Marketing Math Blog

Sep 30
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Why Do Agencies Seek to Limit Client Audit Rights?

By Contract Compliance Auditing, Letter of Agreement Best Practices No Comments

Assurance CollageAgency attempts to restrict client audit rights or limit record retention requirements through agency-centric contract language and negotiating tactics should be addressed in a direct manner by advertisers during the contracting process.

Efforts on the part of an agency to limit the scope of an audit, shorten the timeframe subject to audit, regulate audit methodology, restrict an advertiser’s right to select an audit partner or limit access to agency data that supports its billings to the client pose significant risks to an advertiser’s marketing investment.

Other than the furtherment of agency self-interest, there is no valid reason for restricting an advertiser’s right to audit an agency partner’s contract compliance and financial management practices. Given the materiality of marketing spend, agency compliance audits serve as a crucial governance control that enables advertisers to verify the accuracy of agency billings and prevent financial management practices that could negatively impact an advertiser.

The failure to secure the proper audit rights in client-agency agreements, or neglecting to exercise existing audit rights on a regular basis can lead to serious legal and financial repercussions.

Because the advertising industry operates primarily on an estimated billing model, where agencies receive client funds in advance of performance and before final costs are determined, greatly increases risks. This is exacerbated by the industry’s practice of delaying reconciling actual costs to estimated billings and the absence of third-party invoices supporting the costs being billed.

Blindly trusting agency billings without regular audits to verify costs increases the likelihood of errors, non-compliance, and bad financial management practices. Independent compliance audits often uncover issues such as:

  • Overbilling
  • Non-transparent fees or mark-ups
  • Timekeeping errors and irregularities
  • Unauthorized use of agency affiliates
  • Identification of earned but unprocessed credits, discounts and rebates
  • Under delivery of agency time-of-staff commitments (i.e., total hours, staff mix)
  • Failure to reconcile retainer or project fees
  • Process gaps that drive inefficiencies or legal risks, both internally and externally
  • Inordinately long lead times for processing third-party vendor payments
  • Failure to adhere to contract terms (e.g., competitive bid requirements, data privacy)
  • Use of restricted practices (e.g., principal media buys)

Unchecked, findings like these limit an advertiser’s working dollars and reduce the return on their approved marketing spend.

The good news is that periodic reviews of agency network partners can help identify compliance gaps, rectify mistakes, and encourage agency partners to be more mindful of their contractual obligations and client expectations.

As the 17th century French writer, Francois de La Rochefoucauld once intoned: “Self-interest makes some people blind, and others sharp-sighted.” The question is, which side of that equation do you want to be on?

Aug 05
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How Brands Fund Retail Media Network Activity Matters

By advertising legal, Advertising Regulation, Retail Media Networks No Comments

Enacted in 1936 the Robinson-Patman Act (RPA) protects small businesses by promoting fairness and competition among the buyers and sellers of goods by prohibiting discriminatory actions related to pricing. Further, the RPA prevents firms from “skirting the price discrimination” issue by using volume rebates, processing/ handling fees, advertising, and promotional allowances to leverage their scale and gain an unfair advantage over smaller competitors.

While enforcement of the RPA has waned since the 1990’s, earlier this year a group of congressmen urged the Federal Trade Commission (FTC) to reinvigorate its use of this tool to “promote fair competition” in the food and retail industry.”

What was the impetus for this move? The degree of consolidation that has occurred in the sector since the RPA was introduced. Today, the top four food retailers account for over one-third of grocery sales and four suppliers account for as much as 60% of sales in most grocery categories. Of note the target of the FTC’s enforcement actions in this area have typically been manufacturers.

Aside from the issue of consolidation, there is another development of note that has emerged since the RPA was enacted… the creation of Retail Media Networks (RMNs). According to Group M advertisers spent $45 billion on RMN’s in 2023 which accounted for almost 11% of total U.S. ad expenditures.

So how are the RPA and advertiser use of RMN’s related?

The answer comes down to how brand marketers are funding their RMN purchases. If a brand’s RMN investment is paid for using trade marketing or promotional allowances (which is often the case) then the RPA requires that such allowances be made available to all retail customers on an “equal and proportionate” basis.

Better coordination between an advertiser’s Trade Development and Marketing teams is required to assess and monitor the organization’s RMN spend to ensure RPA compliance and to optimize that investment.

Additionally, seeking the support of in-house legal and or engaging outside counsel specializing in anti-trust and trade regulation can further minimize the risk of non-compliance. This is particularly so if the RMN investment is to be funded out of a trade-marketing or promotional allowance fund.

