Marketing Math Blog

Dec 03
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What’s Good for Agency Holding Companies May Not Benefit Advertisers

By Principal Media, Client Agency Relationship Management, Letter of Agreement Best Practices No Comments

Bias and ObjectivityEvery agency holding company is engaged in principal-based media buying to one extent or another. Further, the use of this tactic is at the forefront of their presentations to Wall Street analysts.

The holding companies pitch to analysts has everything to do with their agencies, focusing on how principal-based buys allow them to move beyond traditional service fees and capture higher margins by leveraging media arbitrage opportunities. Any potential benefit of this controversial buying tactic to advertisers is secondary. 

While agencies claim to be committed to delivering improved media efficiencies and to client transparency vouching for media delivery and pricing to assess the accuracy of these claims is difficult at best.

Agency claims of cheaper media, access to premium inventory, and better placements sound great to some clients. However, delivery against these benefits is often illusory and cannot readily be validated. In the end, there is no way of knowing whether the promises associates with these buys were delivered or that the advertiser was simply overcharged for subpar media inventory. The reason is that principal-based media buys are typically contractually exempt from compliance and media performance auditing. Thus, there is no means for advertisers to independently assess agency performance for that portion of their media budget invested in this manner.

One of the most important aspects of a Client/ Agency relationship is trust and the comfort of knowing that in exchange for the agreed-upon transparent fee, the agency’s advice and recommendations will be objective and based solely on what is best for the client. Principal-based buying creates the potential for conflicts of interests. Importantly, it can undermine the notion of trust and create doubt about whether agency proposals in this area are truly focused on the client or what’s best for the agency.

Advertisers should be concerned and take proactive steps to protect themselves from their agency’s use of this media buying approach. The reason for this is that agency claims of cheaper media, access to premium inventory, and better placements sound great, however, delivery against these benefits is often illusory and cannot readily be validated.

The three best safeguards for advertisers to implement can be readily implemented in the client/ agency agreement.

  1. Contractually reinforce the fact that the relationship is principal-agent based and that the agency has a fiduciary responsibility to the client in all transactions undertaken on the client’s behalf.
  2. Add language to the contract that prohibits the agency from engaging in principal-based media buying unless an authorized representative(s) of the client provides written approval in advance of the agency undertaking such an approach.
  3. Add contract language that states when principal-based buys are authorized, the agency is required to fully disclose all aspects of the buy including media placements and the underlying inventory costs. Further, clients should specify that all principal-based buying activity is subject to independent audit or review.

Ensuring that agency interests are aligned with advertiser business goals and implementing a framework for trusting that the agency’s advice will always be focused on the advertiser is the key to building a successful relationship. In the end, this far outweighs any alleged benefit related to principal-based media buying.

Nov 05
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Do Marketers Have the Time to Drive Efficiency and Performance?

By Advertisers, Marketing, Supply Chain Optimization No Comments

time for actionAccording to a recent McKinsey & Company study, marketers believe that they are being asked to “do more, with less.” Further, many survey respondents feel ill-equipped to deliver on the expanded expectations of the marketing department.

In what marketers view as a more complex marketplace requiring a “new holistic marketing operating model” their concerns include, but are not limited to:

  • Insufficient talent/ capabilities in-house
  • Incoherent strategy/ lack of consistency regarding priorities
  • Insufficient budget to support resourcing requirements
  • Insufficient link between marketing and business outcomes

The seminal question to be asked is: “Where do you want your marketing team to focus their time and resources? Business objective attainment and brand building? Or supplier compliance and performance monitoring? For those organizations fortunate enough to have a marketing operations function, both sets of expectations can be addressed.

Broadly speaking, marketing operations is typically responsible for a range of efficiency enhancing and accountability tasks including but not limited to process optimization, streamlining workflow, performance monitoring and reporting, budgeting and resource allocation, governance, and compliance. In some organizations responsibilities may also include management of the marketing technology stack, data, and analytics.  

For marketers that don’t have a marketing operations team, the challenge around driving efficiencies, supplier performance and accountability is more acute. The primary reason is that most traditional marketing teams don’t have personnel with the type or level of experience to provide adequate stewardship of these areas. As such, much of their time and resources are allocated to the strategy development, creative development, audience engagement, and media delivery aspects of their responsibilities.

Of note, eighty percent of the respondents to the McKinsey survey believe that “rigorous marketing performance management” was a “must have.” Unfortunately, only forty percent were “confident in their execution” of those tasks. Shoring up resources in this area must be viewed as mission critical if organizations hope to optimize their marketing investment.

