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Marketing MathTM

Category Archives: Advertising Agencies

What’s Fueling Agency Holding Company Profit Growth?

27 Aug

agency holding company profitsAccording to a new report from Marketing Services Financial Intelligence, agency holding company profits for 2011 were up almost 30% on an 8% revenue increase.  The firm tracks publicly traded holding companies such as WPP, Omnicom, Interpublic, Havas, Publicis and Aegis along with some smaller organizations.  Of note, it was reported profit margins also rose for the group, “averaging 15%.”

Clearly, in spite of what has been a tough global economic climate, the agency holding companies continue to perform well from a financial perspective.  In addition, they have continued to expand their footprint via a robust level of merger and acquisition activity as well.

So what can we make of the stellar results?  Certainly, life is good for the holding companies.  Perhaps more intriguing is to ponder how a collective of holding companies managed to achieve a 4X multiple on profit growth vis-à-vis topline revenue.  On the surface it’s easy to understand, control expenses and boost the margin yield on incremental revenue.  However, the agency business falls into the “professional services” category.  Their primary expense is direct labor.  So as revenue increases, so do direct labor costs.  Right?  If not, how do you add business without expanding staffing coverage at the same rate?  Wouldn’t this negatively impact client service levels or the caliber of the work?

So if agency staffs are growing commensurate with revenues, what is the source of the extraordinary profit?  While the answer may be complex and varied there are certainly aspects of the agency holding company model that likely have contributed to this growth:

  • Increased utilization of agency owned resources/affiliates on existing client business ranging from in-house studios to trading desks, barter firms and production companies.
  • Improved employee utilization rates, whether in the form of associates working longer or devoting a higher percentage of their time to billable activity.
  • Non-transparent revenue growth on existing client business including but not limited to interest income associated with float, growth in agency volume bonification (AVB) revenues along with other vendor discounts and credits.

Let’s be clear.  There is nothing wrong with an agency holding company making money.  Further, there is nothing wrong with the aforementioned practices as a means of driving profitability.  The issue that advertisers should more clearly understand relates setting transparency standards and clear financial rules between themselves and the agency.

As a first step, to understand the current state of affairs and use it as a basis for improvement going forward, it is a best industry practice for the any advertiser to implement a detailed contract compliance audit.  This initial review boosts the advertiser’s understanding of the agency’s billing practices, and their basis, to assess time value of money treatment, fees vs. agency time-of-staff investments, AVB calculation methodology, adequacy of financial terms, manual vs. system treatment and the like.  The advertiser can then answer the questions – “where are my financial risks?” and “how do we mitigate them?”

Once accomplished, then perhaps the advertiser won’t have to “ponder” agency holding company profit growth rates and can join their agency partners in celebrating their hard earned financial success.

If you would like to gain the benefit of what we’ve learned first-hand through our agency contract compliance auditing practice and would like to schedule a complimentary consultation on “Transparency in Action,” please contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com.

It’s Your Money and Your Reputation

26 Jun

advertiser's reputationDo you know what happens to your organization’s money, once it has paid the advertising agency?  If you’re like most advertisers you probably don’t know and may not even care.  Perhaps you should. 

Advertising agencies, regardless of the contractual definition of their role (agent vs. independent contractor), act on an advertiser’s behalf to procure and pay for services, space, time, etc… purchased from third-party vendor organizations that are related to producing and distributing the client’s advertising and communications messaging.  In turn, the advertiser is billed by the agency, typically upfront on an “estimated” basis for those goods and services with payment due to the agency in 15 to 30 days from receipt of invoice.  Terms between agency and client are usually set to insure that the agency has the client’s funds prior to the time third-party vendor invoices are presented for payment. 