In the words of Tom Graves, U.S. Congressman and businessman: “Let’s make it simple: Government control means uniformity, regulation, fees, inspection, and yes, compliance.”

Jul 02
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AI Has the Power to Boost Advertisers Working Dollars. Will It?

By Advertisers, Artificial Intelligence, Digital Media, Working Media No Comments

artificial_intelligence“Automation is no longer just a problem for those working in manufacturing. Physical labor was replaced by robots; mental labor is going to be replaced by AI and software.” ~ Andrew Yang

What do ad creation, programmatic customization, personalization, audience targeting, predictive analytics, performance reporting, and fraud prevention have in common? The adoption of Artificial Intelligence (AI) has already demonstrated the ability to enhance advertising performance while reducing the time-on-task in these areas for agency creative, production, and media teams.

Consider Digiday’s recently published article citing a case history for The Brandtech Group indicating that its generative AI platform had the ability to produce ads “10 times faster, deliver twice the performance and cost 30 to 50 percent less.”

When it comes to media, Group M recently predicted that “AI-enabled media buys will account for 94.1% of all ad spending by 2029.” This indicates that there will be a significant shift in how media planning and buying will be executed, reinforcing the need for advertisers and agencies to adapt their approach to realize the resulting efficiencies and media performance improvements.

AI’s ability to automate routine tasks and efficiently process reams of data will reduce the time and resources required by agencies to service their clients. Consequently, AI can play a key role in lowering the fees advertisers pay to their agency partners and AdTech intermediaries, thus increasing working ad spend.

Forrester recently issued its Agency AI-Powered Workforce Forecast, 2030 (US), predicting that “by 2030, US ad agencies and related services companies will lose 32,000 jobs to automation, 7.5% of the total agency workforce.” The potential labor savings is not limited to the advertising industry, according to McKinsey, “by 2030, activities that account for up to 30 percent of hours currently worked across the US economy could be automated” as a result of the adoption of generative AI.

From an agency perspective, the automation of labor-intensive, repetitive jobs will eliminate certain roles. Thus, agencies will seek to protect their revenue by effectively harnessing AI to consolidate their share of ad spend across their client base. For example, WPP recently announced a “Production Studio” application using generative AI and a content engine recently developed with Nvidia that will create “text, images, and video” for advertisers.

Advertisers must move swiftly and with purpose to proactively engage their marketing services providers to discuss AI’s potential impact on upcoming scopes of work along with the corresponding agency staffing plans and resource investment needs. Questions regarding how and when AI will be deployed and what the effect will be on various creative, media, and operational processes should be discussed in detail. The resulting feedback will allow advertisers to ascertain the potential for in-housing certain tasks and realigning responsibility for specific roles and project work across their agency network.

In conclusion, there can be no doubt that AI is poised to significantly transform the advertising industry. AI’s ability to optimize, and innovate how advertising is created, delivered, and monitored will certainly be a game changer. By taking the lead on the integration of AI into their workflows, advertisers can reduce their reliance on agency services and lower the amount of time and resources required by their agencies to create and manage ad campaigns. In turn, this will lower fees as a percent to total ad spend, improving advertisers’ working dollars.

Jun 20
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How Will Generative AI Impact Client/ Agency Relationships?

By Artificial Intelligence, Client Agency Relationship Management No Comments

This article from DigiDay provides a glimpse into the future impact of generative AI on the ad industry: “Pencil’s ads are produced 10 times faster, deliver twice the performance, and cost 30 to 50 percent less.” While it remains to be seen what the impact will ultimately be on agency service delivery and remuneration, changes will be forthcoming … Read More

Jun 20
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Transparency. All Talk, No Action?

By Programmatic Buying, Media Transparency No Comments

Excellent piece in AdExchanger on the talk around transparency and change in digital advertising. The author’s perspective accurately captures the state of affairs regarding transparency, particularly as it relates to programmatic media: “…the open programmatic marketplace is not where serious advertisers and agencies buy ads, nor where reputable media owners sell their inventory.” As Mr. De Zanche aptly states: “effective outcomes cannot be achieved if only pockets of the industry are embracing change.” … Read More

Jun 04
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Agencies Should Act in The Client’s Best Interest. Always.

By Advertisers, Advertising Agencies, Principal Media No Comments

principal mediaClient/Agency Relationships were once predicated on the concept of a principal-agent relationship, where the agency had a fiduciary duty to act in their clients’ best interest. When this concept was the accepted practice, most Client/ Agency agreements reinforced this expectation.

