Marketing Math Blog

Jul 23
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What if Advertisers Suspended All Digital Media Spend?

By Advertisers, Advertising Agencies, Digital Media No Comments

committeeSound preposterous? Perhaps not when you consider how much of an advertiser’s investment is siphoned off by digital fraudsters and criminals. One has to wonder if the efficacy of a reallocated media mix would really hamper in-market performance.

Let’s face it, in spite of the incessant level of press coverage, advertiser, agency and publisher posturing and the formation of numerous industry task forces, digital ad fraud has continued unabated.

In March of 2014 the IAB estimated that approximately 36% of all web traffic was fake, the result of bots. In December of 2014 a joint study by the ANA and White Ops, an ad security firm, estimated that digital fraud accounted for $6.3 billion out of a total estimated spend of $48 billion.

Various other studies have suggested that up to 50% of publisher traffic is bot related and that somewhere between 3% and 31% of programmatically bought ad impressions were from bots. During December of 2014 there was a research study done on FT.com which revealed that “in a single month, 72% of the ad impressions offered on open ad exchanges as being on FT.com were fraudulent.” The impressions were from sites pretending to be the FT and the ads appeared only on sites viewed by bots.

Ironically, in spite of the financial impact of these crimes, advertisers continue to spend an increasing percentage of their marketing budgets on digital media. According to Strategy Analytics, digital media will reach $52.8 billion in U.S. ad spending in 2015, accounting for 28% of every dollar spent, second only to TV. Further, while every other medium is either losing revenue or seeing low single digit growth, digital is anticipated to grow at 10% to 13% per annum over the next three years.

There are a number of industry stakeholders benefiting from the meteoric growth in digital spending, publishers, ad tech providers and agencies to name a few. For example, the major ad agency holding companies have seen revenues from digital media grow to represent up to 50% of their annual revenue base.

Thus it was with a slightly cynical eye that I viewed the recent press release from the Trustworthy Accountability Group (TAG) regarding their latest initiative to combat digital ad fraud. The focus of the release was straightforward enough, dealing with working to minimize “illegitimate and non-human ad traffic originating from data centers.” However, in the end it was about Google lending the group its blacklist of suspicious data center IP addresses for use in a pilot program.

As most industry participants know, TAG is the joint effort of the ANA, 4A’s and IAB launched in 2014 to work collaboratively with companies in the digital advertising space to combat ad fraud. While supportive of industry stakeholders teaming up to address key issues, one wonders how likely it is that TAG will be able to mitigate advertiser financial risks in the near-term.

Curiously, on July 23rd the 4A’s announced the formation of a committee that will focus on addressing “issues related to the digital supply chain.” Their press release pointed out that the newly formed committee will work closely with “other 4A’s committees and task forces, such as the Media Measurement, Data Management and Mobile committees, on policies and best practices.”

Have any of the existing task forces’ yet demonstrated tangible evidence of progress being made to combat digital fraud? It is difficult to imagine how the formation of yet another committee is going to make a difference. Do the organizations forming these ad hoc groups feel that the industry is so superficial and shallow that the news of a new committee will help advertisers feel better about the lack of measurable progress being made on this front? 

If the industry doesn’t make concrete progress in the near-term, there is a strong likelihood that we will be welcoming a new “alliance partner” to the team… regulators. We know that historically business in general and the ad industry in particular have never been fans of government involvement. However, if the industry’s self-regulatory approach doesn’t begin to yield results, Washington will assert itself and they should, advertisers are literally being robbed. This is white collar crime at the highest level when you consider that in the U.S. alone, $6.3 billion is being siphoned off by bad actors on an annual basis, 13% of total spending in this specific area.

While the industry struggles to bring order to the chaos surrounding digital media advertisers might rightly ask the question; “Does it really make sense to continue to allocate hard earned dollars to a medium with the audience delivery and viewability issues that currently plague digital?”

What if advertisers were to place a moratorium on digital ad spending until more concrete actions are taken by the industry to protect their investment?

An extreme position? Yes. Unlikely? No doubt. However, this is the type of dramatic action required to force reform and provide advertisers with the transparency and controls required to yield satisfactory returns on their digital media investment. If nothing changes, every incremental dollar invested in digital media will continue to line the pockets of the tech-driven criminals which are preying on advertisers. In turn, this rapidly growing revenue stream allows fraudsters to expand their capabilities at an even quicker rate than those trying to police them creating a “no win” situation for the industry.

From this writer’s perspective, while industry task forces and committees can play a role in furthering the dialog, they will not suffice. Traditional outcomes from these groups include recommended best practices, guidelines, advisory white papers and the formation of new committees to continue the fight… hardly enough to strike fear in the hearts of digital criminals.
In the words of noted businessman Ross Perot:

“If you see a snake, just kill it – don’t appoint a committee on snakes.”

