Join our list of informed global advertisers seeking to improve the financial stewardship of their marketing investment. Click Here to Subscribe

Marketing MathTM

Category Archives: Advertising Agencies

In the Wake of PepsiCo’s Marketing Procurement Decision

16 Nov

OversightOn November 12, Ad Age reported that PepsiCo had made the decision to eliminate its Marketing Procurement department. As a result of the decision, the company will shift responsibility for marketing procurement activities to their brand executives.

PepsiCo’s move is consistent with its philosophy of shifting responsibilities to their brand teams with the goal of allowing those decision makers to “more quickly balance cost value and quality in all of their decisions.” While the company acknowledged the potential risks associated with the move as it relates to financial due diligence and contract compliance, it believes that it will be able to leverage its procurement experience, practices and processes to support the brand teams in this endeavor.

As industry participants know all to well, the role of procurement in marketing has been a contentious one over the last decade or so. Thus, it is likely that this decision will spark much dialog among marketers, procurement professionals and their agency partners. Some advertisers will evaluate the merits of a similar approach for their business and many in the agency community will weigh the impact of this decision on the broader topic of procurement’s role in marketing going forward.

We believe that regardless of one’s perspective, periodic introspection on seminal topics such as marketing procurement is helpful and continued dialog between advertisers and agencies on the practice is healthy. That said, we do not view PepsiCo’s decision as the beginning of a trend away from enterprise accountability and its application to the marketing function.

In our agency contract compliance practice, we work with advertisers that have highly developed, actively involved marketing procurement teams and we also work with advertisers that have not yet involved procurement on the marketing portion of their business. Regardless, each organization is mindful of the accountability and oversight obligation they have when it comes to their marketing investment. After all, advertising and marketing spend is one of the largest line items on a company’s P&L, and is critical to brand building over the long-term and demand generation in the near-term.

Financial accountability related to marketing can be viewed as falling into the following categories:

  1. Formalizing and centralizing key aspects of the agency relationship lifecycle: agency selection, on-boarding, performance monitoring, optimization, and transition when necessary.
  2. Leveraging the agency investment, by brand and across the organization as a whole. Decisions in this area can include both agency remuneration system development and overall composition of the agency network. Do we draft and engage disparate agency brands? Select agencies from a particular holding company? Or do we build a dedicated shop at the holding company level (i.e. WPP’s Team Detroit serving Ford Motor Company or Garage Team Mazda).
  3. Financial stewardship oversight and implementation of controls to safeguard the organization’s marketing spend at each stage of the investment cycle.

In our experience, the best tactic for aiding management of an agency network is the use of a standardized but customizable “Master Services Agreement” template. Formalizing the legal and financial terms and conditions necessary to protect an advertiser’s monetary investment and intellectual property rights is a critical first step on the path toward accountability. This is closely followed by the need to identify representatives from select functional areas of the organization that have would have involvement in the contracting, compensation system development and performance review portions of the agency relationship management program.

Organization’s that have implemented Strategic Relationship Management (SRM) initiatives will undoubtedly have an edge when it comes to leveraging their agency fee investment across brands, divisions and geographies. These companies will likely already have pre-determined agency selection protocols and established compensation guidelines or at a minimum maintain a database of information that can be accessed by client-side executives responsible for agency relationship management to help shape their decision making in this area.

Finally, whether an advertiser has a formalized marketing procurement department or not, independent agency contract compliance and performance monitoring support will typically satisfy an organization’s oversight and transparency requirements.

Many will suggest that PepsiCo’s decision will lead the industry down the path of rethinking the role of or need for marketing procurement. To the contrary, we believe that procurement’s role in marketing has been and will continue to be a highly individualized decision for advertisers. While important, we believe that procurement is but one piece in the overall puzzle for advertisers seeking to optimize their return on marketing investment.

Programmatic: Promising, but is the Benefit to Advertisers Real?

19 Oct

cautionIn 1997 rock legend David Bowie told his fans at a Madison Square Garden concert; “I don’t know where I’m going from here, but I promise it won’t be boring.” While his comments were a reflection on life after his 50th birthday, they could just as easily be used to describe the future of programmatic media buying.

Put yourself in an advertiser’s position and consider your reaction when your media agency approaches you with this enticing proposition;

Through our proprietary programmatic buying platform we have the ability to deliver quality, targeted inventory to precise segments of your target audience at a time and in an environment when they’re most receptive to your message and at rates that are a fraction of market pricing.” 

For many advertisers, the response to this enticing offer has been “sign us up.”

The programmatic revolution began with digital media, evolved to print and OOH and is now being implemented in the television marketplace. Many industry pundits consider programmatic to be one of the advertising industry’s most prominent developments. This algorithmic based method of connecting media sellers and buyers to conduct inventory transactions in an automated, real-time manner clearly holds much promise.

Benefits to advertisers are said to include; rate efficiencies, advanced targeting, message personalization and enhanced access to premium content. For media sellers the benefits allegedly include the ability to move less desirable remnant inventory and optimize CPMs across their inventory portfolio. Ad tech firms, such as demand side platforms, sell side platforms and ad exchanges, which here-to-for never existed earn transactional fees on programmatic activity and or licensing fees from organizations that utilize their technology tools. Agencies are able to leverage their clients’ “Big Data,” do more with fewer people and when programmatic buys are executed through their trading desk operations, there is incremental revenue to be gained from media arbitrage (buying low, selling high).

