Marketing Math Blog

Media Rebate Follies Continue

By Advertisers, Advertising Agency Audits, Media Rebates No Comments

media rebatesThe Association of National Advertisers (ANA) conducted a survey among 180 members with regard to the prominence of media rebates within the U.S. media market.  Of note, both the ANA and those members surveyed expressed concern about the existence and appropriateness of this practice. 

By way of background, media rebates or volume over-rides have been in use within the European advertising market for several years.  In essence, media properties offer advertising agency holding companies a financial incentive tied to their overall purchases of space and or time.  These rebates can take the form of cash rebates or no charge media weight which is banked by the agency holding company.  These rebates can range between 1% and 15% of the media commitment.  The agency community has long contended that this practice did not take place in the U.S.  Advertisers on the other hand have always had their doubts about those denials and with apparently good reason. 

In the recent ANA survey, 28% of the respondents indicated that they “were aware” of incentives being provided by the media to advertising agencies.  Further, 85% of the ANA members surveyed felt that those rebates should be passed along to the advertiser.  Yet in spite of these beliefs, only one-third of the respondents had client-agency contract language to that effect.   Of note, Bill Duggan, EVP of the ANA stated that; “Frankly what I find personally surprising is that agencies are doing this.  It’s in my opinion a totally inappropriate practice.”  Some of the ANA members echoed those sentiments indicating that it was a “dark and murky” area of the business that required greater transparency. 

Why the concern?  Quite simply, the notion that a media seller would offer a media buyer with a financial incentive to increase the level of media purchased from them raises a serious conflict of interest issue.  In fact, I cannot think of one cogent argument for the agency to participate at any level in the retention of volume over-rides at either the holding company or operating agency level.  The media agency has a fiduciary responsibility to its clients.  The advertiser needs to know with certainty that the resource allocation decision being made by its media agency are driven by sound, fact-based analysis tied to optimizing the advertisers return on media investment… not tied to the agency being able to supplement their revenue base. 

Having contract language that clearly defines what constitutes a “rebate,” how the advertisers pro-rata share of that rebate is to be calculated, in what currency that rebate is to be paid (cash or media) and the timing of those payments is a must.  However, that may not be enough.  Why?  The utter lack of transparency regarding these deals between global media concerns and global agency groups creates a series of challenges for the advertiser to assess the validity of the rebate amounts identified.  In our advertising agency contract compliance auditing practice we have often encountered scenarios where the advertiser was receiving quarterly “rebate” checks, but had no basis for calculating or forecasting the amounts of those rebates.  Of note, more often than not, the CFO of the operating agency does not have insight into how the holding company is allocating the rebates back to the client base. 

In our opinion, independent contract compliance auditing is a necessary compliment to solid contract language to protect the advertiser’s interest.  The knowledge gleaned across multiple audit engagements and the subject matter expertise necessary to even identify the presence of a rebate program, let alone calculate payment levels is crucial. 

Let’s remember one fact.  The multi-national agency holding companies are publicly traded entities.  They are responsible for accreting shareholder value… their shareholders, not the advertisers.  The incremental profit margin on volume over-ride programs, interest income from float, the mark-up on in-house studio or trading desk charges and the like is significant.  To be clear, no one begrudges an agency from profiting on the investments which they make in building out their infrastructure and resource offering to improve performance or operating efficiencies.  The issue is quite simply one of transparency.  In the case of rebates, it is the advertisers’ money being invested, not the agency’s.  Therefore, any economic benefit should come back to the advertiser, plain and simple. 

Hopefully the ANA’s recent survey on this topic results in meaningful dialogue within the advertising community over this practice and how to monitor and control its use within the U.S. market.  However, no one should be surprised with regard to the existence of these programs.  In a March 3, 2008 BusinessWeek article entitled; “An Adman Tests the Limits” Irwin Gotlieb Chairman of WPP’s Group M media operation stated that the agency had begun to pursue rebate programs with U.S. based outdoor advertising companies and that they were looking at other media channels to expand the concept to in the U.S. market.  

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

 

Drive Contract Compliance, Boost ROMI

By Contract Compliance Auditing, Marketing Agency Network No Comments

ROMIDoes your organization believe that its marketing investment can have a profound impact on growth, revenue flow and profitability?  If the answer is “yes,” then implementing a strong marketing accountability program can help boost financial outcomes.

