Marketing Math Blog

May 29
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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.

May 22
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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.

May 15
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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.

May 09
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Agency Trading Desks and the Issue of Transparency

By Digital Media, Media No Comments

With the rise in digital advertising budgets and the dramatic expansion in the level of inventory available from publishers, advertising agency holding companies have developed a viable alternative to ad exchanges for securing a portion of their clients’ digital media inventory needs.  This is being done through the use of agency trading desks.

Simply put, a trading desk is a separate holding company service entity that integrates a demand-side platform with other technology and a wealth of consumer data to deliver targeted audiences at scale.  While primarily focused on display advertising, this dynamic method for purchasing media on a real-time basis is expanding to the buying of online video, search, mobile and social media.   This approach leverages an auction based model to buy unsold publisher inventory at efficient rates relative to pre-procured media.

The benefits to the advertiser can be significant when it comes to audience buying and ad impression optimization relative to content/ context based digital media buys or purchasing packaged buys through an ad network.   Given the relative newness of this approach combined with the complexity of the service offering and the limited understanding of trading desks among advertisers there remain concerns about the approach tied primarily to what is perceived as a lack of transparency.  This in turn has resulted in questions ranging from how agencies are compensated for this service (“Are advertisers  double paying their agency partners?”) to the potential for an agency’s objectivity to be compromised as they become both a buyer and seller of inventory (buy from publisher at one price, resell to clients often at a premium).

There are a number of ways for advertisers to enhance transparency into the trading desk operations of their agency partners.  The first is to check your agency letter-of-agreement to determine if there is language related to the agency’s trading desk operation.  If not, check to determine if a separate agreement with the trading desk operation was executed and read through the agreement carefully.  Secondly, engage your agency in dialogue about whether or not they are currently using buying digital media on your behalf through their trading desks and if so, what percentage of your overall digital buy is being channeled through the trading desk.  If the agency is not utilizing their trading desk for your digital media buying, ask whether or not it would be appropriate for your business model and what percent of your digital media buy would be a candidate for this approach.

With the answers to these questions in hand, it is time to discuss how the agency expects to be compensated for this service.  Compensation could include any or all of the following; commission on executed media buys, fee for service, incentive compensation tied to performance (i.e. cost per action, cost per lead, cost per acquisition) and mark-up on the media purchased by the trading desk and sold to the advertiser.  Further, inquire whether or not the trading desks earns rebates or discounts from publishers or technology partners tied to volume and if so, how is your pro-rata share calculated and passed through to you.

It is important to note that the trading desk model employed and the approach taken will vary by agency, so asking questions and establishing guidelines on how to evaluate both the efficacy and efficiency of this approach is critical before allocating a portion of your digital media budget to this channel.   While questions remain with regard to this emerging agency service, the level of risk represented is no more than that represented by ad networks.  Having direct conversations with your agency about the approach, costs, reporting and performance metrics will go a long way to ensuring that you have a sound understanding of how your investment is being handled.

Finally, incorporate a “Right to Audit” clause into the agreement which you execute with the trading desk operation to contractually insure your organization access to the date required to support your desire for full transparency. If you would like to learn more about this area and or how AARM can assist you in assessing the relevance of this approach or analyzing the performance of your agency’s trading desk, contact Cliff Campeau, Principal at ccampeau@aarmusa.com for a complimentary consultation on the topic.

May 01
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Who’s on First? Advertisers Want to Know

By Advertisers, Advertising Agencies No Comments

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

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

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

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

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

Apr 23
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Time Keeps Ticking… 3 Common Agency Time-of-Staff Reconciliation Errors

By Agency Fee & Time Management No Comments

It has been several decades since the move away from full-service agency relationships where advertisers compensated their partners on a straight commission basis, to the use of specialized marketing agencies compensated on a direct labor or fee basis.  However, in spite of the elapsed time, advertisers may still not be optimizing their agency fee investments.