Assuming that each stakeholder realized the aforementioned benefits ascribed to this approach, programmatic buying, irrespective of the issues experienced to date in the digital media market, certainly holds the potential to be a win, win scenario for all of the players.

Unfortunately, the underlying technology behind programmatic buying is not fully understood by many in the industry. To be fair, programmatic digital media buying is a highly nuanced and complex process. It greatly impacts digital display ad spending in general and mobile in particular. It can involve real-time-bidding (RTB) or programmatic direct, where advertisers can still secure inventory guarantees, it can be applied in an open exchange or private marketplace and can include traditional banners or non-standard rich media and video.

Given that programmatic buying is still in its infancy, one might logically assert that a greater level of refinement is required to support programmatic buying’s current share of digital media spending, prior to even considering expansion of programmatic buying to other media. Supporting this perspective are some of the challenges which the industry is grappling with to improve the programmatic experience for digital media:

  • Reducing the level of non-human traffic and fraud
  • Minimizing the % of ad spend accruing to “facilitators” or middle-men
  • Serving up environmentally relevant programmatic creative across devices
  • Improving advertiser transparency

We agree that programmatic media buying holds much potential. However, the industry’s experience to date suggests that advertisers have born the bulk of the risk involved with this emerging technology and its application in the digital market.

So when the talk turns to the expansion of programmatic to other media segments one has to wonder if advertisers are ready to embark upon another investment spend scenario in media segments with much steeper learning curves and higher degrees of risk.

Relative to the digital market sector, television, OOH and print are much more complex when it comes to the variety of non-digital assets, lack of uniform inventory management processes and disparate mainframe environments. Throw in the fact that there are multiple ad tech providers already offering a variety of non-standard platforms/ technologies in an attempt to solve for these considerations and the near-term prospects appear quite challenging.

In a recent article in MediaPost, Joe Mandese shared insights on some of the pioneering work being conducted in programmatic/ addressable TV by Mitch Oscar, Programmatic TV Strategist for US International Media (USIM) and his peers. During the interview, Mr. Oscar shared results from one client’s programmatic TV ad buys, which suggested they had generated “improved results and efficiencies” relative to conventional TV buys.

Compelling to be sure, however, one must pause to consider the observation that the data shared by Mr. Oscar indicated that the “mix of networks and dayparts were all over the place and it was difficult to find meaningful patterns from it.” Further, when USIM asked the programmatic TV suppliers to document what actually ran, “it generated a report with 163,866 lines of code covering 3,563 pages, something most traditional TV buyers and advertisers might not consider practical to evaluate.”

Hopefully advertisers, agencies and media property owners take a more measured approach to expanding programmatic buying to other media segments to avoid some of the pitfalls currently being experienced in digital media. Perhaps we can all benefit from the words of St. Jerome, the Catholic priest, historian and theologian, who once intoned:

“The scars of others should teach us caution.”

 

 

Compensation: One Key to Improved Digital Media Transparency

10 Sep

loyaltyLong troubled by the concept of ad agencies as media re-sellers, it has been my belief that the agency trading desk model and the resulting media arbitrage mode of compensation employed by most trading desk operations is one of the key drivers of advertiser transparency concerns with regard to digital media.

To be completely candid, our bias is that any activity in which ad agencies are engaged, that challenges the notion of a principal-agent relationship between advertiser and agency, is detrimental to establishing meaningful trust and mutual respect. Non-transparent agency revenue sources such as media arbitrage, AVBs and the awarding of jobs to related parties, without the appropriate level of due diligence or client awareness create a serious schism when it comes to marketing accountability. As importantly, they often form the basis for “me first” behavior on the part of agencies, which is not in the best interest of those clients that have entrusted them to act as their fiduciary partners with the goal of optimizing the advertisers return-on-marketing-investment (ROMI).

When it comes to digital media, there are too many competing forces focused on selfish financial interests, rather than those of the advertiser. Publishers, ad networks, exchanges, demand side platforms and agencies all seeking to optimize their share of an advertiser’s digital media investment.

Consider WPP’s recent second-quarter 2015 earning release in which the organization announced a first-half revenue gain of 6.8% and a profit increase of 51.7%. What was most telling was the following statement, within the release indicating that “net sales growth, which excludes inventory, purchased and resold to clients directly, was 5.2%.” So while media reselling makes up a relatively small portion of the agency holding company’s revenue base, it obviously contributes significantly to agency profitability. To WPP’s credit, it is the only agency holding company which breaks out organic net sales growth. 

During the spring of 2014, the Association of National Advertisers (ANA) raised concerns on behalf of its members with regard to the lack of media transparency and cited issues related to “programmatic digital buying and agency trading desks” in particular. Supporting the ANA’s perspective was information from the World Federation of Advertisers (WFA) and DataXu, which suggested that “only 55¢ of every media dollar in programmatic digital buying ends up with publishers,” with the rest going to “agencies, trading desks, demand-side platforms and ad networks.”  

