdTech, Billing Practices, Digital Media, Programmatic Buying No Comments

Supply Chain OptimizationThe following article from Digiday focuses on AdTech companies and their role in the curation of premium inventory for advertisers with the advent of fewer third-party cookies. This dynamic is particularly true on the open web, outside of private marketplaces and the safety of programmatic guaranteed deals. 

The author posits that “Knowing where to find the best inventory for specific business goals is becoming table stakes for some of the largest stakeholders in AdTech.”  This has led to a flurry of alliances between agency holding companies, trading desks, DSPs and SSPs to provide better, more affordable advertiser access to quality, targeted impressions. These efforts and a rethinking of current business models could lead to contraction and disintermediation in the AdTech market sector. 

As a result, AdTech players are looking for ways to establish compelling value proposition that translate into defensible competitive positions. Tom Triscari, an Economist at consulting firm Lemonade Projects states; “Today, media agencies own accounts payable to publishers, but what if DSPs like Trade Desk encroach on this coveted accounting territory?” We believe the more appropriate questions is “What if advertisers were to pay publishers and media sellers on a direct basis?”

If advertisers were to rethink the estimated billing model and seek to reduce the number of intermediaries between them and the media sellers the impact on the supply chain would be profound. We believe that such a strategy that would improve transparency, generate multiple financial benefits and improve controls, while mitigating risks for advertisers … Read More

Mar 22
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Misdirected Programmatic Ads: Activity Went Undetected

By Advertisers, Brand Safety, Marketing Accountability, Programmatic Buying No Comments

fraudsterAdvertisers are paying agency fees and commissions, transaction fees, technology and data fees to several intermediaries to optimize their media spend and protect the integrity of their brands… So who’s looking out for the advertiser? Check out this article from Campaign US to learn more about the risks to programmatic advertisers ... Read More

Feb 26
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Building a Foundation of Trust in Client/ Agency Relationships

By Advertisers, Advertising Agencies, Client Agency Relationship Management, Contract Compliance Auditing, Featured, Letter of Agreement Best Practices No Comments

TrustPerhaps I was fortunate. Perhaps it was a sign of the times. When I began my career at J. Walter Thompson, we took great pride as an organization in the number of client relationships that we had, which were measured in decades. Clients such as Ford Motor Company, Unilever, Kellogg’s, Kimberly-Clark, Kraft Foods, and others were celebrated, revered, and nurtured.

Not unlike today, there were challenges to be faced and pressures to be dealt with, whether market-driven or internal.  So, what allowed those relationships to flourish through good times and bad?

The answer was simple. Trust and a mutual commitment to the partnership combined with alignment on business objectives.

Today it is believed that the average length of client-agency relationships is around 3½ years. Is this reduction in longevity correlated with the fact that there has been a slow, but steady erosion in the level of trust between advertisers and their agencies? Consider that a couple of years back, the Association of National Advertisers (ANA) conducted a survey and found that only 29% of its member marketers ranked the “current level of trust between client-side marketers and ad agencies as high.”

A waning level of trust can inhibit communication between stakeholders leading to difficulties that throttle the productivity of the partnership. Conversely, as Stephen Covey once said:

“When the trust account is high, communication is easy, instant, and effective.”

Thus, if you believe that stable, long-term strategic partnerships are more conducive to achieving an organization’s business and marketing objectives, then the obvious question is “How can we establish client-agency relationships that endure the test of time?” The answer seems obvious… addressing the issue of trust.

In our experience, there are three fundamental steps that can be taken to build and maintain trust between advertisers and their agency partners.

  1. Contractual agreement predicated on a “Principal-Agent” model – Simply put, in this type of relationship the agency is charged with acting on the client’s behalf and in their best interest. This legally binds the agency to always put the client’s interests first and eliminates their ability to benefit from the relationship at the client’s expense. One of the beneficial outcomes of this type of model is that the client can take solace in knowing that the advice and recommendations of the “Agent” is more likely to be unbiased. In the event that an agency recommends the consideration of principal-based or inventory media buys or the use of or procurement of services/products from a related party of the agency, then the agreement language should require full-disclosure and prior written client approval.
  2. Periodic agency contract compliance and financial management reviews – Having a sound contract in place is a positive step in the right direction. However, if an agency’s compliance with contract terms and conditions is uncertain then achieving the desired level of trust may be elusive. Given industry concerns regarding transparency, all stakeholders will benefit from an independent evaluation of compliance and performance. Further, knowing that there will be an additional layer of oversight inspires stakeholders on both sides of the partnership to uphold the client organization’s desired levels of governance and transparency established within the agreement. This is not a sign of mistrust, but a signal of an advertiser’s commitment to the principle of “assurance.” As the saying goes: “In God we trust, all others we audit.”
  3. Establishing a fair and compelling agency remuneration program – Properly compensating agency partners is fundamental to securing the requisite level of support and bolstering an agency’s commitment to its fiduciary role. Additionally, a well-paid agency is less likely to engage in practices such as the pursuit of vendor kickbacks, the application of non-transparent mark-ups, profiting from the use of client funds, or the unauthorized use of sub-contractors and related parties. Contractual language capping agency revenue to that which is authorized within the agreement and subsequent statements of work will also protect the advertiser from these tactics and help curtail agency temptation to inappropriately supplement its income at the expense of its fiduciary obligations to its clients.

We have seen firsthand the benefits of this proven formula in promoting transparency and bolstering an organization’s trust in its agency partners. Thus, marketers and their agency counterparts should consider embracing this approach to strengthen and reinforce long-term agency-client relationships by ensuring a solid footing.