Principal-agent relationships helped instill a level of trust among client stakeholders creating strong partnerships between advertisers and their agencies that spanned years, if not decades. Unfortunately, over time, certain agency practices began to erode that trust.

The shift began with agency holding companies pledging funds entrusted to them by advertisers to select media sellers to earn rebates that were based upon the holding companies aggregate spend across their client portfolio, and funneling work to affiliates without competitively bidding their services. Then came principal media buying, an arbitrage process whereby the agency or their affiliates would purchase media and resell it to clients at a higher rate, earning non-disclosed mark-ups that were often unauthorized by its clients. In these scenarios, agencies act as principals, rather than agents, often prioritizing their own financial interests at the expense of their clients.

Recognizing the growing use of principal media among agencies, the Association of National Advertisers (ANA) conducted an in-depth analysis of this practice titled “Acceleration of Principal-Media.” As part of its study, the ANA identified key characteristics of principal media, including the following:

  • The agency or its affiliate is not an agent of the client. The agency is the reseller of the media or other service.
  • Clients are often unaware of where or how the agency acquired the inventory.
  • The agency is delivering media where the actual price (if any) is not disclosed, and the agency markup is not known.
  • Advertisers have limited audit rights. Notably, clients are not allowed access to associated vendor invoices.

None of these characteristics are particularly confidence-inspiring, even if an agency secures the client’s permission to engage in principal media buying. So why would an advertiser even consider authorizing this practice? The key selling point is typically the ability to reduce costs on select commodity-like media.

Some believe that this approach can play a role in an advertiser’s arsenal if they enter these arrangements with a modicum of knowledge and with the requisite controls in place to mitigate the attendant risks. However, the ANA’s study found that more than half of the survey respondents were only “somewhat familiar” or “not familiar” with the practice. Further, in our contract compliance auditing practice, we find that most advertisers lack the appropriate contract language or controls to safeguard or vouch their advertising investments in principal media buys.

One might reasonably ask: “Is principal media buying ever acceptable, even with the appropriate controls in place?” The inability of advertisers to audit principal media performance, the lack of transparency regarding agency costs and profits, and the limited ability to vouch for the quality of the inventory could be reasons enough to forgo the use of principal media. More importantly, advertisers will never know whether their agency’s principal media recommendations are genuinely in their best interest or driven by the agency’s profit motives.

Absent full cost transparency, audit rights, agreed upon mark-ups, and pre-approval rights for principal media advertisers should rightly favor a principal-agent relationship, with clear accountability and alignment on the agency’s duties and responsibilities as a fiduciary of the client versus the pursuit of illusory efficiencies.

“Media arbitrage or principal media involves the manipulation of price differences in different locations on the same inventory to achieve a riskless benefit to the principal.”

May 29
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Where Do You Stand When It Comes to Principal Media?

By Marketing No Comments

ANAThe Association of National Advertisers (ANA) recently released its report on principal-media, a practice where agencies take ownership of the media and resell it to their clients at at a price higher than what was paid. As a marketer, short of preventing your media agency from utilizing principal-media on your behalf, there is a solution to protect your organization from the unauthorized use of this practice… sound contract language, independent auditing of media agency partners, and strict controls around the approval granted to purchase principal media. If you have questions regarding this practice, sometimes referred to as media arbitrage, you will find the following article from The Media Leader to be of interest … Read More

 

May 29
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Do Agency Revenue Models Raise Concerns Among Marketers?

By Marketing No Comments

riskShould marketers be okay with non-transparent agency revenue practices, as long as they are acknowledged?

When it comes to principal-based buys the marketer bears all of the risks for the potential to “improve efficiencies” that cannot be wholly substantiated. Can a marketer ever really know the impetus behind an agency’s recommendation for principal-based media decisions and whether or not it is in the client’s or the agency’s best interest?

Interested in learning more about the Association of National Advertisers (ANA) recent report on how “agency holding companies profit from media sales to clients?”…Read More

 

Apr 30
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Finding Gold Through Quarterly Business Reviews

By Advertisers, Advertising Agencies, Client Agency Relationship Management, Marketing No Comments

money“If one does not know to which port one is sailing, no wind is favorable.” –  Lucious Annaeus Seneca

Marketing is a complex, demanding, and time-consuming endeavor that deals with both strategic and executional elements. Often the resulting tasks seem to outnumber the time and resources available to address each effectively.