Unfortunately, the odds are stacked against advertisers in this equation. Further, absent a principal-agent relationship to govern the interactions between advertisers and advertising agencies, one can legitimately ask; “Who is looking out for the advertiser’s interests?” 

Perhaps the simplest way of shifting the balance of power is to better align the roles and responsibilities of advertisers and agencies. This process should begin with a review of the media scope of services and the resulting agency remuneration system. Secondly, as part of this process, we believe that advertisers should seek to eliminate media arbitrage as a source of agency trading desk revenues. Why? To return to a fiduciary standard, where a principal-agent relationship is the hard and fast rule. 

To be fair, clients will need to consider a compensation schema, which offsets, at least in part, the revenue currently being generated by their agency partners under the current system. Such an approach could very well incorporate incentives tied to performance based criteria including but not limited to; inventory quality, CPM rate optimization, timeliness of digital buys and programmatic creative development and frequency cap/ curve management to reward extraordinary agency performance. 

Revising compensation is perhaps the quickest and most effective means available to revitalize advertiser confidence in their digital agency partners and in removing any agency qualms with regard to fully disclosing comprehensive digital media buy details to advertisers. Executed in combination with contract language dealing with the disclosure and disposition of other potential non-transparent revenue sources, such as rebates, AVBs and volume discounts and advertisers will have eliminated a couple of key items that have caused some within the client organization to question the loyalty of their agency partners. 

“Where the battle rages, there the loyalty of the soldier is proved.” ~ Martin Luther

Ready to Embrace Full-Service Agencies Once Again?

24 Aug

full service advertising“Back in the day” is a catch phrase that many of us who came up in the ad business during the full-service agency, 15% commission era are accustomed to using when discussing the state of affairs within the industry today.

Things were simpler then for both marketers and ad agencies. Agencies were valued strategic partners, with C-Suite access that were tasked with developing brand positioning architectures, target segmentation schema and the creation and stewarding of brand communications across customer touchpoints. Marketers managed one full-service agency to handle all of the “above the line” branding and activation activities and maybe one or two “below the line” shops to handle tasks such as sales promotion and yellow pages advertising.

Fast forward to the here and now and the concept of “generalist” agencies, as full-service shops are often derogatorily referred to, has given way to specialization. As a result, marketers have seen the depth of their agency rosters swell in number to represent several to several dozen shops, each responsible for some, but not every aspect of a brand’s interaction with some, but not all segments of that brand’s target audience.

In the current “specialization” model, the challenges for marketers, particularly for those with limited staff resources, that don’t employ a full-service agency-of-record, are many. There are critical tasks and hand-offs which need to be addressed within the client organization and across their agency network, such as:

  • Who is responsible for marketing communications strategy development?
  • Who is on point for the integration and coordination of the communications program across touchpoints? Across media? Across target segments? Across geographies?
  • Who owns the agency relationships?  

Factor in the challenges caused by evolving dynamics including organizational silos (i.e. digital versus traditional media), cross-channel marketing and attribution, big data and ad technology and the level of complexity, which marketers face grows to an almost dizzying height.

As to “who” is responsible, the obvious answer is that ownership of these tasks clearly resides with the client-side marketing team. This might help to explain why marketers are feeling stressed out, with many actually expressing a lack of confidence in their team’s ability.

Two short years ago Adobe conducted a survey of 1,000 U.S. marketers and found that only 40% of those surveyed felt that their company’s marketing efforts were effective. This same survey indicated that 68% of marketers were feeling “more pressure to show a return on investment on marketing spend” (ROMI). Earlier this year, Workfront surveyed 500 marketers and found that 25% felt “highly stressed” and 80% stated that they felt “overloaded and understaffed.”

It should go without saying that this is not a healthy dynamic for marketers and doesn’t seem to bode well for organizations seeking to optimize their ROMI.

One might realistically ask the question, “Are such organizational and or workload challenges impacting brand/ customer relationships? Some industry experts, such as Liz Miller, SVP of Marketing at the CMO Council have suggested that consumers in fact have a disjointed perspective of certain brands, resulting in part from inconsistent experiences across touchpoints. In a recent interview with Marketing Daily, Ms. Miller suggested that the key issue facing marketers was delivering a “holistic, connected customer experience.”

Thus it would seem that in this era of specialization, deep agency rosters, headcount pressures on both client and agency organizations, rapidly evolving ad technologies and an empowered consumer, with a wide array of choices a return to “simpler” times would be welcome.

In our experience, advertisers that are successfully navigating this complex, rapidly changing market have done three things that are contributing to their success:

  1. Reduced the size of their agency rosters.
  2. Deputized an Agency-of-Record partner to share in the responsibility for developing joint strategies and orchestrating marketing activities to deliver a holistic brand experience.
  3. Placed a high premium on effective, collaborative communications with their agency partners and internal stakeholders to gain buy-in to the organization’s marketing communications efforts and to provide regular performance updates. 

While a return to the “good ole days” may be nothing more than a fanciful wish, the concept of simplification remains a viable means of steadying the ship and allocating both advertiser and agency resources in a more efficient manner. 

