Marketing Math Blog

What is the Future of Agency Trading Desks?

By Programmatic Buying, Trading Desk No Comments

crystal ballIt was recently reported in Adweek that IPG was re-organizing its trading desk operation, Cadreon.  Representatives from IPG cited the costs and conflicts across its agency brands and offices stemming from having a centralized, autonomous trading desk with its own P&L.

This is a timely issue as publishers, agencies and advertisers brace for a pronounced increase in the role of programmatic buying.  Internal squabbles aside, the reason why some agencies aren’t totally on board with holding company trading desks comes down to one item… their own bottom line.  While agency holding companies could easily address this dilemma via a revenue sharing model between their entities that is not the seminal issue with trading desks.

The primary consideration in our opinion should be focused on an agency’s role in serving the advertiser and whether or not that obligation can be fulfilled when they’re acting as a re-seller of media where the original inventory cost is not disclosed.  Secondly, while the agencies and the ad networks have figured out how to make money moving digital inventory, publishers and advertisers are now evaluating the financial impact of programmatic buying and assessing alternatives which drive both efficiencies and performance for their respective organizations.

What are the financial implications?  The aforementioned Adweek article cited “agency insiders” who indicated that trading desks generated “high profit margins” in the “40% to 50% range” (hence the internal conflict).  Easy to see why advertisers would forgo the arbitrage model and opt for having their media AOR handle the digital media buying, on a fully-disclosed basis, within the context of their letter of agreement and the remuneration program that has been established.  Throw in the desire for advertisers to understand more about the quality of their digital ad placements and the environment is ripe for change.

Does this spell the end for trading desks?  Not at all.  Change and refinement are to be expected for a business model that only came into being within the last several years.  The technological capabilities that trading desks possess to manage reams of client data to effectively match advertisers with relevant inventory/audiences on a real-time basis is incredibly valuable.  This is particularly compelling as a higher percentage of an advertiser’s budget is shifted to digital media and programmatic buying.  Having said that, most advertisers are simply not willing to accept the level of opacity and the resultant hidden learning’s, which reside within their agency’s trading desk operation.

While media has evolved through the decades, the formula that has governed the media marketplace should remain constant; publishers sell inventory and advertisers buy inventory through their ad agency partners… not from them.  In the words of the noted American author Wendell Berry:

“The past is our definition.  We may strive, with good reason, to escape it, or to escape what is bad in it, but we will escape it only by adding something better to it.”

Scam Ads? You’ve Got to Be Kidding.

By Advertisers, Advertising Agencies, Contract Compliance Auditing No Comments

scam adsMany of you are by now familiar with the recent scandal which has embroiled Ford and JWT India with regard to a series of “Scam Ads” for the Ford Figo.  The ads were created for entry into an awards show and were accompanied by tear sheets and a client letter allegedly vouching for their authenticity.  Much has been made about the actions taken by Ford which led to the dismissal of two JWT creative representatives and a member of the client’s marketing team for the offensive nature of the scam ads.

What is interesting are the revelations which have come to light regarding these faux ads and the extent to which agencies around the globe invest the time and money in creating these ads for the sole purpose of demonstrating their creative prowess.  One might ask; “Are awards really that important to the agency community?”  So much so that their actual work on a client’s behalf is deemed to be too pedestrian to be entered into competition?  In commenting on this practice to Ad Age, Susan Credle, Chief Creative Officer of Leo Burnett observed; “Sometimes, we (the industry) are so consumed with winning awards that we forget how public our work is.”

Much of the feedback has rightly been on the potential negative impact these ads can have on a brand when they inadvertently become public, as in the case of Ford.  But there is another aspect to this practice beyond who bears the risk and it is related to the issue of who bears the expense of this non-sensical pursuit of creative recognition.   The answer to this question should come as no surprise to anyone… the advertiser.  Interestingly, according to Nancy Hill, President and CEO of the 4A’s; “Clients don’t know that this happening.”

