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Category Archives: Contract Compliance Auditing

4 Questions That Can Impact Your Digital Buys

15 Nov

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According to eMarketer, in 2017 advertisers will spend 38.3% of their ad budgets on digital media – in excess of $223 billion on a worldwide basis. Yet, in spite of the significant share-of-wallet represented by digital media, there is generally little introspection on the part of the advertiser.

Looking beyond the “Big 3” [ad fraud, safe brand environment and viewability concerns], the lack of introspection begins much closer to home. Simply, in our experience, client-agency Agreements do not adequately address digital media planning and placement roles, responsibilities, accountability or remuneration details.

Standard media Agreement language does not adequately cover digital media needs. By this we mean specific rules and financial models need to be included in Agreement language that cover each potential intermediary involved in the buying process and to guarantee transparent reporting is provided to the advertiser. It is our experience that Agreement language gaps related to “controls” can be much costlier to advertisers than the aggregate negative impact of the Big 3.

And, regardless of Agreement language completeness, a compounding factor is that too few advertisers monitor their agencies compliance to these very important Agreement requirements. To assess whether or not your organization is at risk, consider the following four questions:

  1. Can you identify each related parties or affiliate that your ad agency has deployed on your business to manage your digital spend?
  2. Does your Agreement include comprehensive compensation terms pertaining to related parties, affiliates and third-party intermediaries, that handle your digital ad spend?
  3. Is your agency acting as a Principal when buying any of your digital media?
  4. What line of sight do you have into your ACTUAL media placements and costs?

If you answered “No” to any of the questions, then there is a high likelihood that your digital media budget is not being optimized. Why? Because the percentage of your digital media spend that pays for actual media inventory is likely much lower than it should be, which is detrimental to the goal of effectively using media to drive brand growth.

Dollars that marketers are investing to drive demand are simply not making their way to the marketplace. Often a high percentage of an advertiser’s digital media spend is stripped off by agencies, in-house trading desks and intermediaries who have been entrusted to manage those media buys. A recent study conducted by AD/FIN and Ebiquity on behalf of the Association of National Advertisers (ANA) estimated that fees claimed by digital agencies and ad tech intermediaries, which it dubbed the programmatic “technology tax” could exceed 60% of an advertiser’s media budget. This suggests that less than 40 cents of an advertiser’s investment is actually spent on media.

A good place to begin is to ask your agency to identify any and all related parties that play a role when it comes to the planning, placement and distribution of your digital media investment. This includes trading desk operations, affiliates specializing in certain types of digital media (i.e. social, mobile) and third-party intermediaries being utilized by the agency (i.e. DSPs, Exchanges, Ad Networks, etc.). The goal is to then assess whether or not the agency and or its holding company has a financial interest in these organizations or are earning financial incentives for media activity booked through those entities.

Why should an advertiser care whether or not their agency is tapping affiliates or focusing on select intermediaries to handle their digital media? Because each of those parties are charging fees, commissions or mark-ups for services provided, most of which are not readily detectable. This raises the question of whether or not the advertiser is even aware charges are being levied against data, technology, campaign management fees, bid management fees and other transactional activities. Are such fees appropriate? Duplicative? Competitive? All good questions to be addressed.

When it comes to how an agency may have structured an advertiser’s digital media buys, there is ample room for concern. Is the affiliate is engaged in Principal-based buying (media arbitrage)? Is digital media being placed on a non-disclosed basis, versus a “cost-disclosed” basis where the advertiser has knowledge of the actual media costs being charged by the digital media owner?

Evaluating your organization’s “risk” when it comes to digital media is important, particularly in light of the findings of the Association of National Advertiser’s (ANA) “Media Transparency” study released in 2016, which identified agency practices regarding non-transparent revenue generation that reduces an advertiser’s working media investment.

The best place to start is a review of your current client-agency Agreements, to ensure that the appropriate language safeguards are incorporated into the agreement in a clear, non-ambivalent manner. Once in place, monitoring your agency and its affiliates compliance to those contract terms and financial management standards is imperative if you want to assure compliance, while significantly boosting performance. 

“Today, knowledge has power. It controls access to opportunity and advancement.” ~ Peter Drucker     

Interested in learning more about safeguarding your digital media investment? Contact Cliff Campeau, Principal, AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on this important topic.

 

Media Agency Contract Framework

19 Sep

ISBA | The Practice – A Creative Digital And Marketing AgencyGlad to see the ISBA contract framework being more universally utilized. The terms and conditions recommended within this document absolutely provide media advertisers with the necessary legal and financial safeguards to protect their interests. This is, without question, the best “first line of defense” when it comes to transparency accountability Read More

Is There No End? Deceptive Practices by SSPs Should Alarm Advertisers

13 Sep

risk-icebergCriminal. Is it any wonder advertisers are rethinking their digital media investments. SSPs optimizing yields (theirs and the publishers) by defrauding advertisers raises serious concerns centered, once again, around the lack of transparency.