For most advertisers, there is little transparency into the financial transactions between their advertising agencies and their third-party vendors, which number in the hundreds, if not thousands.  This lack of transparency results in diminished advertiser control and increased risks associated with third-party vendor reconciliation and accounts payable management.  Risks typically fall into four areas: 

  1. Clear and unambiguous title to any and all intellectual property/ work product
  2. The advertiser’s reputation among 3rd party vendors
  3. Treasury management “opportunity” costs
  4. Exposure in the case an agency became unable to pay its creditors 

AARM conducts agency contract compliance and financial audits of advertising and marketing agencies on behalf of advertisers.  In our experience it is rare to see a client-agency contract that identifies clear terms and conditions for the agency’s handling of third-party vendors or in establishing processes and controls to allow the advertiser to monitor performance in this area.   Don’t advertisers want to know if and when third-party vendors have been paid?  If vendors were paid at the agreed upon rate or something less?  If the reconciliation process resulted in credits, discounts or rebates that are due back to the advertiser?  Who are the vendors being utilized? 

Based on our financial audit experience, there has been a clear trend in recent years of agencies stretching out disbursements to third-party vendors well beyond their payment terms, as measured by “Days Payable Outstanding” or the time lag from vendor invoicing to agency payment to the vendor.  There can only be two reasons for this performance and neither is particularly sound.  Firstly, the agency may have flawed vendor reconciliation processes and or they are putting inadequate resources against this “non-revenue generating” area of their business.  Secondly, the agency is seeking to maximize interest income from float.  Simply defined, “float” is the amount of money that the agency has collected from the advertiser but has not yet disbursed to a vendor.  In almost all instances, agencies both earn and retain the interest income on this float. 

Within the agency community it is often joked that interest income (from float) is an agency’s best client; “It pays on time and never complains.”  However, when it comes to the advertiser’s reputation the risk of being labeled a “slow pay” is no laughing matter.  Whether deserved or not, such a reputation can carry both opportunity costs and economic costs in the form of vendors charging higher rates to compensate for their “carrying costs” or not offering preferential treatment.  Nor do many client-side CFO’s find much humor in lost interest income opportunities, aged vendor credits or delayed earned but unprocessed discounts and rebates.   

When the size of an advertiser’s budget is considered and the fact that this investment is being managed through a small group of agencies, who in turn handle purchases and payments on behalf of the advertiser with hundreds of diverse third-party vendors ranging from media property owners to production studios to third-party ad-servers, it may be time to perform an independent assessment of performance in this important area. 

After all, we’re all familiar with the adage: “What is inspected is respected.” 

Interested in learning more about the financial portion of an agency contract compliance audit?  Please contact Don Parsons, Principal at AARM at dparsons@aarmusa.com for a complimentary consultation.

 

Who’s on First? Advertisers Want to Know

01 May

agency freelancersAd Age recently published the results of discussions it conducted among agency executives, freelancers and staffing companies with regard to the growth in agency utilization of freelance talent.   If you’re an advertiser their findings may serve as a wake-up call for you.

First and foremost, we understand the fast-paced nature of the advertising marketplace and the important role that variable labor plays in helping agencies meet short-term labor demands.  That is not the issue.  What is of concern is the growing reliance on independent contractors versus permanent staffers by ad agency executives.  Ad Age coined the term “permalancers” to reflect this trend of engaging freelancers for extended periods of time, in excess of 100 days.

Why the concern?  Consider Ad Age’s primary conclusion on their investigation into this practice, that agencies “are not attracting and managing freelancers appropriately.”  This perspective is supported by an executive of Redscout Ventures a division of MDC who was quoted in the Ad Age article stating that; “our current system of sourcing freelancers is incredibly inefficient.”   Sourcing and managing of freelance talent aside, there are numerous risks and costs to an advertiser that are often not transparent.  For example, do advertisers even know which agency representatives serving on their account are permanent staffers or freelancers?  Is there an established procedure that defines how the advertiser is being billed for freelance time (i.e. pass through cost or incorporated into agency fee/ direct labor cost calculations)?  What is the impact on agency time-of-staff investment tied to the learning curve associated with rotating in freelance help?  Does this practice impact the quality of the work or the level of re-dos?