Not only is there the time-of-staff spent on creating these ads, the production costs and potentially the award show entry fees and even travel to awards shows such as Cannes (if not in direct expenses, overhead allocation) but the opportunity cost related to the diversion of client-paid agency resources being diverted away from brand building and demand generation advertising support. 

Given all of the good work done by agencies and advertisers alike, it is a shame that a sophomoric practice such as the creation of “scam ads” exists and serves to detract from the perceived level of professionalism attributed to the entire advertising industry. As the old proverb goes;

Don’t do what you’ll have to find an excuse for.”  

What can be done?  The Ford – JWT firings of those responsible for the Figo ads are one thing, others have advocated for creative award show reforms such as banning faux ads from entry combined with a more thorough vetting process.  From our experience, advertisers who employ contract compliance auditing, with detailed fee/ time-of-staff monitoring and expense reconciliation can further enhance the controls necessary to insure that agency behavior and financial stewardship decisions are consistent with expectations. 

Transparency Rules: Not So Clear

By Digital Media, Digital Trading Desk No Comments

digital trading deskThe hot topic thus far at the American Association of Advertising Agencies (4As) “Transformation” conference in New Orleans has been in and around agency charging practices for their digital trading desk operations.

It would appear as though the panel of agency digital media experts fell into one of two camps:

1) Arbitrage and profiting on the spread between actual inventory cost and client authorized plan costs is an acceptable way for agencies to recoup the investment they make in digital technology support and there is no obligation to share true cost data with clients.

2) Agencies should fully disclose the cost of the original inventory and any fees or commissions charged to clients in association with an agency’s procurement of that media.

Over the course of the last three to five years, virtually every agency holding company has launched a digital media “trading deskoperation focused on the procurement and in some instances re-selling (arbitrage) of online advertising inventory.  Evolved from the early days of demand side platforms, agencies have layered on significant data analytics capabilities that allow the trading desks to select the most appropriate inventory/ audiences for their clients in a real-time-bidding (RTB) auction environment.  No one disputes the value of that capability and its role in securing optimized inventory at the right price.  The questions surface around the transparency into the true cost of that inventory and whether it’s purchased for all the right reasons.

Theoretically, agency holding companies present their trading desk clients with agreements that specify the type of buying practices employed by the trading desk operation and the fees associated with that service.  Practically speaking, in our agency contract compliance audit practice, seldom have we seen separate agreements executed for this service nor have existing letters-of-agreement (LOA) been modified to reflect the terms of engagement for this aspect of an agency’s media buying offering.

Separate from the 4A’s conference, Rob Norman, Global Digital Chief of GroupM presented an interesting perspective in an interview with Ad Age when he referred to their policy on trading desk charging practices as “transparent, but not disclosed.”  In the end, this may be the most practical approach to the debate on this topic.

For savvy advertisers who seek full-disclosure on all aspects of the relationship with their agency partners and 3rd party vendors this is a discussion that they need to have prior to authorizing the agency to engage their trading desk on their behalf.  On the other hand, for advertisers who believe that they are receiving superior online ad inventory pricing and that the results of the effort are consistent with expectations, they may be comfortable forgoing insight into the cost of the original inventory.  The point is, that these are conversations that should be had upfront between the advertiser, agency and trading desk.  Any decisions made with regard to agency/trading desk remuneration, 3rd party vendor disclosures and transparency requirements on behalf of the digital trading desk process and performance should then be incorporated into the LOA.

While it would be convenient if there were published industry guidelines on this issue and others related to contract and compensation topics ranging from the composition of agency overhead rates to standard ranges for fee multipliers and full-time equivalent definitions, the fact is there are no standards.  Thus, advertisers must enter into all agency agreements with their “eyes wide open.”  Caveat emptor.

An agency can best serve the needs of their clients and their proprietary interest by initiating these conversations, sharing the agency’s philosophy on the practice in question and discussing options that are available to the advertiser within the context of that agency offering.  There is nothing to be gained by suppressing dialog on topics such as trading desk charging practices and transparency.  In fact, having these conversations surface after work has been begun can call into question the agency’s trustworthiness and or loyalty.