As American computer scientist Alan Perlis, once said;

“Fools ignore complexity. Pragmatists suffer it. Some can avoid it. Geniuses remove it.”

 

Building a Relationship and Managing to Scope Are Not Mutually Exclusive

04 Aug

project scopeAdvertisers are comfortable paying their agency partners for services performed and the work product which they deliver. Conversely, agencies are comfortable billing for the services provided and work which they complete. More often than not, advertisers and agencies have contractual agreements, which specify how the agency is to be remunerated for such work.

So what is the root cause contributing to continued industry concerns over agency compensation and profitability?

Consider that, most agency compensation systems establish guaranteed profit ranges of between 10% and 20% with the opportunity for additional incentives tied to performance. Further, most client-agency relationships begin with fairly well defined “Scopes of Service” and “Agency Staffing Plans” which serve as the basis of the agency remuneration program. The obvious answer has to be that regardless of both parties good intentions, actual practice must not mirror the agreed upon contractual terms.

From our perspective, the answer comes down to one key aspect of any professional service provider’s business model… the ability to align staff investment with the scope of services required by their clients. As a contract compliance auditor and marketing accountability consultant we have had the good fortune to analyze a broad range of client-agency relationships, across industries and around the globe. In virtually every scenario where an agency asserts that they are not being adequately compensated on a given client, these two items are misaligned. The only acceptable instances we’ve come across are in the context of an agency knowingly investment spending to assimilate a new client and or on a particular aspect of a client relationship.

The primary issue for ad agencies is that their time-keeping practices are less than optimal and their systematic ability to accurately track time at a project or task level is often times poorly setup or woefully lacking in capabilities. This is frequently compounded by inadequate controls and reporting, making it extremely challenging for agency management to have the proper information necessary to course correct on a real-time basis. Finally, even if the agency does have the proper tools and is aware of any shortfalls, agencies often aren’t comfortable engaging their clients in meaningful discussions surrounding project burn rates, inefficient processes, demands exceeding the original agreed to scope, or variances in planned staff mix and utilization levels. Consequently, these issues are often left unresolved until the year-end relationship evaluation meeting, leaving the only option for the agency but to approach their client with a plea for additional remuneration to offset its over investment of time. Not surprising, the timing of these discussions are such that it is often too late for the client to even consider such a request. In the words of Roman statesman and philosopher, Seneca:

“When a man does not know what harbor he is making for, no wind is the right wind.”

Fortunately, this scenario is easily remedied through improved controls and good communications.

For starters, agencies must educate their employees and contractors on the purpose and importance of accurately tracking their time by client, project and or task, in fifteen minute increments and the need to submit their time sheets on at least a weekly basis. Ideally, these guidelines along with any other agency or client specific requirements, should be published and reviewed periodically with the agency staff.

Secondly, time-of-staff reports should be issued to clients on a monthly basis and should incorporate staff investment detail by person, by department and should be compared back against the total hours and utilization rates identified in the staffing plan along with an explanation of any noteworthy variances. This should be supplemented with a quarterly meeting between agency and client executives to review progress against the contractual Scope of Services and to discuss the agency time-of-staff investment to-date and, if necessary, any actions required to realign the two going into the next quarter.

While the agency will usually be the direct beneficiary of this approach, clients will genuinely appreciate and respect the timeliness and thoroughness of this “no surprises” process. Simple? Yes. Straight forward? No doubt. Who’s responsible for taking the first step… the agency. This methodology is part and parcel of every professional services provider’s responsibility to their clients and shareowners. Importantly, it allows agencies to effectively build rapport and manage their client relationships on a profitable basis.

 

 

 

 

What if Advertisers Suspended All Digital Media Spend?

23 Jul

committeeSound preposterous? Perhaps not when you consider how much of an advertiser’s investment is siphoned off by digital fraudsters and criminals. One has to wonder if the efficacy of a reallocated media mix would really hamper in-market performance.

Let’s face it, in spite of the incessant level of press coverage, advertiser, agency and publisher posturing and the formation of numerous industry task forces, digital ad fraud has continued unabated.

In March of 2014 the IAB estimated that approximately 36% of all web traffic was fake, the result of bots. In December of 2014 a joint study by the ANA and White Ops, an ad security firm, estimated that digital fraud accounted for $6.3 billion out of a total estimated spend of $48 billion.

Various other studies have suggested that up to 50% of publisher traffic is bot related and that somewhere between 3% and 31% of programmatically bought ad impressions were from bots. During December of 2014 there was a research study done on FT.com which revealed that “in a single month, 72% of the ad impressions offered on open ad exchanges as being on FT.com were fraudulent.” The impressions were from sites pretending to be the FT and the ads appeared only on sites viewed by bots.

Ironically, in spite of the financial impact of these crimes, advertisers continue to spend an increasing percentage of their marketing budgets on digital media. According to Strategy Analytics, digital media will reach $52.8 billion in U.S. ad spending in 2015, accounting for 28% of every dollar spent, second only to TV. Further, while every other medium is either losing revenue or seeing low single digit growth, digital is anticipated to grow at 10% to 13% per annum over the next three years.