At Advertising Audit & Risk Management we conduct both contract compliance audits and agency fee reconciliations which consistently highlight the financial impact and risks confronting advertisers regarding the lack of controls and limited transparency around an agency’s use of freelance talent.   Audit findings have identified risks ranging from intellectual property ownership to violations of the non-compete clause to inadequate time tracking of freelance talent.  Unbridled, an agency’s use of freelance talent shifts the legal and financial risks associated with the advertising industry’s lack of sufficient controls in this area from the agency to the advertiser.

There are mechanisms which an advertiser can implement to mitigate this risk without affecting their agency partners’ ability to tap into variable talent pools to supplement the account team if and when needed.  Advertisers interested in learning more about how to assess the prevalence of the use of freelance talent by their agencies and what can be done to introduce the requisite protections can contact Don Parsons, Principal at AARM for a complimentary consultation at; dparsons@aarmusa.com.  For more on this issue, read the article; “Freelancers’ Stock Rises on Madison Avenue” in Ad Age.

Do Agency Brands Still Matter?

27 Aug

agency brandsTimes have changed. In 1984 the average client agency relationship lasted 7.2 years. Ironically, while that may seem like a short duration, by 1997 it had declined to 5.3 years. Where do you believe it is today? Gone are the days when the advertising agency relationship was so esteemed that advertiser CEO’s were often on point for managing what was viewed as an invaluable resource. Advertising agencies once measured the span of their client involvement in decades and prided themselves on the longevity of those relationships. Unfortunately, transience has supplanted stability as the law of the land.

CEOs are seldom involved with the organization’s agency network, the Marketing function has lost some of its luster within the executive suite and according to a 2010 Spencer Stuart study, CMO’s turnover every 28 months on average. On the agency side, as holding companies greatly expanded their collection of traditional agency brands and specialty shops many with overlapping and often indistinct resource offerings the cache of the individual agency nameplates began to diminish. Add to this the trend that has emerged in numerous high profile agency reviews of the holding company offering to assemble a team of subject matter experts from across its network to serve up a “Best in Class” solution to the prospective client. While this approach certainly has appeal, on paper, aggregating professionals from companies with different cultures, philosophies, perspectives and processes has seldom proved to be the elixir advertisers and agencies alike have sought. Remember Enfatico?

Agency brands should matter, perhaps more so in today’s environment than at any time in the past. Whether they do or don’t is not what is at issue. The asset value of a strong agency brand to its diverse stakeholders can be significant. It starts with instilling a sense of belonging with the agency’s associates, which in turn leads to a feeling of pride and a passion for the work which they do, which drives employee satisfaction and reduces turnover.  Enhancing agency employee tenure is an important component in acculturating associates into the agency’s philosophy and belief systems, driving familiarity with advertising planning and development processes and creating a level of comfort and confidence among the client facing representatives with the agency’s solutions offering.  Stability and consistency in this area can greatly enhance the agency’s ability to achieve in-market success for client brands, which can transcend the environment of change and emphasis on short-term results that often permeates client-side organizations. Importantly, strong brands attract buyers.

Brands attract buyers based upon a known set of attributes which help to shape buyer expectations of what they’re getting, minimizing unexpected surprises and reducing buyer remorse. Clients that are satisfied with the agencies that their organization has bought into will invest the requisite time, energy and resources into those relationships, thus heightening the odds of success.

In the end, success, however each party in the client-agency relationship defines it is the key to rejuvenating individual agency brands and helping to stabilize a somewhat unsettled marketplace. As David Ogilvy once said; “The pursuit of excellence is less profitable than the pursuit of bigness, but it can be more satisfying.” I would contend that once excellence is achieved, profits will follow. One needs to look no further than average agency direct margins today vis-à-vis ten, fifteen or thirty years ago to prove that point.