So if you’re an advertiser that has engaged your agency partner’s expanded service offering whether in the form of digital trading desks, in-house studios, programming procurement or production, poster specialists and or barter, check to make sure that you have a current binding agreement in place that affords you the desired level of protection, control and transparency.

If you would like a complimentary consultation to discuss agency contract “Best Practices,” contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com.

The Value of Consistency in Building Brands

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

brandingMarketing pundits the world over have long championed the role of consistency when it comes to building great brands.  When citing examples, we frequently here about creative expressions of that consistency ranging from Budweiser and the Clydesdales to Nike and their “Just Do It” slogan to McDonald’s and their “Golden Arches” or Coca Cola’s iconic red can. 

Rarely do we tout the generation’s long relationships between advertiser and agency which have contributed mightily to building so many of today’s top brands.  Chevrolet and Campbell-Ewald, Ford and J. Walter Thompson, Exxon Oil and McCann, Kellogg’s and Leo Burnett, Met Life and Young & Rubicam or Unilever and Lowe + Partners are but some of the examples of long-term collaborations.  And yet, sadly, even some of these unions are no more.

Great advertising is the result of proven methodologies and sound processes, which guide talented professionals steeped in brand knowledge and keenly aware of the needs and desires of the brand’s target audience to produce compelling work.  This doesn’t happen overnight.  Great advertising requires a commitment between an advertiser and their agency partners, a culture which values brand building and the vision to be able to balance that with the need to generate sales and build share today.  Importantly, it requires a resource investment on the part of both client and agency and a deep level of respect between those organizations which allows for a robust, long-term relationship in which both parties can challenge and feed off of one another.

So why then has the length of Client/ Agency relationships shrunk so dramatically over the course of the last thirty-years?  Why does it seem that when an advertiser changes CMO’s that an agency review is but a few short months behind?  Why do so few corporate CEO’s take the time to get to know their organization’s advertising agency partners? 

An advertiser’s agency network, which can number dozens of agencies across disciplines, geographies and brands, is a corporate asset which is at the heart of the organization’s ability to create near-term demand generation and long-term brand value.  Thus, the agencies which comprise this network should be afforded the requisite level of respect and attention which a valued strategic partner would warrant. 

Advertising agencies are not the property of, nor the sole purview of a CMO.  This is not to diminish the importance of a CMO’s agency stewardship responsibilities or their contribution to deftly managing the outputs of an organization’s agency network.  It is the realization that enduring, effective collaborations must be anchored in a culture that values long-term relationships.

At its low in 2006, the average time-in-position of a CMO was 23.2 months according to research conducted by executive recruiting firm Spencer Stuart.  The good news is that CMO tenure has climbed to 43.0 months in 2011.  However, 3 ½ years is but a blink of an eye in the context of some of the Client/ Agency relationships referenced earlier.

It is a truism that “great clients, get great work” when it comes to advertising.  So what makes a “great” client?  It begins with an organization that respects their ad agency and the agency personnel which work on their business and values the work that is done on behalf of their brands.  This is augmented by the willingness to integrate the agency into the broader marketing team and to work seamlessly as one unit, while understanding the division of roles and responsibilities.  Importantly, it involves a commitment to the relationship.  Agency CEO’s are much more willing to invest in adding resources, developing personnel and building infrastructure to elevate the caliber of work on a client business when they can do so with a long-term perspective and the opportunity for a return.

David Ogilvy once shared his perspective on the role of his agency and the investment required to implement his vision in a memo to his board of directors in 1978:

“I have a new metaphor. Great hospitals do two things: they look after patients, and they teach young doctors.  Ogilvy & Mather does two things: we look after clients, and we teach young advertising people.  Ogilvy & Mather is the teaching hospital of the advertising world.  And, as such, to be respected above all other agencies.”

Needless to say there are a myriad of processes, controls and performance monitoring tools which come in to play to maintain focus and to incent all parties to engage in the proper behavior and motivate each member of the team to achieving in-market success.  These include everything from a properly structured letter-of-agreement, a fair remuneration system which rewards superior performance, annual 360° relationship reviews, proper client briefing processes, independent performance assessments and access to key decision makers within both the Client and Agency organizations.