Jun 22
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Dueling Task Forces

By Advertisers, Advertising Agencies, Agency Compensation, AVBs, Client Agency Relationship Management No Comments

DuellingRecently, the Association of National Advertisers (ANA) sent an RFP to professional auditors, research firms, agency search specialists and management consultants to undertake a study of how media is bought in the U.S. with an emphasis on the practice of AVBs or rebates.  Separately, the American Association of Advertising Agencies (4As) announced the formation of a task force to address the issue of media rebates, with the goal of issuing new “Best Practices” and “guidelines” governing this area.

The good news is that both industry groups have taken to heart advertiser concerns regarding the use of rebates and the reporting of non-transparent revenue.

Sadly, a collaborative effort between the two industry associations would have been ideal if the goal was to clearly identify the appropriateness of this practice, the extent to which it does occur and to formulate guidelines that both the ANA and 4As constituents could agree to.

Ultimately, both advertisers and agencies benefit from the identification of practices that could impede trust and potentially mar client-agency relations. Further, a timely joint resolution regarding the use of rebates in the U.S. market would also send a clear message to the other side in this discussion about what is and is not acceptable and that would be the media sellers.

After all, there is a precedent for the two organizations to marshal their resources to address issues of importance to their constituents. Two obvious recent examples are the “Trustworthy Accountability Group” or TAG alliance and the “Making Measurement Make Sense” or 3MS task force both of which include the ANA, 4As and IAB that are tackling the issues of digital media fraud and digital media audience delivery measurement respectively.

One might argue that nothing is more important than the need to restore trust between advertisers and agencies. One need look no further than the recent spate of media agency reviews taking place by advertisers such as; P&G, Volkswagen, Sony, Visa, L’Oréal,  Johnson & Johnson, Sears, Unilever, General Mills, Coca Cola, Daimler and Citigroup to name a few to understand the need to restore both transparency and confidence.

Therefore it would seem that removing any obstacle which hinders that goal would be expedited if both the ANA and 4As were teamed up to tackle the issue. Of note, the number and size of the aforementioned relationships which are in review comes at a significant cost to advertisers and agencies. Both the time and out-of-pocket expense associated with conducting the reviews and the transition and integration costs associated with onboarding a new media agency partner.

As many astute industry followers believe, the ultimate answer to the issue of rebates will be rooted in a broader conversation around agency remuneration and what is considered fair and appropriate. In order for this conversation to occur and to bear fruit, both sides will have to come to the table in the spirit of full-disclosure and be prepared to engage in open, honest dialogue.  Thus, a joint approach on rebates could have set the tone for ultimately addressing one of the root causes of the problems.

As New York Times best-selling author Patrick Lencioni so aptly stated:

“Great teams do not hold back with one another. They are unafraid to air their dirty laundry. They admit their mistakes, their weaknesses, and their concerns without fear of reprisal.”

Either way, we wish both the ANA and 4As success with their efforts in resolving the questions surrounding the use of rebates. We believe that putting the topic of rebates in the industry’s rear-view mirror sooner rather than later will allow advertisers, agencies and publishers to move on to the more economically damaging issue of digital fraud, which according to the ANA will cost advertisers $6.3 Billion globally in 2015 alone.

Jun 18
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Buying Quality Never Hurts

By Digital Media, Digital Trading Desk, Marketing Budgets, Media, Programmatic Buying, Uncategorized No Comments

high qualityTwo things that we know with certainty;

1. Digital media continues to grow at a double-digit rate and will eclipse television in overall ad dollars come 2021.

2. Programmatic buying will represent 48% of all global digital display advertising at the end of 2015 (source: Magna Global).

What is also happening as digital and programmatic continue to grow is that tools to seek out and secure quality inventory are greatly improving. This is important because the discussion regarding programmatic buying has been unevenly focused on securing low cost, rather than high quality inventory.

Of note, pursuing premium digital inventory on programmatic platforms, when using solid ad targeting and quality optimization metrics can also boost ad viewability.  While a focus on “quality” inventory doesn’t eliminate advertiser transparency concerns, it does begin to address the effectiveness of an advertiser’s media investment in this area.

Supporting this approach is a recent ComScore Verification Study which found that “91 of the top 100 sites have less than 5% non-human traffic.” Unfortunately for programmatic devotees, accessing premium inventory via private marketplaces and direct dealing with trusted publishers currently represents a better path for those focused on quality.

Media buying automation is clearly marching forward and not only in the context of securing a growing share of the digital media spend. Programmatic buying has already been introduced in the television and print media sectors as well. Thus, while the use of computers and algorithms to purchase media has yet to be de-bugged and fully proven the dream of one-to-one advertising at scale, purchased on an efficient basis is proving to alluring for the industry to bide its time.

There are two cautionary notes, which the industry should consider before continuing its head long rush down the programmatic path.