There are a number of industry stakeholders benefiting from the meteoric growth in digital spending, publishers, ad tech providers and agencies to name a few. For example, the major ad agency holding companies have seen revenues from digital media grow to represent up to 50% of their annual revenue base.

Thus it was with a slightly cynical eye that I viewed the recent press release from the Trustworthy Accountability Group (TAG) regarding their latest initiative to combat digital ad fraud. The focus of the release was straightforward enough, dealing with working to minimize “illegitimate and non-human ad traffic originating from data centers.” However, in the end it was about Google lending the group its blacklist of suspicious data center IP addresses for use in a pilot program.

As most industry participants know, TAG is the joint effort of the ANA, 4A’s and IAB launched in 2014 to work collaboratively with companies in the digital advertising space to combat ad fraud. While supportive of industry stakeholders teaming up to address key issues, one wonders how likely it is that TAG will be able to mitigate advertiser financial risks in the near-term.

Curiously, on July 23rd the 4A’s announced the formation of a committee that will focus on addressing “issues related to the digital supply chain.” Their press release pointed out that the newly formed committee will work closely with “other 4A’s committees and task forces, such as the Media Measurement, Data Management and Mobile committees, on policies and best practices.”

Have any of the existing task forces’ yet demonstrated tangible evidence of progress being made to combat digital fraud? It is difficult to imagine how the formation of yet another committee is going to make a difference. Do the organizations forming these ad hoc groups feel that the industry is so superficial and shallow that the news of a new committee will help advertisers feel better about the lack of measurable progress being made on this front? 

If the industry doesn’t make concrete progress in the near-term, there is a strong likelihood that we will be welcoming a new “alliance partner” to the team… regulators. We know that historically business in general and the ad industry in particular have never been fans of government involvement. However, if the industry’s self-regulatory approach doesn’t begin to yield results, Washington will assert itself and they should, advertisers are literally being robbed. This is white collar crime at the highest level when you consider that in the U.S. alone, $6.3 billion is being siphoned off by bad actors on an annual basis, 13% of total spending in this specific area.

While the industry struggles to bring order to the chaos surrounding digital media advertisers might rightly ask the question; “Does it really make sense to continue to allocate hard earned dollars to a medium with the audience delivery and viewability issues that currently plague digital?”

What if advertisers were to place a moratorium on digital ad spending until more concrete actions are taken by the industry to protect their investment?

An extreme position? Yes. Unlikely? No doubt. However, this is the type of dramatic action required to force reform and provide advertisers with the transparency and controls required to yield satisfactory returns on their digital media investment. If nothing changes, every incremental dollar invested in digital media will continue to line the pockets of the tech-driven criminals which are preying on advertisers. In turn, this rapidly growing revenue stream allows fraudsters to expand their capabilities at an even quicker rate than those trying to police them creating a “no win” situation for the industry.

From this writer’s perspective, while industry task forces and committees can play a role in furthering the dialog, they will not suffice. Traditional outcomes from these groups include recommended best practices, guidelines, advisory white papers and the formation of new committees to continue the fight… hardly enough to strike fear in the hearts of digital criminals.
In the words of noted businessman Ross Perot:

“If you see a snake, just kill it – don’t appoint a committee on snakes.”

Dueling Task Forces

22 Jun

DuellingRecently, the Association of National Advertisers (ANA) sent an RFP to professional auditors, research firms, agency search specialists and management consultants to undertake a study of how media is bought in the U.S. with an emphasis on the practice of AVBs or rebates.  Separately, the American Association of Advertising Agencies (4As) announced the formation of a task force to address the issue of media rebates, with the goal of issuing new “Best Practices” and “guidelines” governing this area.

The good news is that both industry groups have taken to heart advertiser concerns regarding the use of rebates and the reporting of non-transparent revenue.

Sadly, a collaborative effort between the two industry associations would have been ideal if the goal was to clearly identify the appropriateness of this practice, the extent to which it does occur and to formulate guidelines that both the ANA and 4As constituents could agree to.

Ultimately, both advertisers and agencies benefit from the identification of practices that could impede trust and potentially mar client-agency relations. Further, a timely joint resolution regarding the use of rebates in the U.S. market would also send a clear message to the other side in this discussion about what is and is not acceptable and that would be the media sellers.

After all, there is a precedent for the two organizations to marshal their resources to address issues of importance to their constituents. Two obvious recent examples are the “Trustworthy Accountability Group” or TAG alliance and the “Making Measurement Make Sense” or 3MS task force both of which include the ANA, 4As and IAB that are tackling the issues of digital media fraud and digital media audience delivery measurement respectively.

One might argue that nothing is more important than the need to restore trust between advertisers and agencies. One need look no further than the recent spate of media agency reviews taking place by advertisers such as; P&G, Volkswagen, Sony, Visa, L’Oréal,  Johnson & Johnson, Sears, Unilever, General Mills, Coca Cola, Daimler and Citigroup to name a few to understand the need to restore both transparency and confidence.

Therefore it would seem that removing any obstacle which hinders that goal would be expedited if both the ANA and 4As were teamed up to tackle the issue. Of note, the number and size of the aforementioned relationships which are in review comes at a significant cost to advertisers and agencies. Both the time and out-of-pocket expense associated with conducting the reviews and the transition and integration costs associated with onboarding a new media agency partner.