It is safe to say that with the passage of time and repetition, the ability to improve these processes and tools… and their outputs, becomes infinitely more doable than when changing agencies every few years.  Perhaps Leo Burnett had it right when he intoned:

 “I have learned that you can’t have good advertising without a good client, that you can’t keep a good client without good advertising, and no client will ever buy better advertising than he understands or has an appetite for.”

Are Advertising Agency Performance Assessments Disruptive?

By Client Agency Relationship Management, Contract Compliance Auditing, Marketing Accountability No Comments

disruptionThe answer to this question will be as diverse as the background and experience readers have with corporate accountability initiatives in general and marketing services agency audits in particular.  However, the question shouldn’t be whether or not these assessments of contract compliance or performance are disruptive but; “are they beneficial?” 

As a former agency account director and client side marketing executive, I have had the benefit of seeing the marketing accountability process from both perspectives.   As such, in my humble opinion, performance assessments and contract compliance audits are neither disruptive to the advertiser’s or the agency’s workflow, nor do they place any undue strain on the relationship.  Quite the contrary, in my experience performance monitoring and compliance testing serve to better align advertisers and agencies and more often than not lead to process improvements which are beneficial to both parties.

What is puzzling is that there are individuals on both the client and agency side that continue to rebel against the prospect of a comprehensive, independent assessment of their collective performance and adherence to the terms of the relationship.  After all, both parties were actively involved in negotiating their letter-of-agreement (LOA), which most likely contains a statement of work, an agency staffing plan, a schedule of charging practices, 3rd party vendor management parameters and a clause detailing the advertisers “Right to Audit.”   It occurs to me that accepting independent assessments is much akin to accepting the truth.  In the words of the 19th century German philosopher Arthur Schopenhauer :

“Every truth passes through three stages before it is recognized. In the first, it is ridiculed, in the second it is opposed, in the third it is regarded as self-evident.”

More importantly, there isn’t a member of the C-Suite in any client organization who is not wholly on board with the notion of accountability.  While not initially the case in the context of marketing, those days are clearly in the rearview mirror.  It is not uncommon for corporations to spend between 1.5% and 5.0% of their revenue on marketing.  Whether the goal is to build brands, create short-term demand and or to grow market share, marketing is an important component in the success of an organization.  Thus, it is imperative that executives have confidence that their staff, their partners and their 3rd party vendors are making good resource allocation decisions with the company’s marketing investment. 

Performance reviews and compliance audits provide a measure of control to an advertiser to ensure that there is transparency into the decisions being made with regard to their marketing investment.  These initiatives have the added benefit of providing a mechanism to review personnel, processes and resource investment on the part of the agencies so that adjustments can be made along the way to improving their return on marketing investment (ROMI).   Independent audits also yield an excellent opportunity for client and agency to engage in a candid, comprehensive dialog regarding the audit findings and recommendations which frequently contain normative benchmarks or industry “Best Practice” insights.  This type of approach fosters partnership and strengthens relationships.  Everything is on the table, no surprises, with the simple goal of identifying various means of improving performance.

From a workflow perspective, audits should not disrupt an agency’s critical role in the demand generation process.  Is there a modicum of time required of the account team and or the subject matter experts on the agency side?  Most definitely, but not at an onerous level.  Further, this can be an incredibly worthwhile investment of time if the agency is willing to provide feedback and share insights into the relationship and thoughts that they might have on changes that can be made to strengthen that relationship and in turn boost performance.  Other than those qualitative interviews, it is the agency financial team that is typically “on point” for providing the requisite data and or reports required to support the audit.  The nature of the information request is straightforward is typically detailed within the LOA and can be readily accessed from the agency’s financial system, thus requiring little administrative time… unless of course the agency has neglected their “housekeeping” duties along the way (i.e. lax time-of-staff controls, failure to reconcile fees, delays in reconciling 3rd party vendor fees, etc…). 