Over the course of our timekeeping system and fee reconciliation audit work we frequently come across vagaries and oversights that hinder an advertiser’s ability to leverage its investment in agency compensation.  This is frequently compounded by the fact that there is little transparency into the accuracy of an agency’s time reporting vis-à-vis its timekeeping system.

The three most common errors that our audits uncover are as follows:

  1. Lack of a proper agency staffing plan incorporated into client-agency agreements.  A proper staffing plan should identify annual full-time equivalent hours, the individual, their position, the pledged utilization level and the billing rate or departmental cost to be utilized to calculate and reconcile agency fees.
  2. While many client-agency agreements set forth processes for monthly time-of-staff reporting and quarterly or annual reconciliation reviews, few advertisers receive and or review these reports or reconcile fees to the agency’s time-of-staff investment.  Further, it is rare that the advertiser has previously conducted an independent third-party review over the accuracy or validity of an agency’s time reporting.
  3. No definitive contractual approach for how an agency will report on and or bill for freelance or independent contract talent.

A lack of clarity and controls in this area results in transparency gaps and billing oversights.  Absent independent verification of agency time reporting, discrepancies are not transparent to the advertiser.  And, absent accurate historical information, the problem is perpetuated when future fee levels are based on inaccurate historical time and cost assumptions.

Clear definition, process and control will mitigate significant economic risks for both the advertiser and agency.  This is also why a comprehensive staffing plan is essential to the fee / time-of-staff reconciliation process.  In the words of William Penn:

“Time is what we want most, but… what we use worst.”

Armed with accurate costing and utilization information, both the Advertiser and Agency will be able to build on their joint efforts in fostering a strong partnership based on a fair underlying compensation structure.

As a complimentary offer, and to talk through agency fee investment best control practices, please contact Don Parsons, Principal at Advertising Audit & Risk Management, at dparsons@aarmusa.com.

Apr 18
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Global Marketer Gets Lean & Mean

By Advertisers, Marketing Agency Network No Comments

marketing services agency networkAt the beginning of 2012 PepsiCo announced a series of strategic enterprise expense reduction initiatives.  These included the elimination of 8,700 employees representing 3% of its global workforce plus additional cost reductions of $500 million per annum over the course of the next three years and an announced streamlining of its marketing services agency roster.

It was announced that part of the savings from that initiative would be invested back into marketing PepsiCo’s beverage brands to narrow the competitive spending gap with category leader Coca Cola.  According to Jefferies & Co. in 2010 Coca Cola spent 8% of annual revenues to market its beverage brands compared to 3% for PepsiCo.

On April 13, 2012 it was reported by Advertising Age that Pepsi’s North America beverage division had completed the downsizing of its agency roster.  The result?  Pepsi eliminated sixty-five percent of its beverage division’s marketing agencies, approximately 100 agencies.  Long-time agency partner Omnicom Group was the big winner, strengthening its hold on what has been a long-term client relationship.

To PepsiCo’s credit, it had recognized that its agency roster had become bloated in recent years and took aggressive action to right size its marketing services agency network.  So what will this move yield for the beverage giant?  Well for one, the consolidation of responsibilities across fewer agencies will yield a combination of agency fee and expense reductions tied to the elimination of duplicative efforts and overlapping roles and responsibilities across its marketing agency network.  Secondly, the reduction in the size of PepsiCo’s agency roster will enhance the marketing team’s focus and ability to effectively engage its marketing partners in a meaningful collaboration to build sales, market share and brand strength.

Managing and motivating a smaller group of suppliers is certainly less complex than doing so with an agency network numbering over 150 marketing agencies.  However, post-consolidation PepsiCo’s North American beverage division will continue to work with approximately fifty agencies.  While there will continue to be challenges in aligning agency resource investment and effort with the division’s business goals, establishing performance criteria and systematically monitoring progress across its media, creative services, digital, diversity, promotion and PR agencies this is clearly a step in the right direction.