Once the annual planning process is complete and budgets are approved, marketers and their agency partners typically plunge headlong into implementing the strategies and programs that comprise those plans. There are deadlines to be met and stakeholder expectations to be addressed. So, it is seemingly tough to justify another meeting, additional reporting, or vouching for each agency partners financial management performance. Yet, this may be just what the doctor ordered to optimize marketing spend and keep all parties aligned on the organization’s goals and expectations.

The use of quarterly business reviews (QBRs) fosters critical dialog between cross-functional teams on both the client and agency side regarding key business strategies, challenges, performance expectations and opportunities that arise over the course of the budget year. Properly structured, QBRs help to ensure that both sides are aligned on the business and relationship priorities established at the beginning of the year. Further, they help to satisfy corporate governance standards for marketing budgets that represent a material expense.

Ideally, the financial leadership team is applying an appropriate level of pressure and installing strict requirements to improve transparency and accountability regarding a firm’s marketing spend. Yet we know that agency performance vouching simply does not receive the attention it deserves. Marketers can and should involve their peers in procurement, finance, and internal audit to assist in structuring and implementing quarterly reviews to complement the weekly status updates, monthly performance tracking discussions and financial management reporting that regularly occur. This type of cross-functional participation also helps to create buy-in and build confidence in an organization’s agency partners.

Further, involving financial team members from the agency in this process yields incremental benefit and provides the agency with the opportunity to broaden its relationship with the client. Experience reinforces that agency team’s welcome open communication and the opportunity to discuss and share feedback on business challenges and goals that occur in QBRs.

More than just an accountability tool, QBRs enable brainstorming and idea generation opportunities that can help refresh the organization’s marketing and advertising efforts… all the while building a basis for stronger client/ agency relationships.

Apr 02
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Advertisers: Lost Interest Income Opportunity

By Advertisers No Comments

agency holding company profitsAs of this writing, the prime rate or the interest rate charged by banks to their best customers for loans is 8.5%. (source: Wall Street Journal Prime Rate Survey, March 26, 2024). This is up significantly from 2015, when the prime rate was 3.5%.

There was a time when Client/ Agency agreement language contained provisions binding the Agency to always conduct itself as a fiduciary, acting in the best interest of the advertiser and prohibiting the agency from earning any income on the use of client funds. Today, many such agreements don’t specifically address these two issues.

Understandably, the times have changed to a degree, specifically as it relates to practices such as principal-based media buying where the agency may forgo its fiduciary obligations (theoretically with the client’s prior written approval). Further, advertisers have been less vigilant when it comes to securing the requisite protective language and implementing the appropriate financial stewardship practices when it comes to their agency agreements.

This is particularly concerning given that the “estimated billing” process remains the dominant mode of charging practice when it comes to agency billing for third-party expenses. In short, estimate billing entails the agency invoicing the advertiser often in advance of performance and ahead of third-party vendor billing so that it is in possession of client funds when it is time to process payment to those vendors. Then, once a campaign has run or a production job has been closed, the agency reconciles estimated costs to actual and where appropriate issues a credit to the advertiser.

Unfortunately, the timing for agency media invoice reconciliations and production job closings can run upwards of 180 days post agency billing to advertisers. This combined with agencies holding unbilled media funds, rebates, and incentives often until ninety days post year-end and advertisers may be forgoing significant interest income opportunities resulting from their funds being held at the agency, rather than by client finance teams.

The good news is that these risks can be mitigated by taking some straightforward steps relating to an advertiser’s investment. For example:

  • Requiring agencies to reconcile and pay third-party vendor invoices within 30 to 45 days of the end of the month of service, rather than relying on indeterminant contract language such as “Agency will use commercially reasonable efforts to promptly remit client’s payments to third-party vendors.”
  • Establishing “job closing” timing and reconciliation guidelines with each agency partner.
  • Tightening up “unbilled media” reconciliation practices from 30 to 90 days end-of-year to 60 days end of quarter.
  • Identifying monthly financial reporting formats to estimate and track any “rebates, incentives, and credits” earned by the agency or its holding company related to the use of advertiser funds.
  • Establishing contract language prohibiting the agency from earning any income on the use of client advertising funds.
  • Consider moving from an “estimated” to a “final” or “progressive” billing process that allows advertisers to maintain tighter control of their funds.

Interest income opportunities, cost of capital, and improved treasury management controls are all factors that advertiser financial management understands and values and should be a foundational element of Client/ Agency agreement and relationship management practices. 

“Money is always eager and ready to work for anyone who is ready to employ it.” ~ Idowu Koyinikan