The first is the cost premium being paid by advertisers due to the level of fraud, which is being perpetrated on the industry. Vergard Johnson, former Chief Customer Officer of Spider.com who spoke at the recent IAB X-Series: Programmatic conference in Toronto, told the audience that “a typical botnet can make about $300,000 a day off of advertisers” and that “somewhere near 10% of all corporate and residential computers are infected with moderate-to-high risk malware.”  Sadly, he went on to point out how easy it is for hackers to infect our computers and gave an example of how once they’ve infected a computer that they can run “can run 23 full-screen browser windows on ad-filled ghost sites, without any sign of the activity even on Windows Task Manager.”

A second area of concern is the fact that programmatic buying has been found to increase the level of discrepancies. The reason according to James Curran, CEO and founder at Staq “is that every ad server in the chain of exchanges counts impressions, views, clicks and conversions a little differently.” In an article which he recently wrote for AdExchanger, he went on to point out that, while publishers, particularly publishers selling quality, in-view inventory have born the financial brunt of satisfying advertiser make-good demands, the “tedious and inexact process” of clearing reconciliations is both time consuming and costly.

So, while hope rings eternal when it comes to advertising automation, taking a guarded approach and focusing on quality inventory will continue to be an advertiser’s best line of defense.

 

 

May 29
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Does Your Agency Agreement Address “Special Relationships?”

By Advertisers, Advertising Agencies, Client Agency Relationship Management, Contract Compliance Auditing, Letter of Agreement Best Practices, Marketing Accountability, Marketing Agency Network No Comments

business relationship and partnership conceptWhen it comes to the subject of contracts between advertisers and their marketing agency partners, there is one principle, long understood within the legal, financial and audit sectors that is frequently overlooked… the concept of “Related-Party” transactions.

Why is this important you might ask? Primarily because as principal agent, an advertising agency has a fiduciary responsibility to solely serve the interests of their clients. In fulfilling their role as a fiduciary, agencies are held to a standard of conduct and trust in which they must avoid self-dealing or conflicts in which the potential benefit to the agency is in conflict with that of their client. 

Over the course of the last thirty years, growth within the advertising industry has been chiefly driven by acquisitions and marked by consolidation. The net result was the emergence of large, complex and highly influential agency holding companies such as; WPP, Publicis Groupe, Omnicom, Interpublic and Dentsu. In turn, each of these organizations own dozens of diverse agency brands providing full-service advertising, media, creative, digital and social media, public relations and multi-cultural advertising services and resources. 

Each of the aforementioned holding companies is a publicly traded entity focused on maximizing profits for their shareowners. As such, one of the primary roles of holding company management is to leverage intra-group synergies across their agency brands to profitably drive group revenues. No one would begrudge them this focus, particularly in light of the need to offset acquisition costs and the marketing and operational expenses associated with maintaining dozens of agency brands. 

Unfortunately, advertisers are often unwitting participants in the act of leveraging intra-group synergies. Further, more often than not, the agreements which are in place to formally govern client/ agency relationships do not afford advertisers the requisite controls and or transparency concerning related-party transactions. 

So what is a related-party transaction? In short, related-party transactions can be defined as arrangements between two parties that are joined by a special relationship. For example, if an advertiser’s media agency of record were to funnel a portion of that advertiser’s digital media buy to a digital trading desk operation, which happened to be owned by the media AOR’s parent company that would be considered a related-party transaction. 

While there is nothing wrong with the premise of related-party transactions, they do carry the potential, or at least perception, for conflicts of interest. This may be as simple as an agency awarding work to a related party, rather than competitively bidding that work to a range of providers. Further, undisclosed, these transactions can mask the overall percentage of an advertiser’s budget being spent through their agency, its parent and subsidiary companies.  

Fortunately, this issue is easily addressed in the context of a client/ agency agreement. The first step is straightforward and involves defining the terms “related-parties” and “related-party transactions.” Secondly, it is imperative that advertisers introduce standards for the identification of agency related party relationships that may come into play on its business and to provide disclosure requirements for when an agency seeks to engage a related-party. At a minimum, such requirements should include: 

  • Identification of the related-party and the nature of the relationship
  • Statement of the business purpose of the transaction and why the related-party is being considered
  • Securing the requisite transparency controls ranging from access to invoices, compensation agreements, contracts and audit rights with regard to the related-party
  • A list of client personnel authorized to sign and approve related-party transactions, in advance of work being awarded

Too often client/ agency agreements do not establish guidelines for behavior in this area. When combined with the fact that agency operating styles sometimes do not openly reveal related-party transactions, a control gap is often created, which can have negative financial consequences for the advertiser as well as blemish the agency relationship. 

May 26
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Client-Agency Erosion

By Advertisers, Advertising Agencies, Client Agency Relationship Management, Uncategorized No Comments

feature2-value-basedcompensationWritten by J. Francisco Escobar, President & Founder – JFE International Consultants, Inc. and originally published by Connote Magazine on October, 31, 2014.