To shore up capabilities in this area, marketers can reach out to their peers in procurement and internal audit and or engage independent specialists with expertise in agency contract compliance and financial management and media performance auditing.

The good news is that co-sourcing responsibility in this area will deliver significant benefits, including streamlined processes, reduced costs, and substantial financial recoveries and future savings. Our experience in conducting agency contract compliance and financial management reviews has consistently shown that marketers can recover substantial financial returns between .5% and 4.5% of total billings, often far exceeding audit costs. Beyond the financial benefits, this approach strengthens controls, mitigates risks, and optimizes marketing ROI through improved contract language, enhanced reporting, and streamlined processes.

Thus, if organizations are truly interested in a more “holistic marketing operating model” they should seriously explore co-sourcing solutions to augment their current marketing team’s capabilities. This is a much-preferred course of action when the alternative may be abdication of these responsibilities.

“Efficiency is doing things right; effectiveness is doing the right things.” ~ Peter Druker

Sep 30
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Why Do Agencies Seek to Limit Client Audit Rights?

By Contract Compliance Auditing, Letter of Agreement Best Practices No Comments

Assurance CollageAgency attempts to restrict client audit rights or limit record retention requirements through agency-centric contract language and negotiating tactics should be addressed in a direct manner by advertisers during the contracting process.

Efforts on the part of an agency to limit the scope of an audit, shorten the timeframe subject to audit, regulate audit methodology, restrict an advertiser’s right to select an audit partner or limit access to agency data that supports its billings to the client pose significant risks to an advertiser’s marketing investment.

Other than the furtherment of agency self-interest, there is no valid reason for restricting an advertiser’s right to audit an agency partner’s contract compliance and financial management practices. Given the materiality of marketing spend, agency compliance audits serve as a crucial governance control that enables advertisers to verify the accuracy of agency billings and prevent financial management practices that could negatively impact an advertiser.

The failure to secure the proper audit rights in client-agency agreements, or neglecting to exercise existing audit rights on a regular basis can lead to serious legal and financial repercussions.

Because the advertising industry operates primarily on an estimated billing model, where agencies receive client funds in advance of performance and before final costs are determined, greatly increases risks. This is exacerbated by the industry’s practice of delaying reconciling actual costs to estimated billings and the absence of third-party invoices supporting the costs being billed.

Blindly trusting agency billings without regular audits to verify costs increases the likelihood of errors, non-compliance, and bad financial management practices. Independent compliance audits often uncover issues such as:

  • Overbilling
  • Non-transparent fees or mark-ups
  • Timekeeping errors and irregularities
  • Unauthorized use of agency affiliates
  • Identification of earned but unprocessed credits, discounts and rebates
  • Under delivery of agency time-of-staff commitments (i.e., total hours, staff mix)
  • Failure to reconcile retainer or project fees
  • Process gaps that drive inefficiencies or legal risks, both internally and externally
  • Inordinately long lead times for processing third-party vendor payments
  • Failure to adhere to contract terms (e.g., competitive bid requirements, data privacy)
  • Use of restricted practices (e.g., principal media buys)

Unchecked, findings like these limit an advertiser’s working dollars and reduce the return on their approved marketing spend.

The good news is that periodic reviews of agency network partners can help identify compliance gaps, rectify mistakes, and encourage agency partners to be more mindful of their contractual obligations and client expectations.

As the 17th century French writer, Francois de La Rochefoucauld once intoned: “Self-interest makes some people blind, and others sharp-sighted.” The question is, which side of that equation do you want to be on?

Aug 05
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How Brands Fund Retail Media Network Activity Matters

By advertising legal, Advertising Regulation, Retail Media Networks No Comments

Enacted in 1936 the Robinson-Patman Act (RPA) protects small businesses by promoting fairness and competition among the buyers and sellers of goods by prohibiting discriminatory actions related to pricing. Further, the RPA prevents firms from “skirting the price discrimination” issue by using volume rebates, processing/ handling fees, advertising, and promotional allowances to leverage their scale and gain an unfair advantage over smaller competitors.

While enforcement of the RPA has waned since the 1990’s, earlier this year a group of congressmen urged the Federal Trade Commission (FTC) to reinvigorate its use of this tool to “promote fair competition” in the food and retail industry.”

What was the impetus for this move? The degree of consolidation that has occurred in the sector since the RPA was introduced. Today, the top four food retailers account for over one-third of grocery sales and four suppliers account for as much as 60% of sales in most grocery categories. Of note the target of the FTC’s enforcement actions in this area have typically been manufacturers.

Aside from the issue of consolidation, there is another development of note that has emerged since the RPA was enacted… the creation of Retail Media Networks (RMNs). According to Group M advertisers spent $45 billion on RMN’s in 2023 which accounted for almost 11% of total U.S. ad expenditures.