Establishing performance criteria within the marketing function, and across the organization’s marketing agency network, is an important first step on the path to improved results and a higher level of accountability.  This can be accomplished by integrating agency financial performance metrics into the letter-of-agreement, and by linking agency remuneration and or incentive compensation to the desired outcomes.  Each metric and incentive goal should be well defined and directly tied to the organization’s business goals.  However, well thought out and agreed-to measures only lay the foundation – a constant review and feedback cycle is required to achieve the desired sound accountability.

A successful accountability plan must be sustainable and is dependent on the development of an agency performance monitoring discipline, relative to the letter of agreement, whereby progress and success criteria can be regularly tracked and communicated to stakeholders.  Unfortunately, too few organizations follow through and make the relatively minor investment necessary to implement and sustain such an initiative.

Perhaps the best way to jump start the control and feedback cycle is through the initial use of an agency contract compliance audit.  Let’s assume that the letters-of-agreement and agency remuneration programs were properly constructed and aligned with desired business outcomes.  Conducting an independent audit over marketing agency partner (creative agency, digital agency, media agency, PR firm, sales promotion agency, diversity agency) activity provides the requisite unbiased focus.  A well-scripted audit process will focus on testing past agency activity and reporting, detection of outlying transactions, review of parameters in place, metric refinement, and identification of process improvement opportunities to further enhance the program.

Reasons for an independent audit are many and varied, but here are a few key considerations:

  1. The organization may lack the depth of resources or subject matter expertise to conduct a thorough assessment of an agency’s contract compliance and performance.
  2. Independent auditors can provide agency stewardship insights and “Best Practice” feedback that can strengthen the client/agency relationship while laying the groundwork for improved performance.
  3. Contract compliance audit firms have the tools and experience to probe on all aspects of the marketing investment cycle ranging from agency staffing investment assessments and fee reconciliations to comprehensive billing reconciliations of both the agencies’ and the organization’s 3rd party vendors.
  4. The compliance and performance metrics gleaned from the audit process can enhance an organization’s marketing, financial and legal controls while supporting the firm’s corporate governance initiative.

In our experience, advertisers that have achieved success in optimizing their return on marketing investment (ROMI) have done so with the aid of a top-down accountability program.  At the end of the day, all stakeholders want marketing to succeed and to lead the way toward attaining its organization’s cash generation and brand equity building goals.  None more than the marketing team and their agency partners.  With solid stakeholder support, linking your marketing goals with your organization’s desired financial outcomes, creating a culture of accountability, and a dedicated effort to monitor performance, the path to success will become infinitely easier.

Interested in learning more about the potential benefits of a contract compliance and performance audit that can accrue to your organization?  Contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com for your complimentary consultation.

Who’s Got Your Back?

By Contract Compliance Auditing, Digital Media No Comments

Earlier this week news broke regarding a click fraud scandal at SheKnows.com, the large web portal targeting women.  The fraud was perpetrated by two editors who encouraged writers for the site to click on sponsor ads in an effort to keep sponsors “happy.”  Below is an excerpt from a memo sent by one of the editors:

Our click-through rates are not as great as our impressions (which is not your fault). But we can help everyone out a bit if we get in the habit of clicking on any ads you see alongside your articles, on the site, in your section, ANYWHERE. Our advertisers are the reason we all have paychecks each month so it’s important that they’re happy. Literally all you have to do is click on the ad – you don’t have to stay on their site for a certain amount of time and don’t have to buy a thing. Just click! Click 100 times if you want to!

Perhaps this editor took John Egan, the 19th century Irish-Canadian businessman and political figure too literally when he said; “The absolute fundamental aim is to make money out of satisfying customers.”

Why is this story important?  SheKnows.com, which is one of the U.S.A.’s leading sites catering to women, has been in business since 1999, claiming 50 million visitors monthly to its website.  Sponsors have included the likes of Panera Bread Company, Unilever, Johnson & Johnson, American Girl, Barilla and others (Panera announced their decision to pull advertising from the site following the news). 

Thus, the revelations about click fraud at a large and well established online publisher is troubling on a number of fronts.  One, we should all take umbrage at the fact that a supervisor at a publisher (or any organization for that matter) is instructing its employees to conduct themselves in an unethical manner.  This raises a serious question, “Were these the actions of a rogue editor or symptomatic of the culture of this particular organization or of online publishers in general?”  Secondly, the fact that the actions encouraged were intended to defraud sponsors and that they caused economic harm to advertisers on the site is amoral and borders on criminal.  Finally, the click fraud was never detected.  The fraud came to light only after internal memos were leaked.  In fairness to SheKnows.com, they have dealt with this issue in a professional and contrite manner and if the click fraud was solely due to the actions of two misguided editors, then they, like their sponsors, are victims as well.