WHY WE NEED TO RESTORE THE MOMENTUM OF TRUST IN THE PROCUREMENT ERA

Much change has taken place in the marketing services industry since the year 2000. The advent of the “Procurement Era” along with two severe economic shocks—the dot-com bust and, more recently, the “Great Recession”—have taken a toll on the most important component of marketing services relationships: the element of trust. Three major areas are responsible for this erosion of trust between marketing clients and their agency partners—transparency, equity, and the interpretation of value. Without agreement on standards and guidelines in these vital areas, individual marketers have been left to their own devices, while individual agencies have been somewhat defenseless against a hodge-podge of interpretations and practices that threaten the very fabric of commerce.

TRANSPARENCY

As the spend-based commission system has become virtually irrelevant as a total form of agency compensation, the predominant use of labor-based models has opened the door to client-side procurement and strategic sourcing to exploit transparency in the interest of lowering the cost of services. The use—or, rather, misuse—of benchmarks, all in an attempt to get agencies to fully disclose their proprietary financial information and business economics, has at times been ludicrous. What our industry clearly needs are rules of the road for what is acceptable and unacceptable, in what may be called “limited full disclosure.”

Trust is eroded when a client feels like its agency is withholding information, or when an agency feels like its client is over-reaching (e.g., requesting individual salaries).

We must heed the wise words of business guru Peter Drucker from his 1954 classic, The Practice of Management, “… the purpose of business is to create and keep a customer; the business enterprise has two—and only two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.” So long as we allow relationship stakeholders to view marketing as a cost to be reduced rather than an investment to be optimized, the issue of inappropriate financial transparency and benchmarking will NOT go away.

More recently, the subject of transparency has been at the center of two burning issues in media remuneration—rebates and programmatic buying. The former is an age-old controversy, and the latter a new-age dilemma.

REBATES

Media rebates are a totally normal and acceptable business practice in many countries. In some cases, they are the dominant form of income for media agencies. Thus, it boils down to just two issues of transparency in any given client/agency relationship. First, has the media agency disclosed to its client the markets in which it is receiving rebates? Second, has the client expressly written into its agency contract(s) how rebates will be treated? A lack of either disclosure or specific contractual language creates an opportunity for, and perception of, foul play.

PROGRAMMATIC BUYING

In the rapidly expanding digital media space, programmatic buying, real-time bidding, and other activities generated by demand-side platforms (DSPs) have created significant revenue growth opportunities for technology providers and a host of marketing/media services providers. The capital investment required by these firms to play in this exchange marketplace is significant, coupled with the clear risk associated with carrying media “inventory.”

Large players in the industry have taken differing positions on the financial transparency of their “trading” companies, from full to very limited disclosure of profitability on individual and cumulative transactions. There is currently no right or wrong answer; it is up to individual clients and agencies to ensure they are having sufficient dialogue in this area so that there is a clear understanding about current business practices as it relates to their unique relationship. Anything less will keep a client wondering if they are being exploited, further eroding trust.

EQUITY

There is no greater enemy to trust than the lack of equity in a relationship. When it comes to assessing fairness in client/agency relationships, one needs to look no further than the contractual agreement between the parties. While there are way too many instances to discuss the subject of equity in contractual matters, there are three areas where the greatest transgressions take place.

  1. AUDIT

When a client/ agency relationship begins to exhibit trust issues, the contract is unearthed to ascertain what is contained in the audit provision. It is vitally important that this provision be so unambiguous as to not be subject to liberal interpretation by either party. At minimum, audit provisions should include the following:

  • Reasonable notice period and conducted during business hours
  • Require an audit plan with clear objectives shared with agency beforehand
  • Auditors under nondisclosure with agency
  • Mutually acceptable external audit firm, not compensated on a contingency basis
  • Restrictions — no access to personnel data, agency overhead/profit, other client data
  • Limited to one audit every 365 days (unless there is evidence of contractual breach)
  • Findings favoring agency go to offset findings that favor client
  • Audit results shared with agency prior to finalizing report to client
  • Reasonable length of time in which audit may take place after termination (1 – 2 years)
  1. COMPETITIVE EXCLUSIVITY
    While there are certain untenable competitive situations—such as Coke/Pepsi, AT&T/Verizon, and Home Depot/Lowe’s—most others are often 80 percent perception and 20 percent reality. A well-written and equitable exclusivity clause should force the client to list its competitive concerns. Additionally, these restrictions should apply mostly to identifiable key agency personnel on the staffing plan. And, most importantly, the clause should bring the parties together in dialogue.
  2. PAYMENT TERMS
    Without exception, there is no more contentious, damaging, and inequitable issue facing our industry today than that of payment terms. A little history sets the stage. In 2004, the merger between Belgium-based company Interbrew and Brazilian brewer AmBev created the brewing company InBev. Within two years’ time, InBev embarked on an ambitious global cost-reduction initiative which centered around a movement to unilateral 120-day payment terms across its entire supply base.