So how are the RPA and advertiser use of RMN’s related?

The answer comes down to how brand marketers are funding their RMN purchases. If a brand’s RMN investment is paid for using trade marketing or promotional allowances (which is often the case) then the RPA requires that such allowances be made available to all retail customers on an “equal and proportionate” basis.

Better coordination between an advertiser’s Trade Development and Marketing teams is required to assess and monitor the organization’s RMN spend to ensure RPA compliance and to optimize that investment.

Additionally, seeking the support of in-house legal and or engaging outside counsel specializing in anti-trust and trade regulation can further minimize the risk of non-compliance. This is particularly so if the RMN investment is to be funded out of a trade-marketing or promotional allowance fund.

In the words of Tom Graves, U.S. Congressman and businessman: “Let’s make it simple: Government control means uniformity, regulation, fees, inspection, and yes, compliance.”

Jul 02
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AI Has the Power to Boost Advertisers Working Dollars. Will It?

By Advertisers, Artificial Intelligence, Digital Media, Working Media No Comments

artificial_intelligence“Automation is no longer just a problem for those working in manufacturing. Physical labor was replaced by robots; mental labor is going to be replaced by AI and software.” ~ Andrew Yang

What do ad creation, programmatic customization, personalization, audience targeting, predictive analytics, performance reporting, and fraud prevention have in common? The adoption of Artificial Intelligence (AI) has already demonstrated the ability to enhance advertising performance while reducing the time-on-task in these areas for agency creative, production, and media teams.

Consider Digiday’s recently published article citing a case history for The Brandtech Group indicating that its generative AI platform had the ability to produce ads “10 times faster, deliver twice the performance and cost 30 to 50 percent less.”

When it comes to media, Group M recently predicted that “AI-enabled media buys will account for 94.1% of all ad spending by 2029.” This indicates that there will be a significant shift in how media planning and buying will be executed, reinforcing the need for advertisers and agencies to adapt their approach to realize the resulting efficiencies and media performance improvements.

AI’s ability to automate routine tasks and efficiently process reams of data will reduce the time and resources required by agencies to service their clients. Consequently, AI can play a key role in lowering the fees advertisers pay to their agency partners and AdTech intermediaries, thus increasing working ad spend.

Forrester recently issued its Agency AI-Powered Workforce Forecast, 2030 (US), predicting that “by 2030, US ad agencies and related services companies will lose 32,000 jobs to automation, 7.5% of the total agency workforce.” The potential labor savings is not limited to the advertising industry, according to McKinsey, “by 2030, activities that account for up to 30 percent of hours currently worked across the US economy could be automated” as a result of the adoption of generative AI.

From an agency perspective, the automation of labor-intensive, repetitive jobs will eliminate certain roles. Thus, agencies will seek to protect their revenue by effectively harnessing AI to consolidate their share of ad spend across their client base. For example, WPP recently announced a “Production Studio” application using generative AI and a content engine recently developed with Nvidia that will create “text, images, and video” for advertisers.

Advertisers must move swiftly and with purpose to proactively engage their marketing services providers to discuss AI’s potential impact on upcoming scopes of work along with the corresponding agency staffing plans and resource investment needs. Questions regarding how and when AI will be deployed and what the effect will be on various creative, media, and operational processes should be discussed in detail. The resulting feedback will allow advertisers to ascertain the potential for in-housing certain tasks and realigning responsibility for specific roles and project work across their agency network.

In conclusion, there can be no doubt that AI is poised to significantly transform the advertising industry. AI’s ability to optimize, and innovate how advertising is created, delivered, and monitored will certainly be a game changer. By taking the lead on the integration of AI into their workflows, advertisers can reduce their reliance on agency services and lower the amount of time and resources required by their agencies to create and manage ad campaigns. In turn, this will lower fees as a percent to total ad spend, improving advertisers’ working dollars.

Jun 20
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How Will Generative AI Impact Client/ Agency Relationships?

By Artificial Intelligence, Client Agency Relationship Management No Comments

This article from DigiDay provides a glimpse into the future impact of generative AI on the ad industry: “Pencil’s ads are produced 10 times faster, deliver twice the performance, and cost 30 to 50 percent less.” While it remains to be seen what the impact will ultimately be on agency service delivery and remuneration, changes will be forthcoming … Read More

Jun 20
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Transparency. All Talk, No Action?