In our opinion, it makes sense for both parties to view the accountability process as a sound “preventative” care practice that can preserve the health of the client / agency relationship… not to disrupt it.  Marketers who invite an independent assessment of their performance and that of their agency network are embracing an excellent opportunity to showcase their commitment to corporate accountability and a desire to maximize ROMI.   

Interested in learning more about marketing accountability and how to implement the appropriate controls and transparency?  Please contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on this topic.

How Do Agencies Do It?

By Advertising Agencies, Agency Compensation No Comments

ad agency profitsEarlier this month the Japanese agency holding company Dentsu announced quarterly financial results.  For the nine-months ending December 31, 2012 revenues were up 4.5% and net income was up 48.1% year-over-year.  Impressive?  Certainly, but not inconsistent with other players in the ad sector; WPP achieved a 43.3% increase in net income on a 7.4% revenue gain and Omnicom Group reported a percentage net income increase which was twice that of its revenue growth. 

A healthy advertising sector represents good news for clients and agencies alike.  Growing, profitable advertising agencies are able to invest in; infrastructure, personnel and research which ultimately allows them to better serve their clients.

There are two interesting observations with regard to the aforementioned agency financial reporting; 1) the recent results fit a pattern of extraordinary net income growth for the category, relative to revenues. 2) In a professional services business, the ability to generate net income growth of 2X to 10X that of revenue can only be achieved through a combination of significant expense reductions and or dramatic increases in direct margin.

Let’s be clear.  Like most other professional service providers whether in the financial, legal or consulting sectors, payroll makes up a disproportionately high percentage of an advertising agency’s expense base.  The publicly traded agency holding companies break out salary expense within their financial reports, allowing for a review of this cost center.  In a 2010 review of agency expense structures, Adweek reported that for the top five agency holding companies, expenses represented between 83% and 94% of revenues.  Salary expenses ranged between 59% and 72% of revenues.  The difference between the two is largely made up of real-estate and overhead costs.

Thus it is unlikely that agencies are relying on expense reduction as the primary source of net income accretion.  This would have a dramatic, negative impact on the caliber of work, service levels and ultimately, client retention and would be unsustainable over any prolonged period of time. Therefore margin growth would appear to be the primary contributor to the extraordinary net income gains.  But how you ask?  After all, industry compensation surveys consistently report that the average agency profit level identified within client/ agency agreements is 15%.   

Unfortunately the answer is clear, while not altogether transparent to advertisers.  A portion of the improved margin is tied to the provisioning of agency-owned services such as in-house studios, trading desks, poster specialists, barter firms and production companies. These services have tremendous margin upside for an agency because there is limited disclosure to the advertiser of the rates paid to the ultimate media seller and or the fees earned by the agency in the form of incremental commissions, spread between planned and purchased costs or volume rebates paid by the media.  Then there are sources of agency revenue which are seldom discussed and rarely audited which contribute to an agency’s bottom line profits.  These include but are not limited to AVBs, interest income from float, earned but un-processed discounts, rebates and no-charge media weight.

These practices are neither good, nor bad they simply represent the nature, albeit murky, of the global advertising industry today.  In the end, knowledge is power.  For example, the agencies that have been smart enough to vertically integrate and to leverage non-transparent income “opportunities” have generated solid bottom line performance. 

For advertisers the answer is simple, extend your knowledge of what is clearly a dynamic and often opaque marketplace: 

  1. Revisit your agency contracts to make sure that the requisite legal and financial controls have been incorporated to protect your interest. 
  2. Make sure that your agency contract extends to the parent company and any sister divisions which may be engaged as part of your agency’s service offering.   
  3. Examine your agency performance evaluation process and remuneration methodology to ensure that you are incenting the behavior and outcomes which you desire.
  4. Engage an independent auditor to assess your marketing service agencies contract compliance and performance to make sure that the requisite level of transparency is always maintained.

In the words of Sir Edward Coke, the renowned seventeenth-century English jurist;

Precaution is better than cure.”

If you’re interested in a second opinion of the soundness of your client/ agency agreement or would like to discuss the benefits of an agency contract compliance audit, contact Cliff Campeau, Principal at AARM via email at ccampeau@aarmusa.com.