InBev’s acquisition of Anheuser-Busch in 2008 brought this issue to the U.S. and started a domino effect across the largest global packaged goods companies, and the industry as a whole. Although several industry groups are working to address the issue directly, there has been no concerted effort to denounce this practice as patently unfair and damaging to the service provider community, and ultimately the overall marketer ecosystem.

How can it be that companies whose current cash position may exceed the market capitalization of the biggest marketing services holding companies expect to extend cash payments, particularly in the current low interest rate environment on cash deposits? And even more ironic is the concept of cash neutrality in master service agreements, where large advertisers expressly define it as what it truly is and then choose to apply it only to the cash management of media expenses between themselves, agencies, and media owners, but not to fees, production, or third-party expenditures.

VALUE

The notion of value has become central to the dialogue as the industry makes attempts to get away from payment based on people’s time to that of results generated by agencies’ deliverables. But who ultimately defines value and, more importantly, who determines it?

Two bellwether companies, representing the largest marketer and most valuable brand in the world, respectively, have taken it upon themselves to lead the industry with “value-based” compensation models. Sadly, both of them miss the mark on an interpretation and application of value that would engender and foster trust with their agency supplier partners.

In both cases, payment is initially determined by historical labor-based models and adjusted based on each company’s definition of value. Then, the ultimate determination of value is once again solely the purview of the client, with a significant component being a subjective, qualitative evaluation of agency performance.

The real benefit in these two models is purely on the buyer’s side. On one hand, creating a general contractor model removes internal/external cost, which then eliminates multiple touch points, transactions, and negotiations. But efficiencies are gained by managing agencies via menu pricing and standardized spreadsheets.

To their credit, both companies have continued to enhance their respective models since their joint introduction in 2009, but neither appears to have budged in the direction of increased collaboration on the definition and determination of value.

Value, like transparency and equity, has to be a two-way street. Nothing could be more productive in client/agency relationships than the dialogue that is created between the parties to mutually define success and value for their unique “marriage.” And even more interesting is when actual monetary value can be tied to the accomplishment of collaboratively devised objectives. When a client and agency can agree to a scope of services that relate to realistically achievable objectives, and the agency is able to exceed them, then you have true incremental value that should be rewarded accordingly. It’s not rocket science or brain surgery, but it does require a commitment by both parties to put in the necessary effort, energy, and time to ensure a fair and honest playing field. Doing so can only serve to encourage and restore trust.

AN INDUSTRY CALL TO ACTION

Restoring a momentum of trust in the marketing services industry calls for explicit, concerted action by the major industry associations.

We desperately need collaboratively developed standards and guidelines governing the critical issues of transparency and equity in client/agency relationships. Conversely, value should remain a nut for individual, involved parties to crack. Given the uniqueness of each and every engagement between marketers and their supplier-partners, every significant statement of services or statement of work (SOW) between the parties must contain a specific section addressing the mutual expectations of transparency, equity, and value.

Francisco Escobar is a business management advisor to global advertisers and agencies in the marketing services industry. He speaks internationally on issues surrounding marketing procurement and optimizing business relationships. If you are interested in learning more about “restoring the momentum of trust” in your client/agency relationships contact Francisco at (214) 728-6903 or via email at francisco@jfeintl.com.

May 01
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What is the True Cost of Opacity? (part 2 of 2)

By Advertisers, Advertising Agencies, Client Agency Relationship Management, Marketing Accountability, Marketing Agency Network No Comments

risk-icebergPart 2 of a two-part look advertiser concerns regarding “transparency” and the impact it is having on client-agency relations.

Why is a tight client-agency agreement important? One need look no further than the recent comments of Maurice Levy, Chairman of Publicis; “We have a clear contract with our clients, and we are absolutely rigorous in respecting transparency and the contracts.”  It should be noted that other agency executives have also cited their compliance with the terms of their client agreements as part of their response to recent questions regarding transparency in the context of rebates and the lack of full-disclosure associated with trading desk operations.

As contract compliance auditors we would suggest that most of the client-agency agreements, which we review do not have sufficient language to deal with the evolving advertising landscape.  It is common to find contract language gaps when it comes to items such as; AVBs, related party obligations, disclosure requirements and or right to audit clauses. Therefore, it is quite possible for an agency to be in compliance with an agreement as Mr. Levy suggested and still not be operating in a fully transparent manner.

To the extent that reducing the level of opacity is an important step in establishing a solid client-agency relationship founded on the basis of trust, we would strongly encourage advertisers to review their marketing agency partner agreements.