This scandal comes at an interesting time for the online advertising industry.  It is true that online media continues to increase its share of advertiser spending, with growth rates that have far surpassed those of traditional media channels.  In fact, according to eMarketer’s January 2012 survey, online media spending in the U.S. is forecasted to top $39 billion in 2012, more than magazine and newspaper advertising combined.  However, there remain challenges and questions that the online industry must face as it reaches maturation, ranging from declining click rates to attribution measurement to legislative challenges to the industry’s right to self-govern. 

So how does this impact advertisers?  In short, caveat emptor.  With advertisers eschewing investments in traditional channels to fuel spending in online media, including many unmeasured media tactics such as search engine marketing, online video and some forms of social media, there are risks.  The risks are in the form of a lack of advertiser transparency and declining performance levels due to increasing ad clutter and consumer ad avoidance behavior.  It is estimated by ClickZ that click through rates (CTRs), one measure of online ad performance, range from less than .05% for online display ads to 1.0% to 7.0% for search.  It is these lackluster CTRs that provide unscrupulous players the incentive to perpetrate click fraud.

The question to be raised is: “Who is safeguarding the advertiser’s online media investment?”  As referenced earlier, the SheKnows.com click fraud was not uncovered by the Interactive Advertising Bureau or by the advertising agencies for the sponsors on the site, nor by 3rd party ad servers or ad networks nor by the client-side digital marketing teams for those advertisers.  The truth is, if not for a disgruntled employee who leaked an internal communique the fraud would have gone undetected. 

It is for this reason that online advertisers should consider engaging an independent auditor to assess agency and publisher contract compliance, review buying processes and controls, conduct an online billing reconciliation and audit the performance of their media investment in this area.  Interested in learning more about the SheKnows.com click fraud? Check out AdWeek’s feature story.

If you would like to sign up for a complimentary session to discuss the benefits of a 3rd party digital media audit, contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com to schedule a time convenient for you. 

It’s Your Money and Your Reputation

By Advertising Agencies, Contract Compliance Auditing No Comments

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

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

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

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

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

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

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

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

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

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

 

Performance Integrity

By Contract Compliance Auditing, Marketing Agency Network No Comments

In the world of athletics, independent performance assessments are the rule.  In baseball, umps call balls and strikes, in tennis linesmen determine whether a ball is in or out, in football referees call out players for rule infractions.  Given the competitive nature of athletic competition at all levels and the economic impact performance integrity can have in collegiate and professional sports, it is unfathomable to think that the governing bodies overseeing these entities such as the MLB, USTA, NFL or NCAA would allow athletes to self police their contests. 

Is business any less competitive?  When companies consider the value of a point of market share, the impact of positive sales on earnings-per-share or the investment level being made in marketing as a percentage of their selling-and-general-administrative expense the answer would most certainly be “No.”  So why is it that when it comes to marketing performance integrity, self-assessment is the rule rather than the exception? 

In business, as in sports, there are winners and losers.  There are several characteristics that impact whether an organization can be categorized as a “winner.”  These characteristics include, but are not limited to, a company’s market position, year-over-year sale’s increases, customer loyalty/satisfaction and return on shareholder equity.  An organization’s marketing investment and the resulting performance of that investment largely determines an organization’s in-market success.  Given the potential impact marketing has on company performance, don’t you believe that stakeholders (i.e. Share Owners, Board of Directors, Senior Management) would want to insure the integrity of that “performance?” 

Perhaps it makes sense for business to take a lead from their sporting organization counterparts and commit to the independent performance assessment of their marketing partners as a mechanism for optimizing this important investment.  This is certainly not a foreign concept in business – just as public corporations are required to utilize independent auditors to vet the accuracy of their financial statements it would be reasonable, and make good sense, to apply this concept by engaging 3rd party agency contract compliance and performance auditing firms to assist in assessing the efficacy of one’s marketing spend.  The learning and any resulting financial reconciliation related to the audit process would yield dividends on multiple fronts well into the future.  In the words of one of America’s founding fathers, Thomas Paine: 

“Character is much easier kept than recovered.” 