By Programmatic Buying, Media Transparency No Comments

Excellent piece in AdExchanger on the talk around transparency and change in digital advertising. The author’s perspective accurately captures the state of affairs regarding transparency, particularly as it relates to programmatic media: “…the open programmatic marketplace is not where serious advertisers and agencies buy ads, nor where reputable media owners sell their inventory.” As Mr. De Zanche aptly states: “effective outcomes cannot be achieved if only pockets of the industry are embracing change.” … Read More

Jun 04
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Agencies Should Act in The Client’s Best Interest. Always.

By Advertisers, Advertising Agencies, Principal Media No Comments

principal mediaClient/Agency Relationships were once predicated on the concept of a principal-agent relationship, where the agency had a fiduciary duty to act in their clients’ best interest. When this concept was the accepted practice, most Client/ Agency agreements reinforced this expectation.

Principal-agent relationships helped instill a level of trust among client stakeholders creating strong partnerships between advertisers and their agencies that spanned years, if not decades. Unfortunately, over time, certain agency practices began to erode that trust.

The shift began with agency holding companies pledging funds entrusted to them by advertisers to select media sellers to earn rebates that were based upon the holding companies aggregate spend across their client portfolio, and funneling work to affiliates without competitively bidding their services. Then came principal media buying, an arbitrage process whereby the agency or their affiliates would purchase media and resell it to clients at a higher rate, earning non-disclosed mark-ups that were often unauthorized by its clients. In these scenarios, agencies act as principals, rather than agents, often prioritizing their own financial interests at the expense of their clients.

Recognizing the growing use of principal media among agencies, the Association of National Advertisers (ANA) conducted an in-depth analysis of this practice titled “Acceleration of Principal-Media.” As part of its study, the ANA identified key characteristics of principal media, including the following:

  • The agency or its affiliate is not an agent of the client. The agency is the reseller of the media or other service.
  • Clients are often unaware of where or how the agency acquired the inventory.
  • The agency is delivering media where the actual price (if any) is not disclosed, and the agency markup is not known.
  • Advertisers have limited audit rights. Notably, clients are not allowed access to associated vendor invoices.

None of these characteristics are particularly confidence-inspiring, even if an agency secures the client’s permission to engage in principal media buying. So why would an advertiser even consider authorizing this practice? The key selling point is typically the ability to reduce costs on select commodity-like media.

Some believe that this approach can play a role in an advertiser’s arsenal if they enter these arrangements with a modicum of knowledge and with the requisite controls in place to mitigate the attendant risks. However, the ANA’s study found that more than half of the survey respondents were only “somewhat familiar” or “not familiar” with the practice. Further, in our contract compliance auditing practice, we find that most advertisers lack the appropriate contract language or controls to safeguard or vouch their advertising investments in principal media buys.

One might reasonably ask: “Is principal media buying ever acceptable, even with the appropriate controls in place?” The inability of advertisers to audit principal media performance, the lack of transparency regarding agency costs and profits, and the limited ability to vouch for the quality of the inventory could be reasons enough to forgo the use of principal media. More importantly, advertisers will never know whether their agency’s principal media recommendations are genuinely in their best interest or driven by the agency’s profit motives.

Absent full cost transparency, audit rights, agreed upon mark-ups, and pre-approval rights for principal media advertisers should rightly favor a principal-agent relationship, with clear accountability and alignment on the agency’s duties and responsibilities as a fiduciary of the client versus the pursuit of illusory efficiencies.

“Media arbitrage or principal media involves the manipulation of price differences in different locations on the same inventory to achieve a riskless benefit to the principal.”

May 29
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Where Do You Stand When It Comes to Principal Media?

By Marketing No Comments

ANAThe Association of National Advertisers (ANA) recently released its report on principal-media, a practice where agencies take ownership of the media and resell it to their clients at at a price higher than what was paid. As a marketer, short of preventing your media agency from utilizing principal-media on your behalf, there is a solution to protect your organization from the unauthorized use of this practice… sound contract language, independent auditing of media agency partners, and strict controls around the approval granted to purchase principal media. If you have questions regarding this practice, sometimes referred to as media arbitrage, you will find the following article from The Media Leader to be of interest … Read More

 

May 29
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Do Agency Revenue Models Raise Concerns Among Marketers?

By Marketing No Comments

riskShould marketers be okay with non-transparent agency revenue practices, as long as they are acknowledged?

When it comes to principal-based buys the marketer bears all of the risks for the potential to “improve efficiencies” that cannot be wholly substantiated. Can a marketer ever really know the impetus behind an agency’s recommendation for principal-based media decisions and whether or not it is in the client’s or the agency’s best interest?

Interested in learning more about the Association of National Advertisers (ANA) recent report on how “agency holding companies profit from media sales to clients?”…Read More