If agencies truly functioned as principal agents for the advertiser, a less structured agreement may pose less risk. However, today we operate in a complex environment where agencies may have a financial stake in certain outcomes and those stakes are not always fully disclosed to clients. Thus the reality is that the potential for bias to impact an agency’s recommendations clearly negates the principal of agency neutrality.  Think about it, agencies today operate as independent agents, partnering with a range of third-party vendors in the research, technology and media sectors and actually owning and reselling media inventory to their clients.

Don’t agree? Consider the comments of Irwin Gotlieb, CEO of WPP’s Group M at the aforementioned ANA conference; “Those relationships, rightly or wrongly, don’t exist anymore” he said, adding that “You cease to be an agent the moment someone puts a gun to your head and says these are the CPMs you need to deliver.”

It is imperative that advertisers protect themselves from a legal and financial perspective by crafting contract language and implementing the appropriate monitoring and control processes to insure that they have the transparency that they seek in the context of their agency partners’ financial stewardship of their advertising investment.  This does not mean that clients cannot forge solid relationships with their agencies or that their agency partners should not be afforded positions of trust. Quite the contrary, it simply means that candid, direct dialog must occur so that each party in the relationship is clear and comfortable with regard to the guidelines that will be put in place to govern their relationship.

Once clients and agencies have aligned their interests in the context of their relationship, the ability to focus their time, talent and resources on driving business forward and tackling industry challenges will be greatly enhanced. Interested in learning more about industry best practices when it comes to client-agency agreements? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management, LLC at ccampeau@aarmusa.com for a complimentary consultation on this important topic.

Apr 29
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What is the True Cost of Opacity? (part 1 of 2)

By Advertisers, Advertising Agencies, Client Agency Relationship Management, Marketing Accountability, Marketing Agency Network No Comments

opacityPart 1 in a two-part look advertiser concerns regarding “transparency” and the impact it is having on client-agency relations.

Ad industry concerns regarding the issue of transparency and the trust which exists between advertisers and their agencies have taken a new, decidedly negative turn over the course of the last month.  What had been largely an “in-house” debate focused on items such as AVBs, programmatic buying, media arbitrage and concerns over digital media viewability was thrust into the limelight as the result of one Wall Street analyst’s recommendation that ad agency holding company investors “sell their shares.”

The recent revelations about the utilization of media rebates or AVBs in the U.S. marketplace and the resulting firestorm in the advertising trade press seems to have been the tipping point that spurred Brian Wieser a Senior Analyst from Pivotal Research Group to downgrade the stocks of IPG, Omnicom, WPP and Publicis and to recommend that investors exit the category. Mr. Wieser’s recommendation provoked an additional round of denials by some holding company CEOs regarding the practice of agencies accepting rebates in the U.S. and spurred some debate amongst the holding companies about the transparency of their revenue realization processes. One notable CEO, Sir Martin Sorrell of WPP reiterated his company’s policy regarding rebates and encouraged WPP’s competitors to be more forthcoming on that front; “We said what the model is in the U.S., the way it’s a non-rebate model. We’ve made that quite clear. I would urge greater transparency in what’s happening to net sales and revenues, then we would have less black box and more open box.”

While the topic of rebates seems to have garnered a lion share of the attention, when it comes to transparency the rebate issue carries with it much less financial risk than the challenges associated with the rapidly evolving digital media landscape. Consider the fact that various research studies have suggested that digital media advertisers may be losing 50% + of their investment to click fraud, bots, piracy and excessive fees related to supply chain complexity.

Given that digital media now ranks second only to television in terms of media spending and that it continues to grow at double-digit rates the potential for Wall Street commentary regarding advertiser investment in this area could be much more problematic. For instance, at the recent ANA conference on “Agency Financial Management,” Peter Stabler, Managing Director, Senior Equities Analyst with Wells Fargo Securities raised concerns about one particular aspect of the digital media space… agency trading desks. Specifically, Mr. Stabler cited the inconsistent manner in which holding companies report on trading desk operations, the potential for the proceeds from trading desks to inflate revenues and create margin dissolution and the potential for conflict-of-interest concerns between advertisers and their agencies.

If there is a silver lining to this maelstrom, now that the genie is out of the proverbial bottle, perhaps the highly charged nature of these issues can serve as a galvanizing force to bring clients and agencies together to address these issues in an objective manner… without the emotion and finger-pointing which has characterized the discussions to date. Let’s face it, the last thing either party wants is to see their market capitalization rates decline because analysts and investors have concerns about how they transact business and or the state of client-agency relations.

While the individual issues raised are substantive, many feel that they have taken on additional import as a result of an erosion of trust between clients and agencies. Thus, shoring up the strength of these strategic relationships could yield significant asset value both in the context of issue resolution and the ongoing business of building brands and generating demand. As automotive pioneer Henry Ford once said;

“If everyone is moving forward together, then success takes care of itself.”

