The Key to Boosting Advertisers’ Agency Network Management Efforts

Organizations that are committed to Supplier Relationship Management (SRM) undertake a series of defined steps in administering this critical function:

1. Supplier Sourcing, Vetting, and Selection
2. Contracting
3. Performance Monitoring & Evaluation
4. Risk Management
5. Supplier Development & Continuous Improvement
6. Exit Strategy/ Supplier Transition

Procurement or Sourcing typically manages the SRM process and reports to the Chief Financial Officer. In most instances this team has the means to fund routine oversight activities such as supplier audits and performance reviews out of its operational budget.

A solid process to be sure, one that could help the marketing function safeguard the organization’s material investment in advertising, while optimizing the effectiveness of their agency networks.

Currently, Marketers may engage their Procurement teams to support their efforts with supplier sourcing and contracting. However, in our experience there is minimal involvement from Procurement or Finance once an agency is under contract. Consequently, key steps in the SRM process such as performance monitoring and risk management are often neglected. Further, when the Procurement or Finance organizations seek to conduct basic risk mitigation tasks such as periodic suppler audits and performance reviews, they must secure the permission of the marketing team as well as Marketing’s commitment to fund such reviews, which is never a sure bet.

“The key to effective supplier management is not just price negotiation, but also managing quality, delivery, and innovation.”

Implementing a formal SRM process in Marketing, with cross functional support could significantly mitigate risks and improve relationships with agency partners. A key reason for this is that financial oversight of and accountability for an organization’s marketing spend requires an investigatory approach, which experience suggests is best lead by the finance team. This type of control is crucial given the advertising industry’s traditional approach and sometimes nebulous practices regarding the stewardship of client funds:

• Ad agencies use of an “estimated” billing process whereby clients are billed in advance of the actual services performed, with the expectation that the initial estimated invoices will be reconciled to actual costs once a job or campaign is completed.
• Typically, agencies send clients non-descript invoices which do not include copies of third-party vendor or affiliate invoices.
• The time between the initial estimated billing and a final reconciliation can range upward of 3 to 6 months if the advertiser is ever presented with detailed reconciled costs. During this period, there is little transparency regarding the accuracy of the amounts charged by the agency, or the value received by the advertiser. This includes both third-party vendor expenses and agency fees.
• Advertisers simply have no insight into how, when, or what amount their agencies reimburse third-party vendors or related entities for services purchased. Lengthy payment terms from the agency to these suppliers can result in reputational and or financial risks for the advertiser.
• While many client-agency agreements limit an agency’s revenue to that which is specified in the compensation agreement, there are practices that have become common place in the industry that some agencies often employ to enhance their margins:
  • AVBs or Rebates
  • Principal-based media buying (media arbitrage)
  • Retaining unbilled media funds for an inordinate period of time
  • Use of non-transparent, unauthorized mark-ups
  • Appointing related entities or affiliates without proper authorization

While oversight controls are important, this approach can enhance value creation by optimizing supplier relationships grounded in accountability, which increases trust throughout the organization. Agencies benefit from enhanced exposure and better alignment with their clients’ strategic goals.

In the end, a disciplined Supplier Relationship Management (SRM) process will help facilitate enhanced levels of collaboration and improve an agency’s ability to consistently deliver innovative and cost-effective solutions.