As many astute industry followers believe, the ultimate answer to the issue of rebates will be rooted in a broader conversation around agency remuneration and what is considered fair and appropriate. In order for this conversation to occur and to bear fruit, both sides will have to come to the table in the spirit of full-disclosure and be prepared to engage in open, honest dialogue.  Thus, a joint approach on rebates could have set the tone for ultimately addressing one of the root causes of the problems.

As New York Times best-selling author Patrick Lencioni so aptly stated:

Great teams do not hold back with one another. They are unafraid to air their dirty laundry. They admit their mistakes, their weaknesses, and their concerns without fear of reprisal.”

Either way, we wish both the ANA and 4As success with their efforts in resolving the questions surrounding the use of rebates. We believe that putting the topic of rebates in the industry’s rear-view mirror sooner rather than later will allow advertisers, agencies and publishers to move on to the more economically damaging issue of digital fraud, which according to the ANA will cost advertisers $6.3 Billion globally in 2015 alone.

Does Your Agency Agreement Address “Special Relationships?”

29 May

business relationship and partnership  conceptWhen it comes to the subject of contracts between advertisers and their marketing agency partners, there is one principle, long understood within the legal, financial and audit sectors that is frequently overlooked… the concept of “Related-Party” transactions.

Why is this important you might ask? Primarily because as principal agent, an advertising agency has a fiduciary responsibility to solely serve the interests of their clients. In fulfilling their role as a fiduciary, agencies are held to a standard of conduct and trust in which they must avoid self-dealing or conflicts in which the potential benefit to the agency is in conflict with that of their client. 

Over the course of the last thirty years, growth within the advertising industry has been chiefly driven by acquisitions and marked by consolidation. The net result was the emergence of large, complex and highly influential agency holding companies such as; WPP, Publicis Groupe, Omnicom, Interpublic and Dentsu. In turn, each of these organizations own dozens of diverse agency brands providing full-service advertising, media, creative, digital and social media, public relations and multi-cultural advertising services and resources. 

Each of the aforementioned holding companies is a publicly traded entity focused on maximizing profits for their shareowners. As such, one of the primary roles of holding company management is to leverage intra-group synergies across their agency brands to profitably drive group revenues. No one would begrudge them this focus, particularly in light of the need to offset acquisition costs and the marketing and operational expenses associated with maintaining dozens of agency brands. 

Unfortunately, advertisers are often unwitting participants in the act of leveraging intra-group synergies. Further, more often than not, the agreements which are in place to formally govern client/ agency relationships do not afford advertisers the requisite controls and or transparency concerning related-party transactions. 

So what is a related-party transaction? In short, related-party transactions can be defined as arrangements between two parties that are joined by a special relationship. For example, if an advertiser’s media agency of record were to funnel a portion of that advertiser’s digital media buy to a digital trading desk operation, which happened to be owned by the media AOR’s parent company that would be considered a related-party transaction. 

While there is nothing wrong with the premise of related-party transactions, they do carry the potential, or at least perception, for conflicts of interest. This may be as simple as an agency awarding work to a related party, rather than competitively bidding that work to a range of providers. Further, undisclosed, these transactions can mask the overall percentage of an advertiser’s budget being spent through their agency, its parent and subsidiary companies.  

Fortunately, this issue is easily addressed in the context of a client/ agency agreement. The first step is straightforward and involves defining the terms “related-parties” and “related-party transactions.” Secondly, it is imperative that advertisers introduce standards for the identification of agency related party relationships that may come into play on its business and to provide disclosure requirements for when an agency seeks to engage a related-party. At a minimum, such requirements should include: 

  • Identification of the related-party and the nature of the relationship
  • Statement of the business purpose of the transaction and why the related-party is being considered
  • Securing the requisite transparency controls ranging from access to invoices, compensation agreements, contracts and audit rights with regard to the related-party
  • A list of client personnel authorized to sign and approve related-party transactions, in advance of work being awarded

Too often client/ agency agreements do not establish guidelines for behavior in this area. When combined with the fact that agency operating styles sometimes do not openly reveal related-party transactions, a control gap is often created, which can have negative financial consequences for the advertiser as well as blemish the agency relationship. 

Client-Agency Erosion

26 May

feature2-value-basedcompensationWritten by J. Francisco Escobar, President & Founder – JFE International Consultants, Inc. and originally published by Connote Magazine on October, 31, 2014.

WHY WE NEED TO RESTORE THE MOMENTUM OF TRUST IN THE PROCUREMENT ERA

Much change has taken place in the marketing services industry since the year 2000. The advent of the “Procurement Era” along with two severe economic shocks—the dot-com bust and, more recently, the “Great Recession”—have taken a toll on the most important component of marketing services relationships: the element of trust. Three major areas are responsible for this erosion of trust between marketing clients and their agency partners—transparency, equity, and the interpretation of value. Without agreement on standards and guidelines in these vital areas, individual marketers have been left to their own devices, while individual agencies have been somewhat defenseless against a hodge-podge of interpretations and practices that threaten the very fabric of commerce.