In our opinion, the best place to begin is to develop a sound client-agency letter-of-agreement, which clearly articulates both parties expectations and desired behaviors. Further, the agreement should specifically identify the level of disclosure required by the client of the agency, their related parties (i.e. holding companies, sister agencies, trading desk operations, in-house studios, etc…) and their third-party vendors. We believe that this is a critical first step in establishing accountability standards and controls.

Mar 25
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Benchmarking: What is it you want to know?

By Advertisers, Marketing Accountability No Comments

benchmarkingWhen it comes to advertising related expenses, most marketers want to know; “What am I paying relative to the market?” and “What am I paying relative to my competitors?” For organization’s focused here, much energy is expended in their search for the ideal source for “industry norms” or the perfect “pool” against which to benchmark the rates that they paid vis-à-vis others.

This pre-occupation with what others paid clouds the real issue, which is; “Did we get optimal value for our advertising investment?”

Let’s start with a little dose of reality. There are no industry norms when it comes to advertising. Whether in the context of agency remuneration, overhead rates, media pricing or production costs…there is no such thing as rate card. The price an advertiser pays is reliant on multiple variables, variables that differ from one client/ agency relationship to the next.

Consider the following scenario; Advertiser #1 is paying a blended billable rate of $150 per hour for creative, while Advertiser #2 is paying $170 per hour. Is Advertiser one getting a better deal? The answer is; “Who knows?” What market is Advertiser #1’s agency sourcing talent from? New York, NY or Bogota, Columbia? How broad and deep is the creative talent pool available to Advertiser #1? What is the experience level of the individuals in that talent pool? Does the agency have a track record of success when it comes to creating break-through advertising? How solid is the agency’s creative development methodology? Do the processes which they employ (or the lack thereof) result in multiple re-works?  Is the agency deploying their top creative personnel on Advertiser #1’s business or the “B” team? You get the point.

Similarly, when it comes to media there are a number of factors which determine “value” that cannot be captured when benchmarking rates paid against Nielsen, SQAD or media pools. Items such as position in pod, lead-in or lead-out break position, premium placements, editorial adjacencies, relevance and topicality of the content environment, the level of no-charge weight secured to supplement the paid schedule ultimately drive advertiser return on media investment as much or more than the rate paid.  

Additionally, in the context of media rates, one has to weigh their comfort level with the limited transparency into the benchmark source data. Is the data self-reported by advertising agencies based upon what they claim they paid? Given that those same agencies may someday be compared to those self-reported rates is there a remote possibility that some agencies may inflate reported rates, thus artificially increasing benchmark levels? If rate data is provided by media sellers, do you think that they want to show how little they actually charged advertisers, thereby suppressing the rates that they would like to secure? Media auditor and agency search consultant rate benchmarking pools also represent a viable source of information. However, can the size and or composition of their pool be validated? How relevant is it for your demographic target, category or market? How current are the rates in their pool versus older data that has been modeled and rolled forward?  Will your media rates end up in their pool once they’ve completed the audit?

For the record, we are staunch proponents of benchmarking advertising costs. It’s just that in our experience, we have found that the best source for assessing value attainment is not what others paid, but what an advertiser has previously paid. As the old adage goes:

“Put your future in good hands — your own.”

This can best be done by developing and maintaining files that include both quantitative and qualitative information as part of their strategic supplier database. These could include items such as:

  • Fee detail (direct labor costs by position/ function, overhead rates, profit margins)
  • Billable rates for studio & digital production
  • Media rate detail (based upon final reconciled costs)
  • Days payable outstanding detail (agency payments to 3rd party vendors)
  • Annual agency evaluation scores

Of note, organizing this information in a manner that allows for comparisons by agency type, by holding company, by agency brand and by office will afford the advertiser the flexibility to compare both performance and costs across their marketing services vendor network.

For those organizations still interested in assessing the direction of their advertising costs, once they have established their own benchmarking “pool” they can compare year-over-year cost variances relative to published data that might include sources such as the Consumer Price Index, Producer Price Index and or Annual Media Inflation Rate.

Interested in learning how to create your own proprietary benchmarking tool? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management, LLC at ccampeau@aarmusa.com for a complimentary consultation.

 

Mar 17
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transparency

Will Transparency Concerns Undermine Trust?

By AVBs, Contract Compliance Auditing, Marketing Accountability, Media Rebates, Rebates, Trading Desk No Comments

transparencyAt the 2014 ANA “Agency Financial Management” conference, representatives from the Association of National Advertisers, Association of Canadian Advertisers and the World Federation of Advertisers each presented member survey results which indicated that their advertisers were concerned about the lack of transparency which existed into the financial stewardship of their advertising funds.

In their February, 2014 study, the ANA found that forty-six percent of the members’ surveyed expressed specific concern over the “transparency of media buys.” As contract compliance auditors, we know from our dealings that the resulting lack of clarity and in some instances, honesty surrounding issues such as data integrity, audience delivery, trading desks, reporting and financial reconciliations creates financial risks for advertisers. Sadly, the lack of transparency ultimately can serve to undermine attempts to improve trust levels between clients, agencies and media sellers. 