The practice of engaging agency compliance auditors to provide a fair and balanced look into the performance of an organization’s marketing agency network is relatively commonplace in Europe.  This movement has also been gathering momentum within the world’s largest advertising marketplace… the United States of America.  Employing independent auditors is not done to impugn the character of the agencies whose compliance and performance is being evaluated.  Rather, it is performed to validate that the advertiser has, in fact, the appropriate legal, financial and governance controls, fraud detection and performance monitoring processes in place and that the reporting and subsequent level of transparency which it affords the company are satisfactory.  

Given that we started this article with a sports reference, it is only appropriate that we end with a pearl of wisdom from one of major league baseball’s most accomplished players, Hall of Famer Yogi Berra: 

 “You can observe a lot by just watching.” 

Interested in learning more about the benefits of agency contract compliance and performance audits?  Contact Don Parsons, Principal at dparsons@aarmusa.com to schedule a complimentary consultation today.

Accountability Doesn’t Obviate the Need for Governance

By Advertising Agency Audits, Contract Compliance Auditing, Internal Audit No Comments

It has been ten years since Sarbanes-Oxley was enacted by the United States legislature.  The SOX Act, as it is commonly known, covers a number of issues ranging from corporate governance to internal controls and reporting accuracy.  The law came into being as a result of high profile corporate and financial scandals at Enron, WorldCom, Adelphia and Tyco International.  The monetary impact of these events on investors around the globe was both profound and devastating.

As firms began to grapple with SOX compliance requirements, they implemented processes and procedures designed to enhance transparency and improve governance at all levels of the organization.  In the context of a business, Wikipedia offers this definition of governance: “Governance relates to consistent management, cohesive policies, guidance, processes and decision-rights for a given area of responsibility.”

While it took awhile and in some organizations, a longer period of time than in others, marketing’s turn to go under the microscope has come to pass.  In light of the investment level being made by companies, this is certainly no surprise.  Given the complexity of the marketing-advertising supply chain, the use of agents, independent contractors and 3rd party vendors, and the lack of transparency often afforded advertisers, the only surprise is that it has taken this long for organizations to begin to “peel back the skin of the onion.”

For progressive companies that have created a culture of accountability, increased governance and its impact on marketing spend, and all that it entails, represented few challenges.  However, in many organizations the notion of “governance” was interpreted by client-side marketing and advertising agency representatives to be a full-frontal attack on their integrity.  Further compounding the process was the fact that marketing was, and to some extent remains a bit of a “black box” to corporate finance, audit and procurement departments.  In many instances, these departments simply don’t have the subject matter expertise on-staff to help guide their efforts to understand the nuances and complexities of the marketing area.

What do we mean by “complex?”  From the size of an organization’s marketing agency network which could include dozens of firms (earlier this year PepsiCo pared their agency network from 150+ shops to 50) to the hundreds of statements-of-work and purchase orders issued in a given year to the thousands upon thousands of bill-to-client invoices and 3rd party vendor invoices which are processed.  Remember, these include a staggering number of revisions to the ad industry’s typical modus operandi, an “estimated billing” approach in which the advertiser is billed upfront for all or a portion of the creative and or media activity for a given period.   In an estimated billing scenario, it is the advertiser who fronts the money, not the agencies and not the media sellers that bear the risks for their investment.

The good news is that there are a number of competent, highly-regarded, independent agency contract compliance audit firms that can provide capable assistance to an advertiser.  The subject matter expertise which they bring includes insights into most all facets of the marketing supply chain as well as industry “Best Practice” in the area of accountability.  Further, they provide an excellent bridge to enhance communication and further understanding between marketing and their agency network and the governance process championed by finance, audit and procurement.

The time has come that there should be few corporate marketers and fewer marketing agencies that resist an organization’s governance initiatives.  There is no reason, and frankly, no excuse in any quarter for not “stepping up” to enhance transparency and improve the reporting and controls a company has in place to safeguard its marketing investment.  In the words of Stephen Covey:

“Accountability breeds response-ability.” 

Interested in learning more about the role of contract compliance auditing in supporting your company’s governance efforts?  Contact Don Parsons, Partner at Advertising Audit & Risk Management at dparsons@aarmusa.com for a complimentary consultation.

Do Perspectives Drive Outcomes?