Have You Discussed AVBs With Your Media Agency?

By AVBs, Rebates No Comments

agencies as resellersIf not, the obvious question is: “Why Not?”  More importantly, if your media agency hasn’t initiated dialogue with you on this topic don’t wait any longer; engage them directly to gain an understanding on their practices in this area and to share your organization’s perspectives on this complex topic.

What are agency volume bonification deals?  Commonly referred to as AVBs, agency volume deals, rebates or media kick-backs, these deals typically take the form of cash incentives offered to media agencies by media owners to incent them to spend more on their properties.  Long a part of the media landscape around the globe, there’s growing concern within the industry that the use of AVBs is more prevalent (and non-transparent) in the U.S. than had been previously thought.  Those were the findings of a 2012 survey conducted by the ANA in conjunction with Reed Smith on this topic. 

The value of AVBs, which vary by media, by spending level and by country, can be significant, ranging between 3% – 20% of an advertiser’s net media spend.  There are two primary issues with these deals.  The first concern regards the potential of this incremental revenue to unduly influence agency decisions on advertiser media placements, potentially allocating more dollars to a particular media or outlet than would be warranted based upon approved media strategies and or the media properties share of market.  The second has to do with the lack of transparency around these deals between the agency and their clients. 

Unfortunately, a lack of transparency into the presence of AVBs usually results in the advertiser not receiving their pro-rata share of any rebates secured by the agency as a result of the client’s media investment.  While the view regarding “who’s” entitled to the proceeds from AVBs varies somewhat depending upon the country and whether you’re speaking with an agency or an advertiser, one thing is clear… AVBs are earned as a direct result of the cumulative financial investment made by an agency’s client base.  Thus, it isn’t surprising that a majority of advertisers believe that they are entitled to their pro-rata share of any and all earned rebates by the agency brand and or holding company that they are working with.  In fact, in the aforementioned ANA survey on the topic, 85% of survey respondents believed that agencies “should remit all dollars to clients.”

As it stands, an advertiser’s contract with their media agency may not even address this topic, either specifically or in the broader context of any and all earned discounts, no-charge media weight and or rebates.  Thus, the best place to start is a review of the current Letter-of-Agreement that governs the client/agency relationship.  Additionally, direct open and candid conversations between senior members of the advertiser and agency teams are warranted to sort out whether or not the agency is in fact participating in AVB programs and, if they are, the resulting media allocation and or financial impacts on the advertiser.

A forewarning, do not get frustrated.  Too often when it comes to AVBs the first response back from an agency is often “What is an AVB?”  This is typically followed by a firm denial of the agency’s participation in any such incentive program.  To be fair, the day-to-day account team at the agency usually does not have insight into the agency or agency holding company’s practices in this area.  That is why it is best to engage senior representatives from the agency when it comes to this sensitive topic.  Let’s face it, if the agency is currently collecting and retaining any level of AVB rebates that goes directly to the agency’s bottom-line, they often keep this information extremely confidential.  Thus, clients requesting transparency into this practice and or demanding their pro-rata share of the AVB activity has the potential to significantly impact the agency’s income in a negative manner.  In the words of Winston Churchill:

“There are a terrible lot of lies going about the world, and the worst of it is that half of them are true.”

In our experience, a discussion regarding AVBs will likely lead to a broader conversation regarding agency remuneration, scope of work, agency staffing and deliverables.  It is our opinion that advertisers and agencies alike should welcome this conversation with open arms.  Why?  This represents an opportunity to put everything on the table ranging from billable rates, overhead rates, overhead components and guaranteed profit levels so that both parties can discuss the financial aspects of their relationship in a comprehensive, transparent and open manner. 

Finally, one of the more startling findings in the ANA research on this topic was that 40% of the advertiser organizations surveyed were “not sure” if their agency agreements had language dealing with AVBs.  If you harbor any doubt about the appropriateness of the language governing behavior in this area within your agreement, now would be a great time to review the document with your legal team. 

