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.