By Advertisers, Contract Compliance Auditing, Marketing Agencies No Comments

By way of background, I have spent my entire career as a marketing professional.  Of note, I have both advertising agency and client-side experience in addition to having worked in the field of marketing accountability, auditing marketing spend and marketing agency performance.  Hence, I have always been perplexed by the notion that marketing executives were thought by some to be unwilling participants in working with their peers in procurement or finance to help them better understand and assess the stewardship of an organization’s marketing investment.

I don’t believe that anything could be further from reality.  The truth is that the vast majority of marketing professionals have an inordinate sense of obligation to go along with a fiduciary duty to invest their organization’s marketing budget in a manner that will yield the greatest possible return… whether that is brand positioning, revenue generation or market share increases.  To that end, marketers and their agencies work diligently and tirelessly to make every dollar invested work as hard as possible.

Of note, many industry pundits feel as though advertising agencies have fallen from their pedestal and position of respected “partner” to that of a “vendor” who does little more than sell their wares for the best possible price to the highest bidder.  In spite of the fact that the average client-agency relationship tenure is a few years rather than a decade or more as in the recent past, categorizing an agency as a vendor unfairly diminishes the role and contributions made by both the agency community and the client-side marketers that direct their efforts.

Thus, it was no surprise to see the results from CMG Partner’s recent survey that found CMOs had expanded their roles and perspectives within their organizations, becoming something akin to a “CEO of Marketing.”  The trying times related to the global recession and the downward pressure on marketing spend at a time when organizations sorely need to drive demand generation, while challenging, have forged a stronger breed of senior marketing executives.  The report also recognizes that while the marketing profession has made considerable gains in terms of greater corporate influence, it is on “the threshold, rather than in full flower.”  The report concluded that the CMO must “not only earn his or her place at the table” but also “his or her voice.”

So how can marketing executives take advantage of the upward corporate trajectory to achieve broader authority?  One answer would be to fully embrace the use of independent third-party compliance and performance audits to improve corporate transparency into all facets of the marketing supply chain and openly share how an organization’s investment is being stewarded by the marketing team and their agency network.  Transparency and recommended improvement opportunities can help to further the understanding that other corporate stakeholders have with regard to marketing plans, processes and outcomes.  Further, independent reviews of the efficiency and efficacy of the marketing spend can benefit marketers by building peer level trust in their resource decision-making framework and the competency of their agency partners.

An independent assessment of a marketing agency’s contract compliance and performance does not emanate from a lack of trust on the part of a client organization.  Advertisers that have embraced progressive corporate governance initiatives have an obligation to ensure that the large sums of money being invested in this important area are being managed capably and in concert with the terms and provisions of the client-agency agreement.  Thus, the agency community, like any good corporate partner, should both welcome and support a client’s efforts to hold marketing accountable to the same standards that other functions within the organization are held to.  Agencies can benefit from the process as well.  Both as it relates to the independent validation of the investment that they make in the relationship as well as to use the compliance audit process to better align their resource investment and remuneration with the client’s business objectives.

In the words of Michael Josephson, one of the United States’ most sought after ethicists:

“What you allow, you encourage.”

Interested in learning more about the potential benefits of a marketing agency compliance audit?  Contact Don Parsons, Principal at Advertising Audit & Risk Management for a complimentary consultation at dparsons@aarmusa.com.

Why Go to a Doctor for an Annual Check-up?

By Advertising Agency Audits, Contract Compliance Auditing, Marketing Agency Network No Comments

Whether in our business or personal lives, third-party inspections are a fact of life.  Public companies are required to engage independent financial auditors to review their financials.  Many U.S. firms are subject to independent inspections by OSHA to ensure compliance with the Department of Labor’s employee safety and health standards.  And for purposes of establishing a tax base, local governments employ independent appraisers to assess the value of commercial and residential real estate.

Certainly there are times when we rue the fact that we are subjected to outside scrutiny.  However, independent inspections are both necessary to protect stakeholder interests and provide valuable insights that enable businesses, governments and individuals to mitigate risks and drive improvements.

So when it comes to marketing accountability, why do so many organizations eschew independent third-party reviews of their agencies’ processes, contract compliance, financial compliance and performance?  Sadly, in a majority of instances an advertiser allows its agency partners to self-police themselves by providing their own internally generated performance reports on topics ranging from how they invested and stewarded their client’s media dollars to the agency’s time-of-staff investment; or the timeliness with which they paid vendors; or processed discounts, rebates and credits back to the client.