Interested in a second opinion of the soundness of your client/ agency agreement or whether your agency has been remitting any AVBs due your company?  Contact Cliff Campeau, Principal at AARM via email at ccampeau@aarmusa.com to schedule a complimentary review.

What is the #1 Advertising Agency Control Oversight?

By Advertisers, Billing Reconciliation, Contract Compliance Auditing No Comments

spreadsheetIn our experience as contract compliance auditors, the answer to this question is unequivocally an advertiser’s failure to reconcile agency billing activity.  Whether we’re talking creative services, digital production or media, advertisers are simply not vouching for the accuracy or completeness of either the agency’s or the 3rd party vendors billing efforts.

Given that “Estimated” billing remains the predominant form of agency billing to advertisers this lack of oversight creates tangible risks and the potential for financial loss that could be eliminated with the implementation of some fairly simple controls.  These risks include the potential for billing errors to go undetected and aged credits, earned discounts and rebates not being returned to the advertiser and lost interest income opportunities tied to agency float.

The principal stop-gap measure that could allay this problem is frequently overlooked by too many advertisers.  What is that measure you ask?  Simply requiring agencies to provide copies of all 3rd party vendor billing with their bill-to-client invoices. 

In two recent examples, one in North America for a multi-channel direct marketer and one in the middle east for a pan-Arabian conglomerate, the client had put significant funds at risk, which had it not been for an independent audit, would surely have been lost.  Each client was billed on an estimated basis by their agency, and each agency routinely failed to reconcile billing to actual expense.  In both instances there were incremental agency remuneration activities identified that were not supported by the client/ agency agreements.  These came chiefly in the form of AVBs, or volume-rebates, provided by media properties based on large expenditures made by each of the respective advertisers.

Had the requisite bill-to-client “back-up” data been available, client-side Accounts Payable personnel would have had the opportunity to review and challenge the billing and to secure financial true-ups along the way.  Ironically, both advertisers had incorporate “Right to Audit” and “Document Retention” clauses into their agency agreements.  However, as is typical across the industry, neither had previously enacted those clauses to engage an independent auditor to review the accuracy and timeliness of the agencies billing and 3rd party vendor payment processing efforts.

When advertisers take a lax posture on billing reconciliation and vouching, invariably two other areas are frequently impacted.  The first represents a risk to the advertiser in the form of approved purchase order (P.O.) balances and earned, but not yet processed, credits being managed “off-book.”  While these practices seem innocent enough on the surface and often involve client-side marketing personnel, the risks are very real.  The notion is a simple one, the agency and client teams identify credits or unspent budgets and accrue these funds for future use on unexpected new initiatives or for planned projects that exceed budget.  Harmless, right?   Perhaps, until the client-side marketing representative is transferred out of their position or leaves the company altogether.  This usually creates a knowledge gap that allows these “off-book” funds to remain undetected by the advertiser.  Thus, in this scenario the agency is the only entity with knowledge that these funds even exist.

The second area impacted is an advertisers treasury management practices.  With estimated billing, clients are often invoiced by their agency at the time of project approval, with payment due in 15 to 30 days.  However, the agency may not be billed by 3rd party vendors until costs are actually incurred (i.e. calendar month following the month of service) and remittance may not be due for another 30 to 45 days.  Finally, the agency may take an excessive amount of time to reconcile the vendor billing and hold off on processing payment until the charges are fully reconciled.  While that all makes sense, the advertisers funds have been in the agency’s possession and not in an interest bearing account generating interest income for the advertiser. 

Billing reconciliation is too important a task not to have a rigid oversight process and controls in place.  Agencies handle anywhere from several dozen to thousands of 3rd party vendor invoices on the advertisers behalf.  The sheer volume of billing activity can in and of itself create an environment that is ripe for mistakes.  As noted twentieth-century American author Paul Eldridge once said;

“In the spider-web of facts, many a truth is strangled.”

Having a process that provides billing analysis redundancy makes good sense and will likely be welcomed by the agency.   If you’re interested in learning more about independent billing reconciliation audit support, please contact Jim Bean, Principal at Advertising Audit & Risk Management at jbean@aarmusa.com for a complimentary consultation on this important topic. 