Deceptive price price floors, misstated bidding methodologies lying about which publishers they represent and the unauthorized reselling of inventory are practices that must be halted. Advertisers would be right to ask; “Where is my media agency? Why aren’t they protecting my interests when it comes to preventing this type of abuse?” Sad state of affairs Read More.

Who’s Funding the Growth in Martech?

13 Sep

fundingScary article in Mediapost. According to WARC out of London, martech fees now represent 16% of marketing budgets.

Where does this money come from? Marketers aren’t increasing their budgets by this amount. Agency fees haven’t gone down by this amount. Third party vendor expenses haven’t decreased by this amount. Must have come directly out of advertiser message delivery…

Wonder why advertiser’s are questioning marketing efficacy in the wake of stagnant brand growth? Read More

It’s Only Money…

05 Jun

moneyThere was one particularly startling revelation that came from the ANA’s recent Agency Financial Management conference in San Diego. During the presentation of this year’s “Agency Compensation Trends” survey results it was noted that the ANA found that almost half of the members it surveyed had not reviewed the findings of the ANA’s 2016 Transparency study.

Think about that. If an organization did not review the Transparency study’s findings, that means that there must not have been any resulting internal dialog with or among marketing’s C-Suite peers, no direct interaction with their agency network partners, no review of existing Client/Agency contracts, no improvements in reporting and controls in which to illuminate how an advertiser’s funds are being managed.

This, in spite of the level of trade media coverage regarding transparency issues ranging from rebates, discounts and media arbitrage, to the Department of Justice investigation into potential ad agency bid rigging practices or the level of ad fraud, traffic sourcing or non-disclosed programmatic fees on both the demand and sell side of the ledger.

There is only one conclusion that can be drawn from this remarkable revelation…many marketers simply don’t care how their organization’s advertising investment is being allocated or safeguarded. Unfortunately, we regularly see the ramifications of this attitude of indifference in our contract compliance audit practice:

  • Client / Agency agreements that haven’t been reviewed or updated in years
  • Failure among clients to enact their contractual audit rights with key agency partners
  • Limited controls regarding an agency’s use and or disclosure of its use of affiliates
  • No requirement for agency partners to competitively bid third-party and affiliate vendors
  • Lack of communication to media sellers regarding ad viewability standards
  • Failure to assert an advertiser’s position on not paying for fraudulent and non-human traffic
  • No requirement for publishers to disclose the use of sourced-traffic
  • Incomplete instructions on buy authorizations to media vendors, minimizing or blocking restitution opportunities
  • Poorly constructed media post-buy reconciliation formats that lack comprehensive information and insights

Interestingly, there have been many positive developments from key industry associations such as the ANA, 4A’s, IAB and public assertions from leading marketers such as P&G and L’Oréal to further inform and motivate marketers on the topic of transparency accountability. Yet, given the materiality of an organization’s marketing spend and the publicized risks to the optimization of its advertising investment, many organizations have not yet taken action, tolerating the risks associated with the status quo. As the noted British playwright, W. Somerset Maugham once said:

Tolerance is another word for indifference.”

The failure to proactively embrace transparency accountability can pose perilous risks to an organization’s marketing budget which in turn directly impacts its company’s revenue. Many would rightly suggest needlessly.

In these instances, the fault for the increased level of attendant financial risk, fraud and working media inefficiencies lies squarely with those companies that have adopted an attitude of indifference toward these very real proven threats. One cannot blame an ad agency, production house, tech provider, publisher or media re-seller for taking advantage of the status quo and acting in manners that, while not in the best interest of the advertiser, are not expressly contractually prohibited.

The good news is that advertisers can address these issues head-on in a quick and efficient manner, mitigating the risks posed by transparency deficiencies. It all begins with a review of existing Client/Agency contracts and engaging one’s agency partners in dialog regarding the adoption of industry best practice contract language to facilitate an open, principal-agent relationship. The Association of National Advertisers (ANA) has a wealth of information on this topic and can also recommend external specialists to assist an advertiser with agency contract development and or compliance auditing.

Interested in safeguarding your marketing investment? Contact Cliff Campeau, Principal at AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com for a no-obligation consultation on this topic.

Is Your Contract Worth the Paper It’s Written On?

25 May

partnershipThe Association of National Advertisers (ANA) recently released its study on programmatic media. The study was conducted in conjunction with the Association of Canadian Advertisers (ACA), Ebiquity and AD/FIN.

While the study provided fascinating insights into programmatic media performance and costs at the transactional level, there was one particular item that stood out:

88% of the advertisers that were interested in and 75% of the advertisers that signed up to participate in the study could not or had to opt out.