Given that the marketing budget is often the largest component of an organization’s SG&A expenses, one has to ask, “Does the absence of third-party marketing agency oversight make sense?”  “Are there benefits which accrue to the organization by not engaging independent auditors to review compliance and performance across their marketing agency network?”  Can one honestly answer “Yes” to either of these questions?

Marketing accountability audits take several forms ranging from contract compliance reviews, process and performance assessments to financial and media audits.  Conducted by professional independent auditors the process is designed to help advertisers and their agencies mitigate financial and legal risks, improve work processes, verify the equitability of agency compensation, and enhance reporting and communications.  The objectivity, transparency and best practice comparatives yielded by an independent marketing agency audit can provide a positive basis for creating solid, performance-based relationships with each of an advertiser’s marketing agency partners.

It makes sense to outsource since the analytical software, industry knowledge and specific subject matter expertise required to conduct a comprehensive examination of an organization’s marketing spend are typically not available within the advertiser’s Finance, Procurement or Internal Audit staffs.

It is virtually standard practice for client-agency agreements to allow advertisers the “right to audit” all aspects of the agency relationship ranging from agency resource investments to fee reconciliations to financial transaction details and supporting documentation. 

Ironically, very few advertisers enact their right of independent examination, a right that they felt important enough to negotiate into the contract on the front-end of the relationship. 

In the word of noted American author, Bodie Thoene:

“What is right is often forgotten by what is convenient.”

Interested in learning more about marketing agency accountability audits?  Contact Don Parsons, Principal at Advertising Audit & Risk Management for a complimentary consultation at dparsons@aarmusa.com.

Effectively Managing Agency Transitions

By Right to Audit Clauses, Transition Audits No Comments

The purpose of this article is not to analyze “why” the average tenure of client – agency relationships have declined precipitously over the last few decades.  Sadly, research conducted by Michell and Sanders in 1995 indicated that a majority of these relationships lasted “no more than” five years.  Many speculate that the average tenure today is less than three years.  Rather, I would like to focus on an advertiser’s post-termination rights.

Much time is spent on the front end of a relationship negotiating the Letter of Agreement (LOA), often referred to as the “terms of separation” document.  Virtually all of these agreements contain “right to audit” clauses that provide the advertiser access to financial documentation, invoices, 3rd party reimbursement data, time-of-staff investment detail, fee reconciliation data, etc… to vouch for the accuracy of the billing process.  However, once a relationship has been terminated, very few advertisers refer back to the LOA or take action on  protections which it affords their organizations.

The reasons for this lack of attention on the LOA governing the “old” relationship are many and varied: Marketing is focused with on-boarding their new agency partner, Procurement and Legal are engaged in finalizing the LOA for the incoming agency and Finance is supporting their Marketing and Procurement peers on the compensation system analysis/negotiation.

Whether or not an advertiser has enacted their right to audit during the relationship, failing to enact this clause once a relationship has been terminated is a financial risk regardless of whether it was the advertiser or agency that initiated the termination. Conducting exit audits is not intended, nor should it be conducted as a vengeful act imposed by an advertiser on an outgoing agency partner.   Auditing in a post Sarbanes-Oxley world is a corporate governance best practice, part of an organization’s fiduciary responsibility to its shareholders. It is simply a means of formally closing out the relationship and mitigating any attendant financial and or legal risks associated with the transition from one agency to another.  In the words of American humorist and writer Finley Peter Dunne:

“Trust everyone, but cut the cards.”

So the question remains: “Why do so few advertisers audit their outgoing marketing suppliers?”  In our practice, we typically come across two primary reasons, the first is related to the investment in on-boarding the new agency referenced above.  The second is a feeling of empathy for the outgoing agency, particularly if the advertiser has terminated the relationship.  Conducting an exit audit in this instance is sometimes viewed by advertisers as the ultimate indignity for a business entity that was once a valued partner.

It has been reported that fewer than one-in-ten incumbent agencies retain an advertiser’s account once it has gone into review.  So what happens once a review has been announced?  Well, if you’re on the agency side and there is a 90%+ chance that you are going to lose the business, you may immediately begin paring back your resource investment, reassigning agency personnel to other accounts or reducing staff, replacing senior personnel with junior level staffers, delaying or holding earned but unprocessed credits, discounts and rebates rather than passing them back to the advertiser, extending 3rd party vendor accounts payable timing, reducing their stewardship efforts over the client’s advertising investment, etc…

Exit audits can mitigate the risks associated with these practices and can yield valuable insights and process improvements that can be applied to other relationships… while insuring that all billing and fees have been properly reconciled and that all intellectual property rights and assets have been properly transitioned.  Conducting an exit audit is an industry “Best Practice” designed to protect the advertiser and ensure a clean transition.  Implemented in a fair, even-handed and respectful manner they are not intended to punish an outgoing agency partner.