 

How Will Programmatic Media Buying Impact the Role of Agency Media Buyers?

By Agency Compensation, Agency Fee & Time Management, Digital Media, Media No Comments

One of the biggest trends in media buying is occurring within the online display advertising segment, the rapid expansion of programmatic buying.  Ironically, few advertisers have delved into the intricacies of this approach and its impact on the stewardship of their media buys.

In short, programmatic buying is the execution of online media buys utilizing quant technology, demand side software interfaces and algorithms to book, analyze and optimize display ad campaigns, often on a real-time basis.  The RTB exchanges, ad exchanges, demand side platforms (DSPs) and sell-side platforms (SSPs) were initially utilized by publishers to move remnant display space.  However, given the success of programmatic media buying, there is a growing push by agencies and ad exchanges to encourage publishers to expose more, if not all of their inventory, including premium inventory with guaranteed impression delivery which is currently sold on a direct basis. 

Why?  The use of programmatic buying yields a number of benefits ranging from enhanced targeting, the ability to select desired rather than bundled impressions, price clarity and enhanced agency control.  Programmatic buying is a more efficient means for agencies to place and manage media buys.  The processes and workflows affiliated with programmatic buying software solutions allow for improved analytics while yielding significant operational efficiencies for ad agencies, chiefly related to time savings.  Furthermore, they can also integrate with other financial and marketing automation platforms which work across paid, owned and earned media channels. 

The concept of selectively targeting users based upon behavior and projected responses to campaign inputs and to dynamically allocate resources based upon near real-time analysis of reams of data tied to a campaign’s objectives is appealing.  Demand side platforms make decisions for an advertiser based upon inventory availability, pricing, placement data, context and other decision making algorithms that align the advertiser’s media plan, budget and campaign KPIs.  Hence, the potential of programmatic buying to enhance the effectiveness of an advertiser’s media investment and to positively impact their return on marketing investment could be substantial.  Thus, it is no surprise that many stakeholders are already talking about the potential expansion of this concept to cover a higher percentage of online media activity and even extending its application to other media types such as television and print. 

The application of new technology that can effectively leverage “Big Data” to make better resource allocation decisions and evolving media marketplaces that dynamically match seller inventory with buyer demand has tremendous potential.  In fact, most would agree that this is a “game changer.”  Who wouldn’t be supportive?  The question to be addressed in the context of programmatic buying is, “What is the impact on the role of media buyers in the placement and stewardship of a client’s media buy?”  Further, how does an advertiser benefit from the realized “operational efficiencies” generated by programmatic buying that currently accrue to the advertising agencies and publishers?  Perhaps more importantly, “How will this automated approach to media buying and stewardship impact the role of agency media buyers?”

Today, marketers pay a premium in the form of agency fees and commissions for digital media buying relative to those paid for traditional media.  If technology is ushering in a more efficient, more automated form of buy management should advertisers be paying more, or less?  For some of the more progressive client organizations, the question may even be, “Should we utilize an agency at all or purchase media directly via electronic exchanges?”  The potential for disintermediation is very real in this context.  The challenge for media agencies will be to redefine the role of their media buying organizations in an evolving media marketplace to clearly identify how and where their buying staffs add value.  It is likely that their future role will be more strategic, giving way to technology to handle the basics of media execution such as the placement, monitoring, analyzing and adjustment of buys.  That being said, there are media buyer generational issues which will require training and development to school agency media buying professionals on emerging programmatic buying platforms and electronic exchanges.  All stakeholders can benefit from the perspective of Bill Gates when it comes to the promise of technological advancement:

“The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.”

Exciting times to be sure.  Will there be challenges for clients, agencies, publishers and media workflow and data management system providers?  Absolutely.  But in the end, all have the opportunity to benefit from a rapidly evolving and much needed evolution in the way media buys are executed and optimized. 

Interested in discussing the impact of programmatic buying on your client/agency letter of agreement, staffing plans and remuneration system?  Contact Cliff Campeau, Principal at AARM at ccampeau@aarmusa.com for a complimentary consultation.