Why was this? According to the study’s authors, “because of a myriad of legal, technical and process roadblocks put up by players in the ecosystem.” Long story short, those advertisers did not have contractual language providing them with clear data ownership or usage rights with their agency, trading desk and or ad tech partners.

The obvious question to be asked is, How can an advertiser’s programmatic media transactional data not belong to the advertiser? After all, it was their media investment that funded the buys. It was their agency partners who invested those funds on their behalf (or not). So, who could possibly own that data if not the advertiser?

What would you do if your agency partner denied your organization access to programmatic performance data that you had requested. Data that would shed light on your programmatic media performance and costs (i.e. third-party costs, agency fees, tech fees, data fees). It certainly seems short-sighted that an agency would deny their clients access to this data, both in the context of the ANA study and for providing transparency into how their programmatic investment is being stewarded to disclose what their true working media percentage is.

Sadly, this is but one example of Client/ Agency contract language omissions that create disclosure and accountability gaps, which can lead to legal and financial risks for advertisers. Other examples include:

  • No requirement for an Agency to disclose or competitively bid in-house production resources or affiliate companies.
  • Media arbitrage deals in which the Agency is marking-up media by an undisclosed amount on inventory that it owns stemming from principal-based buys it has made.
  • Agencies acting as principals, rather than agents, when investing the Client’s creative production funds. One example might be the Agency or its production studio filing for and retaining incentives offered by states and municipalities for shooting or post-production work completed in their geography.

Marketing spend is on the rise and is certainly considered a material expenditure, which can represent 12%+ of a marketer’s revenue base (source: 2015 CMO survey).

And yet too often, an advertiser’s contractual audit rights are not broad enough to ensure unmitigated access to the data files, records and reporting necessary to evaluate an agency’s compliance with the agreement and or their financial management performance. This can and should include:

  • An advertiser’s right to select an internal or external auditor of its choice (i.e. contract compliance, media performance, financial management).
  • The right to audit the agency and its related parties (i.e. holding company, affiliates, related entities, etc.).
  • Assertion of the advertiser’s right to limit or eliminate an agency’s non-transparent revenue (i.e. AVB’s, rebates, non-disclosed fees, mark-ups, float income).
  • The right to audit principal inventory and or mark-ups.

Contracts are also a great vehicle for communicating performance guidelines for items ranging from brand safety and viewability policies to fraud monitoring requirements and an advertiser’s policy on not paying for bot traffic, all of which are designed to safeguard an advertiser’s investment.

From our perspective, it makes sense for advertisers to engage in dialog with their agency partners to talk through contract terms and conditions, such as these, to secure their perspective and ultimately their buy-in. After all, the contract is a document that will govern most aspects of the Client/Agency relationship. Thus, open dialog that leads to a transparent relationship can form the basis for a trusting partnership that will last for many years to come.

As Stan Musial, the legendary baseball hall of fame member of the St. Louis Cardinals once said:

The first principle of contract negotiations is don’t remind them of what you did in the past – tell them what you’re going to do in the future.”

Advertisers: Contract Compliance is Easier to Secure Than You Think

19 Apr

If you’re an advertiser, we have three brief questions for you to easyconsider:

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

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

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

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

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

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

“Compliance sometimes requires nothing but enforcement.”

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

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

Compliance Auditing: The Path to Building Client Trust

26 Oct

accountability“Trust is the one thing that changes everything” ~ Stephen Covey

In the context of client / agency relationships, transparency simply means removing any element of doubt. Whether in the context of an agency’s earned revenue, billing accuracy, net payments to third-party vendors or the agency’s resource investment on behalf of a client.

The best means of achieving transparency is through an agency contract compliance and financial management audit and or the implementation of a continuous performance monitoring program focused on these aspects of the relationship.

After all, the marketing investment made by most advertisers is material and often ranks as one of, if not the largest SG&A expenditures. Which is precisely why marketing budgets are currently drawing more C-Suite attention from finance, procurement and internal audit personnel, working in conjunction with their peers in marketing.

This type of cross-functional oversight is a good thing. Particularly when striving to build a unified team by earning each other’s trust across the organization. Additionally, experience has shown that sound enterprise accountability and assurance programs can create value for all parties:

  1. Client financial team members benefit from the specific knowledge as to how their marketing dollars are being managed at each phase of the marketing investment cycle.
  2. Procurement gains insights related to the organization’s return on agency fee investment, optimization of contract language and opportunities for potential future cost avoidance initiatives (not related to agency fees).
  3. The internal audit group gains confidence in knowing that contract terms and organizational controls are being adhered to and if not, that actions are being recommended to shore up potential gaps and risks.
  4. Marketing gains feedback on the agency’s financial management performance, while identifying opportunities for process improvements that can boost the efficiency and effectiveness of their marketing investment.
  5. The agency benefits from direct feedback on their performance in this important area, the opportunity for interaction with and exposure to a broad cross-section of senior client management and the trust and associated confidence that comes with receiving a solid “report card.”