Hats off to PepsiCo for taking a measured approach to identifying a supply-chain optimization strategy that has the potential to both save money and enhance marketing ROI.  In the words of Benjamin Franklin; “Well done is better than well said.”

Apr 14
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Agency Agreements Require Adequate Audit Rights

By Advertising Agency Audits, Client Agency Relationship Management, Contract Compliance Auditing, Internal Audit, Letter of Agreement Best Practices, Marketing Agency Network, Marketing Budgets, Marketing Procurement, Right to Audit Clauses, Transition Audits No Comments

Advertising Audit is an important financial control process – not an optional luxury.

Any large company conducting business with an advertising agency or media buying firm without comprehensive Audit Rights is simply at risk. The marketing supplier may refuse to cooperate with (or significantly restrict) even very reasonable audit requests.

Based on years of experience and observation, it is clear that a sub par or non-existent audit clause often limits an Advertiser’s ability to implement standard compliance testing which therefore limits their opportunity to validate agency billings and gain comfort. Important learning opportunities are also lost – clearly an undesired outcome.

An example of a healthy financial relationship between parties – there are cases to note where even lacking clear audit documentation, the marketing supplier has complied with audit requests, but these cases are few and far between.

Pushback is a “red-flag.” Good financial practices should have nothing to fear from thorough scrutiny. The more pushback the higher the risk meter should rise.

Verification of billing accuracy / support would seem an innate right of any large company spending millions of dollars with a vendor (yes, even in Marketing).

What should you do? (1) in the near term amend the current Client-Agency Agreement to add a Right to Audit clause – and make it retroactive for at least 3 years; (2) add a Right to Audit clause within an ancillary document such as a Statement of Work (SOW) or an annual amendment to the Master Client-Agency Agreement; or (3) create a new document signed by both parties creating a Right to Audit and adding it to the vendor master file.

Ensure the audit clause is
well-defined and comprehensive.
For a guide, contact AARM at 415.381.3400

Once Audit Rights are established, a best practice and preventative control measure is to implement periodic and routine testing to deter wasteful practices, to identify errant billing transactions and to monitor key financial metrics. Testing should be performed at least annually, and always in cases where an agency relationship has been terminated (“transition audit”).

The audit concept also applies to systematic (or continuous) monitoring processes. A systematic monitoring program measures agency financial transactions, reporting and timing against a predetermined set of tolerances. Metrics are compiled and delivered at least monthly to stakeholders. Systematic monitoring is generally performed by an independent third-party with specialized software, and the Advertiser often chooses to share results with the agency – to support incentive compensation goals of and or a basis for behavior modification.

Right to Audit is a necessary safeguard in today’s business environment. Determining a schedule, methodology, and defined approach that encompass at some level each vendor in the organization’s marketing network will provide necessary assurance to management that adequate oversight and preventative controls are in place to catch errors, drive efficiencies and enhance ROI.

 
Apr 09
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Managing Controllable Spending

By Marketing Budgets No Comments

The ANA recently released the results of its sixth annual spending survey of 250 marketers regarding their 2012 budgets.  Not surprisingly, budgets are not going up much, if at all.  In fact, half of those surveyed indicated that budgets would be flat and one-third stated that budgets would be reduced from prior year levels.  As part of their budget management efforts, more than 8 out of 10 marketers are being asked to “tightly manage” their controllable spending.  Not surprisingly, the focus on controllable expenses is being extended to the organization’s agency partners as well with more than half of those surveyed indicating that they would ask their agencies to cut internal costs.

The not so good news is that some of the categories of expense reduction being targeted ranging from the elimination of employee training and development to shifts in media mix to lower cost media channels can negatively impact a marketer’s effectiveness in the near-term and over the long-haul.

What if there was an option available for a marketer to meet their organization’s budgetary guidelines, without sacrificing their ability to build brands and to profitably drive sales and market share?