TRANSPARENCY

As the spend-based commission system has become virtually irrelevant as a total form of agency compensation, the predominant use of labor-based models has opened the door to client-side procurement and strategic sourcing to exploit transparency in the interest of lowering the cost of services. The use—or, rather, misuse—of benchmarks, all in an attempt to get agencies to fully disclose their proprietary financial information and business economics, has at times been ludicrous. What our industry clearly needs are rules of the road for what is acceptable and unacceptable, in what may be called “limited full disclosure.”

Trust is eroded when a client feels like its agency is withholding information, or when an agency feels like its client is over-reaching (e.g., requesting individual salaries).

We must heed the wise words of business guru Peter Drucker from his 1954 classic, The Practice of Management, “… the purpose of business is to create and keep a customer; the business enterprise has two—and only two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.” So long as we allow relationship stakeholders to view marketing as a cost to be reduced rather than an investment to be optimized, the issue of inappropriate financial transparency and benchmarking will NOT go away.

More recently, the subject of transparency has been at the center of two burning issues in media remuneration—rebates and programmatic buying. The former is an age-old controversy, and the latter a new-age dilemma.

REBATES

Media rebates are a totally normal and acceptable business practice in many countries. In some cases, they are the dominant form of income for media agencies. Thus, it boils down to just two issues of transparency in any given client/agency relationship. First, has the media agency disclosed to its client the markets in which it is receiving rebates? Second, has the client expressly written into its agency contract(s) how rebates will be treated? A lack of either disclosure or specific contractual language creates an opportunity for, and perception of, foul play.

PROGRAMMATIC BUYING

In the rapidly expanding digital media space, programmatic buying, real-time bidding, and other activities generated by demand-side platforms (DSPs) have created significant revenue growth opportunities for technology providers and a host of marketing/media services providers. The capital investment required by these firms to play in this exchange marketplace is significant, coupled with the clear risk associated with carrying media “inventory.”

Large players in the industry have taken differing positions on the financial transparency of their “trading” companies, from full to very limited disclosure of profitability on individual and cumulative transactions. There is currently no right or wrong answer; it is up to individual clients and agencies to ensure they are having sufficient dialogue in this area so that there is a clear understanding about current business practices as it relates to their unique relationship. Anything less will keep a client wondering if they are being exploited, further eroding trust.

EQUITY

There is no greater enemy to trust than the lack of equity in a relationship. When it comes to assessing fairness in client/agency relationships, one needs to look no further than the contractual agreement between the parties. While there are way too many instances to discuss the subject of equity in contractual matters, there are three areas where the greatest transgressions take place.

  1. AUDIT

When a client/ agency relationship begins to exhibit trust issues, the contract is unearthed to ascertain what is contained in the audit provision. It is vitally important that this provision be so unambiguous as to not be subject to liberal interpretation by either party. At minimum, audit provisions should include the following:

  • Reasonable notice period and conducted during business hours
  • Require an audit plan with clear objectives shared with agency beforehand
  • Auditors under nondisclosure with agency
  • Mutually acceptable external audit firm, not compensated on a contingency basis
  • Restrictions — no access to personnel data, agency overhead/profit, other client data
  • Limited to one audit every 365 days (unless there is evidence of contractual breach)
  • Findings favoring agency go to offset findings that favor client
  • Audit results shared with agency prior to finalizing report to client
  • Reasonable length of time in which audit may take place after termination (1 – 2 years)
  1. COMPETITIVE EXCLUSIVITY
    While there are certain untenable competitive situations—such as Coke/Pepsi, AT&T/Verizon, and Home Depot/Lowe’s—most others are often 80 percent perception and 20 percent reality. A well-written and equitable exclusivity clause should force the client to list its competitive concerns. Additionally, these restrictions should apply mostly to identifiable key agency personnel on the staffing plan. And, most importantly, the clause should bring the parties together in dialogue.
  2. PAYMENT TERMS
    Without exception, there is no more contentious, damaging, and inequitable issue facing our industry today than that of payment terms. A little history sets the stage. In 2004, the merger between Belgium-based company Interbrew and Brazilian brewer AmBev created the brewing company InBev. Within two years’ time, InBev embarked on an ambitious global cost-reduction initiative which centered around a movement to unilateral 120-day payment terms across its entire supply base.

InBev’s acquisition of Anheuser-Busch in 2008 brought this issue to the U.S. and started a domino effect across the largest global packaged goods companies, and the industry as a whole. Although several industry groups are working to address the issue directly, there has been no concerted effort to denounce this practice as patently unfair and damaging to the service provider community, and ultimately the overall marketer ecosystem.

How can it be that companies whose current cash position may exceed the market capitalization of the biggest marketing services holding companies expect to extend cash payments, particularly in the current low interest rate environment on cash deposits? And even more ironic is the concept of cash neutrality in master service agreements, where large advertisers expressly define it as what it truly is and then choose to apply it only to the cash management of media expenses between themselves, agencies, and media owners, but not to fees, production, or third-party expenditures.

VALUE

The notion of value has become central to the dialogue as the industry makes attempts to get away from payment based on people’s time to that of results generated by agencies’ deliverables. But who ultimately defines value and, more importantly, who determines it?