Auditor Compensation Should be Aligned With Client Objectives

By Advertising Agency Audits, Contract Compliance Auditing No Comments

audit compensationAt the recent ANA “Agency Financial Management” conference in Boca Raton, FL there was much conversation around the topic of “contingency” auditors and the relevancy of recovery based compensation models for media and contract compliance audit firms.  This perspective was largely fueled by presenters representing fee-based firms and associations.   Whether their perspective was driven by a desire to pander to their association members, the agency representatives at the conference or somehow believing that being a fee-based auditor was somehow the lesser of two evils is unclear.

In our opinion, this is a largely irrelevant, self-serving position that masks the true benefits of third-party independent marketing audits and reviews.  Our position is that audit compensation models should be treated no differently than those of other professional services firms… including advertising agencies.  Compensation should be tied directly to a scope of services.  These deliverables drive the value of the audit including; contract compliance, process improvement, agency performance assessments, improved reporting/ transparency and or financial reconciliation.  The notion that compensation methodologies somehow skew audit results is a direct affront to the integrity of the advertiser.  The fact is that it is the historical agency billings/ advertiser payments and their basis that determines whether or not the advertiser is entitled to a financial true-up, not the manner in which an auditor is compensated.

If an audit determines that an agency owes their client money due to billing errors, earned but unprocessed credits, rebates and discounts or time-of-staff under-delivery, the findings have nothing to do with how the advertiser has funded an audit.  Like performance based compensation systems espoused by agencies, a combination fee plus performance incentive compensation approach is equally valid and viable for auditors.  The key is to align auditor compensation with the advertiser’s business objectives and culture.  Encouraging their professional services partners to have “skin in the game” as it relates to the financial efficacy of the audit, whether based upon recoveries or future savings is a standard, professional approach for advertisers to employ.

Importantly, performance based compensation systems provide the requisite incentive for audit firms to look beyond the time-capped limitations of fee-based approaches to ensure a thorough assessment based on a comprehensive data review rather than sampling.  Further, the need to audit, whether part of an enterprise accountability initiative, tied to marketing agency turnover or simply following best practices related to enterprise-wide financial risk management protocol, often requires financial flexibility when it comes to funding the initiative.  Thus, a blended compensation system which includes a base fee and performance incentive can enable the advertiser to advance their audit program within the current budget year, without jeopardizing Procurement’s, Internal Audit’s or Marketing’s other initiatives.

During the aforementioned ANA conference, it was suggested by one client-side marketer that “those types of audits,” referring to contingency audits, are frequently initiated by procurement, not by marketing.  Let’s be honest, virtually all third-party audit activity emanates from finance, internal audit or procurement.  Unfortunately, in spite of the fact that an organization’s marketing spend represents one of the largest components of an advertiser’s selling and general administrative expense, U.S. marketing executives have yet to fully embrace their organization’s accountability initiatives.  Focusing on auditor compensation is simply a misguided attempt to further delay any third-party scrutiny.  And if this is not the case, ask those marketing executives to underwrite the cost of a fee-based audit and gauge their reaction to the request.  In the words of noted American author, Katherine Brush:

“Most passport pictures are good likenesses, it is time we faced it.”

At AARM we conduct contract compliance and agency performance audits for a broad-range of multi-national advertisers, many that are represented on AdAge’s “Top 100” advertisers list.  For the record, we are compensation agnostic.  Our goal is simple – to structure a compensation approach that aligns our efforts with the client’s business objectives, culture and audit deliverables.  Of note, in AARM’s process all audit observations are vetted with the agency prior to being shared with the client.  Therefore, if there exists any erroneous findings or the agency feels as though they can share additional information to clarify the findings represented in the audit, the opportunity exists for the agency to address those items before the audit report is published.  In the end, the facts are the facts, regardless of the manner in which an audit firm is compensated.  If an advertiser doesn’t feel as though they can trust the results of the audit, then we would suggest the real issue was the screening process employed on the front-end to select the audit partner, not the compensation program.