Assignment Briefing Process: A Three Step Approach

30 May

assignment briefing processIt should be clear that advertisers’ “own” brand strategy and are therefore responsible for the assignment briefing process. With multiple agencies making up an advertisers marketing services vendor network, how can you have it any other way? Coordinating efforts across this collection of specialist agencies to achieve innovative, impactful, integrated marketing campaigns that deliver on the organization’s goals is the responsibility of the Marketing Team, which is ultimately accountable for generating a return on marketing investment.

There was an intriguing piece written in Advertising Age recently by Casey Jones of Jones & Bonevac on the assignment briefing process that identified results from a recently fielded survey by his firm. The survey found that 54% of agencies surveyed said that “fewer than 40% of the client briefs provided gave a clear indication of what the client expected from the agency.” And of that number; “… 30% said only 1% – 10% of briefs provide clear performance expectations.” This is an issue which creates pitfalls ranging from wasted time and money to ineffective marketing outputs and client/agency discord.

The remedy to this problem requires three relatively straight forward steps. The first is the easiest… develop an assignment brief template containing the requisite information fields necessary to be completed by the Marketing representatives responsible for the brief development. This would include information such as brand value propositions, key competitive differentiators, target audience insights, market/ competitive overview, historical brand performance data and quantifiable objectives for the project. Secondly, formalize an internal review and approval process which includes key stakeholders and senior Marketing management to provide an opportunity for both strategic input and discussion surrounding assignment “success” criteria and how the attainment of those criteria align with the organization’s objectives. Thirdly, construct a concise assignment briefing meeting format that the organization follows to present the approved brief to their agency partners, engage in dialogue with the agency representatives and clarify each agencies roles, responsibilities and deliverables.

Professionals within both the client and agency organizations are intelligent, motivated and desirous of a successful campaign outcome, thus formalizing a framework for the assignment brief can immediately improve the efficacy and efficiency of the entire creative development process. Why? A tighter assignment briefing process results in better creative briefs and stronger creative outputs.

 

4A’s Conference Debate Not Healthy

09 Mar

Intriguing article in Advertising Age on the musings, or should I say public rants, of some agency executives coming out of the 4A’s conference. Are the views voiced by this select group of executives indicative of others in the industry?  If so, this year’s 4A’s conference is likely to have a negative impact on client (and employee) perceptions of the industry.

If select agency leaders aren’t proud of their shop’s work product or staff talent levels or feel that the agency holding company model stifles creativity then they should address these issues in a constructive manner. Blaming clients for their woes and publicly slurring advertiser procurement professionals is certainly not going to address their internal housekeeping issues Read More.

An Example of “Why” Advertisers Should Audit Their Agencies

18 Feb

Let me start by saying that I am not casting doubt on Ogilvy’s position regarding the recent allegations brought by an employee in Federal Court that they overbilled their IBM client by several million dollars between 2006 and 2011.

The question to be asked is; “Does the client know whether or not they were overbilled?” If they have not conducted an independent contract compliance audit and fee reconciliation of their agency during the time period in question, they may have to wait until the conclusion of the court case to find out the answer.

Net, net… all advertisers should conduct periodic audits of their marketing services partners to achieve the requisite levels of transparency to be able to answer questions such as this.  Right to audit clauses in client-agency agreements are negotiated as a legal and financial safeguard to provide unequivocal feedback on performance and contract compliance questions. Have you conducted an audit of your agency recently?  Read More.

Understanding the Current State in Client/ Agency Relations

26 Jan

The attached article by Avi Dan in Ad Age offers a succinct and accurate summation of the current state of affairs regarding client/ agency relations and the role of procurement.

Once agency leaders and client side marketing individuals take an honest, introspective look at the situation they will be in a much better position to re-establish their position as valued strategic partners. Linking client marketing investment to successful outcomes and building C-suite awareness of marketing’s contributions to the organization’s goals will go a long way in improving confidence in the marketing services supplier network.