Over time, agency contract compliance and financial management performance audits have evolved in a manner which has yielded in-depth institutional knowledge and feedback that greatly assists advertisers in stewarding their marketing organizations and agency network partners. This is occurring during a period of time where the complexities of the advertising and media marketplace have expanded significantly, increasing an advertiser’s risk / reward considerations. 

Of late, there has been significant industry concerns relating to the questionable transparency relative to the disposition of an advertiser’s investment. How much money flows through to third-party vendors versus what is retained by the agency? What percentage of activity is directed to the agency’s affiliates or holding company, without client insight or approval rights? Is the agency earning excessive float income on the client’s marketing spend?

Rightly or wrongly, in the wake of these concerns, advertising agencies have found themselves all painted with the same broad brush of operating under an opaque modus operandi. This in turn has raised the specter of mistrust among many on the client-side, which has had negative implications on the strength (and length) of client-agency relationships. Needless to say, this is not a healthy dynamic for generating above average in-market results, solid returns on marketing investment, fair and fully disclosed agency remuneration levels or in building strong relationships.

Time and time again, we have seen clients and agencies alike benefit from the investment in compliance audits and the sustained comfort levels that come with ongoing performance monitoring programs. The chief benefit to both parties is the assurance of knowing that the advertiser’s investment is being well managed by their agency partners and the insight to fuel future process improvements.

In the end, these programs represent the quickest and most economical path to restoring trust between clients and their agencies, allowing both to focus on building strong brands and increasing demand generation. In the words of author Joel Peterson:

“Trust doesn’t just happen. It takes initiation, nurture, evaluation and repair.”

 

Funding Accountability Initiatives

26 Aug

 

fundingThe desire on the part of many advertisers to extend their organization’s accountability initiative to marketing is high. This is due to the fact that marketing is both one of the largest indirect expense categories within an organization and, for those that believe in its ability to drive strategic outcomes, critical in driving brand value and demand generation.

One of the key challenges for Internal Audit and Procurement professionals in implementing accountability programs is that they typically do not have a budget to fund the projects. Rather, they are reliant on their peers in Marketing to “buy in” to the concept and to underwrite the investment associated with analyzing contract compliance, financial management and in-market performance across their agency networks. This dynamic can create a loggerhead that delays or prevents corporate scrutiny into marketing and advertising spending and its resulting business impact.

The irony is that relative to the millions of dollars invested in marketing, the cost of implementing an accountability program for this corporate function is much less than one-percent of total spend. As we know, applying the skills and capabilities of audit and procurement teams and outside consultants typically results in improved controls that mitigate financial and legal risks to the organization. Further, these efforts often uncover historical errors and overbillings, and always generate future savings and improved marketing return-on-investment opportunities that more than offset the cost of the program.

It has always been a mystery as to why more advertisers simply don’t formalize and legislate the marketing accountability program and establish the requisite budget to be administered by the CFO / Finance organization. A minority of our clients operate in this manner, but clearly a “win, win” situation is created where internal audit and procurement provide their support and apply their resources pro-actively and marketing doesn’t feel as though funding is coming at the expense of critical business building programs within their budgets.

From our perspective, the source of funding for extending a corporate accountability initiative to marketing is the last hurdle. The reason is that we have seen marketing’s appreciation for accountability support grow along with their respect for the audit and procurement functions and a recognition that such programs can improve the efficiency and efficacy of the organization’s marketing spend.

The advertising industry is a complex; rapidly changing, technology-driven sector fraught with opacity challenges and risks such as digital media fraud and non-transparent revenue practices employed by agencies, ad tech providers, ad exchanges and media sellers. In light of these dynamics, organizations truly understand the benefit of monitoring the disposition of their marketing investment and the performance of their advertising agencies and third-party vendors.

It has been over 140 years since Philadelphia merchant John Wanamaker offered the following perspective on his ad spend:

Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”

Yet, with the passage of time it would be difficult for the industry to suggest that much has changed with regard to a marketers ability to accurately assess the efficacy of their advertising spend.

There is no time like the present to proactively develop; implement and fund transformative accountability programs that can optimize planned business outcomes, while safeguarding marketing spend at every level of the advertising investment cycle.

Interested in learning more about marketing accountability programs? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management| AARM at ccampeau@aarmusa.com for a complimentary consultation on the topic.

 

Interesting Video: “The Trust Crisis: Marketing’s Biggest Challenge”

16 Aug

From Campaign magazine… Click Here to watch.


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