It might surprise some to learn that the ability to boost available budget and drive efficiencies is closer than they think.  The answer comes in the form of a contract compliance and performance audit of an organization’s marketing agency partners.  In a majority of client/agency relationships the right to audit is specified within the master services agreement.  However, most marketers don’t avail themselves of this legal provision, which yields both improved financial controls and recoveries while leading to improved agency efficiencies and performance.

When was the last time your organization conducted an agency fee reconciliation or conducted an independent billing reconciliation that included actual versus estimated costs along with 3rd party vendor remittance data?  Have you recently checked to determine whether early pay discounts, annual volume rebates or your pro-rata share of agency group buying discounts were being captured and returned to your organization?  Do you currently review your agency partners’ monthly time-of-staff investment reports?  Reconcile them quarterly?  Engage in dialogue with your agency partners to evaluate ways to streamline processes that can reduce your costs and bolster their margins? If the answer to any of these questions is “no” then you could be leaving money on the table.

How much money you ask?  In our experience, it is not uncommon for a compliance audit to yield financial recoveries, future savings and risk avoidance benefits in the 3% to 9% of audited dollar range.  While periodic compliance audits make good legal and financial sense, they can also serve as the impetus to strengthen the client/ agency relationship by establishing and tracking performance criteria while identifying mutually beneficial process improvement opportunities.  Interested in learning more about the ANA survey results? …  Read More

Apr 05
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Agency Agreements Lacking Adequate Audit Rights

By Contract Compliance Auditing, Letter of Agreement Best Practices, Right to Audit Clauses No Comments

For those organizations operating without a Right to Audit clause or a weak clause in their agency agreements, marketing suppliers can outright refuse to cooperate or significantly limit the scope of a proposed audit.  In some cases, the missing clause could turn what would have been a relatively quick and cost-saving process into a long and difficult effort.

More often than not, however, even without a written contract right, most marketing suppliers will allow an audit, especially if the advertiser is or was a major client.  An agency that refuses an audit request knows that it could be portrayed as having something to hide.  Sometimes circumventing your current agency contact and appealing to a superior may result in a positive outcome, since senior management may be unaware of all the reasons for the initial contact’s refusal.  Moreover, certain marketing suppliers may embrace the audit as an opportunity to voice concerns if it thinks it is being unfairly treated, wants to discuss process change, or is seeking additional business from the advertiser.

To obtain a right to audit, options include, in order of preference: (1) amending the current Client-Agency Agreement to add a right to audit clause; (2) adding a right to audit clause within an ancillary document such as a Statement of Work (SOW) and or an annual amendment to the master Client-Agency Agreement; (3) creating a new document signed by both parties creating a right audit and adding it to the vendor master file; or (4) the least desirable option, filing a civil lawsuit and subpoenaing the documents needed to conduct an audit.  When adding a new contract right, it is also important to ensure the audit clause is well-written, clear, and comprehensive.

Most importantly, once the right to audit clause is in place, the advertiser must exercise its right to detect and deter abusive or wasteful practices and potentially recover appropriate funds.  This can include performing regularly scheduled limited audits for some accounts, conducting comprehensive examinations on an annual or bi-annual basis, or performing exit audits after an agency relationship has been terminated.  Often overlooked, as well as extremely effective, are post-audit monitoring programs with metrics specifically tailored to each relationship that can be objectively measured.  Results can be shared and act as a self-policing mechanism to maintain improved performance.  These performance metrics can also be integrated into client-agency evaluations.

Right to audit clauses are a necessity in today’s business environment.  Determining a schedule, methodology, and defined approach that encompasses all members of an organization’s marketing vendor network provides assurance to management that it has adequate rights to oversee its advertising dollars and can identify and take advantage of opportunities for efficiencies through improved oversight.

Interested in a complimentary second opinion on your agency agreement right to audit clause?  Contact Jim Bean, Principal, AARM at jbean@aarmusa.com.