This improved confidence, combined with the ability to establish a causal impact of an agency’s contributions on the client’s return on marketing investment will serve as necessary building blocks in distinguishing the agency and optimizing compensation … Read More.

What is it About Procurement That Ad Agencies Dislike?

18 Dec

agency client procurement relationshipBriefly, it appeared as though Strategic Sourcing, client-side Marketing and Agency professionals were engaged in constructive dialogue regarding procurement’s role in the marketing services arena.  That is until representatives from the ad agency community took to their soap boxes and railed against corporate procurement’s role.

Why do certain agency community representatives continue to wage a public battle to minimize or eliminate the influence of procurement in the agency sourcing process?  Perhaps one has to move beyond the seemingly endless diatribe about procurement’s “lack of understanding” of how to value an agency’s contribution or the intangible nature of agency deliverables on brand health or procurement’s role in driving agency margins down to get to the root cause of their concern.

After all, forging strong alliances with Strategic Sourcing professionals represents an opportunity for agencies and should be a cornerstone of their business development and client retention strategies.  Could it be that some within the agency community are fearful of the financial scrutiny and performance benchmarking that are part of the process?  Perhaps they are not comfortable justifying fees and or offering demonstrable proof that their stewardship of their clients’ advertising investments generated a positive economic impact.

If their concerns are grounded in the former line of thinking that ship has left the pier and those arguments no longer hold water. Company Boards of Directors and Senior Management teams have both mandated Strategic Sourcing’s involvement on an enterprise-wide basis and expanded their near-term charter to include marketing services.  If the concern is related to the difficulty in valuing their contributions there are two economic analyses that are required.

The first is certainly well within an agency’s ability to catalog, monetize and communicate… their investment of resources into stewarding their clients advertising investments.  The second may require more work, particularly if the client-side marketing team and the agency have not implemented a sound return-on-marketing-investment monitoring system to accurately track and attribute their in-market results back to each facet of the client’s marketing investment.  Difficult as that may be, a fact-based, rational construct is the best bet for engaging all parties in a productive discussion regarding agency performance and contributions and for positively impacting the procurement process.

For many organizations the investment in marketing and advertising is one of their largest indirect expenses… it will continue to be scrutinized. Interested in reading more? Attached is a fascinating exchange between individuals with slightly different perspectives … Read More.

How Will Madison Avenue Fair in the Future?

19 Nov

how will madison ave fare?For an industry that has long prided itself on its ability to adapt to change the future will prove interesting for the advertising industry.  Technology driven trends ranging from dynamically generated behavioral driven ad generation to media fragmentation and dramatic changes in consumer media consumption have ushered in a number of changes that must be dealt with during this time of marketing convergence.

Perhaps the most fundamental change is that the industry’s “old” communications model of intrusive media talking at consumers is waning in relevancy in a world where user generated, user shared content forms the basis of a dialogue among consumers’ and between consumers and brands.

How will agency holding companies and individual agencies structure themselves to deliver services? What services will they offer?  Will there be room for specialist marketing services providers or will we see the re-emergence of the full-service agency (or agency holding company)?  How will compensation practices evolve to reflect the structural changes that are occurring within this market?

While change creates challenges, it also generates opportunities for advertisers and agencies alike. Those that grasp the strategic relevance of the rapidly evolving landscape will emerge as thought leaders and will have an opportunity to establish distinguished positions for their firms. As George Bernard Shaw the Irish playwright and co-founder of the London School of Economics once said:

“Reasonable men adapt themselves to their environment; unreasonable men try to adapt their environment to themselves. Thus all progress is the result of the efforts of unreasonable men.”

Where will your firm fall on the progress continuum? The following Fast Company series on “The Future of Advertising” provides a thought provoking look at what’s next for the advertising industry Read More.

 

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