Two bellwether companies, representing the largest marketer and most valuable brand in the world, respectively, have taken it upon themselves to lead the industry with “value-based” compensation models. Sadly, both of them miss the mark on an interpretation and application of value that would engender and foster trust with their agency supplier partners.

In both cases, payment is initially determined by historical labor-based models and adjusted based on each company’s definition of value. Then, the ultimate determination of value is once again solely the purview of the client, with a significant component being a subjective, qualitative evaluation of agency performance.

The real benefit in these two models is purely on the buyer’s side. On one hand, creating a general contractor model removes internal/external cost, which then eliminates multiple touch points, transactions, and negotiations. But efficiencies are gained by managing agencies via menu pricing and standardized spreadsheets.

To their credit, both companies have continued to enhance their respective models since their joint introduction in 2009, but neither appears to have budged in the direction of increased collaboration on the definition and determination of value.

Value, like transparency and equity, has to be a two-way street. Nothing could be more productive in client/agency relationships than the dialogue that is created between the parties to mutually define success and value for their unique “marriage.” And even more interesting is when actual monetary value can be tied to the accomplishment of collaboratively devised objectives. When a client and agency can agree to a scope of services that relate to realistically achievable objectives, and the agency is able to exceed them, then you have true incremental value that should be rewarded accordingly. It’s not rocket science or brain surgery, but it does require a commitment by both parties to put in the necessary effort, energy, and time to ensure a fair and honest playing field. Doing so can only serve to encourage and restore trust.

AN INDUSTRY CALL TO ACTION

Restoring a momentum of trust in the marketing services industry calls for explicit, concerted action by the major industry associations.

We desperately need collaboratively developed standards and guidelines governing the critical issues of transparency and equity in client/agency relationships. Conversely, value should remain a nut for individual, involved parties to crack. Given the uniqueness of each and every engagement between marketers and their supplier-partners, every significant statement of services or statement of work (SOW) between the parties must contain a specific section addressing the mutual expectations of transparency, equity, and value.

Francisco Escobar is a business management advisor to global advertisers and agencies in the marketing services industry. He speaks internationally on issues surrounding marketing procurement and optimizing business relationships. If you are interested in learning more about “restoring the momentum of trust” in your client/agency relationships contact Francisco at (214) 728-6903 or via email at francisco@jfeintl.com.

What is the True Cost of Opacity? (part 2 of 2)

01 May

risk-icebergPart 2 of a two-part look advertiser concerns regarding “transparency” and the impact it is having on client-agency relations.

Why is a tight client-agency agreement important? One need look no further than the recent comments of Maurice Levy, Chairman of Publicis; “We have a clear contract with our clients, and we are absolutely rigorous in respecting transparency and the contracts.”  It should be noted that other agency executives have also cited their compliance with the terms of their client agreements as part of their response to recent questions regarding transparency in the context of rebates and the lack of full-disclosure associated with trading desk operations.

As contract compliance auditors we would suggest that most of the client-agency agreements, which we review do not have sufficient language to deal with the evolving advertising landscape.  It is common to find contract language gaps when it comes to items such as; AVBs, related party obligations, disclosure requirements and or right to audit clauses. Therefore, it is quite possible for an agency to be in compliance with an agreement as Mr. Levy suggested and still not be operating in a fully transparent manner.

To the extent that reducing the level of opacity is an important step in establishing a solid client-agency relationship founded on the basis of trust, we would strongly encourage advertisers to review their marketing agency partner agreements.

If agencies truly functioned as principal agents for the advertiser, a less structured agreement may pose less risk. However, today we operate in a complex environment where agencies may have a financial stake in certain outcomes and those stakes are not always fully disclosed to clients. Thus the reality is that the potential for bias to impact an agency’s recommendations clearly negates the principal of agency neutrality.  Think about it, agencies today operate as independent agents, partnering with a range of third-party vendors in the research, technology and media sectors and actually owning and reselling media inventory to their clients.

Don’t agree? Consider the comments of Irwin Gotlieb, CEO of WPP’s Group M at the aforementioned ANA conference; “Those relationships, rightly or wrongly, don’t exist anymore” he said, adding that “You cease to be an agent the moment someone puts a gun to your head and says these are the CPMs you need to deliver.”

It is imperative that advertisers protect themselves from a legal and financial perspective by crafting contract language and implementing the appropriate monitoring and control processes to insure that they have the transparency that they seek in the context of their agency partners’ financial stewardship of their advertising investment.  This does not mean that clients cannot forge solid relationships with their agencies or that their agency partners should not be afforded positions of trust. Quite the contrary, it simply means that candid, direct dialog must occur so that each party in the relationship is clear and comfortable with regard to the guidelines that will be put in place to govern their relationship.

Once clients and agencies have aligned their interests in the context of their relationship, the ability to focus their time, talent and resources on driving business forward and tackling industry challenges will be greatly enhanced. Interested in learning more about industry best practices when it comes to client-agency agreements? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management, LLC at ccampeau@aarmusa.com for a complimentary consultation on this important topic.

Follow Blog

RSS Feed

OR

Enter your email address to follow this blog and receive notifications of new posts by email.

Featured Posts

Sign-up for a complimentary “Mitigating Market Risk” Consultation.