Fast forward one-year and two events come to light, which raise serious issues regarding trust.

The first was a speech made by Jon Mandel, former CEO of WPP’s Mediacom unit at the ANA’s “Media Leadership Conference” in early March, where he alleged the widespread use of volume based rebates or kickbacks from media sellers to agencies. He suggested that these practices, which have the potential to negatively affect advertisers, had migrated from cash advances to no-charge media weight which an agency can then deal back to clients or liquidate in barter deals. Mr. Mandel specifically stated that media agencies “…are not transparent about their actions. They recommend or implement media that is off strategy or off target if it works for their financial gain.”

The second event, which coincidentally involves Mr. Mandel’s former employer, Mediacom, deals with revelations regarding the use of “value banks” and the falsifying of media campaign reports by its Australia operation. For those not familiar with the term value bank, this is where media sellers provide a certain level of no-charge media weight to agencies based upon their aggregate client spending with that entity.

In a story which broke in Mumbarella, a media news website, it was reported that media “discrepancies” were found in late 2014 in an audit of Mediacom. The audit, conducted by EY was actually commissioned by Mediacom once it had learned of the problems. Among the findings of EY’s investigation were that Mediacom personnel had “altered the original demographic audience targets to make it appear as though the campaigns had reached the official OzTam audience ratings numbers.” Further, the review found that the agency had been taking “free or heavily discounted advertising time given to it by TV stations” and selling it back to its clients in violation of its parent company’s (GroupM) policy.

While Mediacom terminated several of the employees allegedly involved in these matters and pro-actively engaged an auditor, it should be noted that the audit found that the aforementioned fraud had been taking place undetected for a period of “at least two years.” This certainly raises questions regarding the efficacy of the controls that were in place at the agency to safeguard advertiser funds. The combination of lax controls and limited transparency had a negative financial impact on some of the agency’s largest clients (i.e. Yum! Brands, IAG, Foxtel).

As an aside, following Mr. Mandel’s comments to the ANA conference attendees, Rob Norman, Chief Digital Officer at WPP’s GroupM stated that; “In the U.S., rebates or other forms of hidden revenue are not part of GroupM’s trading relationships with vendors.” Sadly, in light of both Mr. Mandel’s revelations and the Mediacom Australia situation U.S. advertisers will likely take little solace in these reassurances from WPP. Worse, given the levels of advertiser concern about the lack of transparency within the industry, there is a high likelihood that other agencies will be painted by the same broad brush and assumed to be engaged in similar practices… whether they are or aren’t.

For an established industry with estimated 2014 global ad expenditures of $521.6 billion (source: MAGNA GLOBAL) it is amazing that some of the aforementioned practices would take place and that the industry would continue to deny rather than acknowledge their existence in an overt manner. Unchecked, the murky dealings of some media owners and a handful of agencies may ultimately push trust, not transparency to the fore of advertiser concerns and that is not a healthy dynamic when it comes to client/ agency relationships. The words of American humorist and journalist Kin Hubbard may serve to synthesize the crux of the issue:

“The hardest thing is to take less when you can get more.”

Interested in learning how you can improve your transparency into the financial management of your organizations marketing investment? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com.

 

 

 

 

Feb 26
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Turnover: Temporary Anomaly or Omnipresent Reality

By Advertising Agencies, Marketing Agencies No Comments

 

 

agency compensationChief Marketing Officers come and go every twenty-three months or so. The average Client-Agency relationship tenure is thought to be around three years. So has anyone really noticed that average ad agency turnover is reportedly running between 28 – 30 percent? 

In an industry where change and upheaval have become constants, the agency talent crisis has likely not received the attention that it deserves… outside of the agency community. Clearly, this is a dynamic that agencies in general and agency HR executives specifically are acutely aware and are trying to address. After all, in a service business that is highly reliant on talented professionals with diverse skill sets to create and deliver their product, the talent challenge cuts to the heart of agency sustainability. 

During the fall of 2014, Digiday published an article entitled; “Anatomy of an Agency Talent Crisis” which suggested that entry-level salaries were one of the primary challenges in attracting college graduates to even consider a career in advertising. In light of the 4A’s annual talent survey findings, which found that “most entry-level salaries” for agency personnel “were between $25,000 – $35,000,” most agency insiders understand the challenges in attracting and retaining top tier talent. 

The question, which has not been addressed is; “Why aren’t agencies paying more to secure top college graduates?” If a capable young person armed with a college degree can earn a starting salary of $70,000 by going to work for Accenture, McKinsey, Booz & Company, Adobe, Google or Microsoft then it stands to reason that advertising agencies must close the salary gap if they hope to attract their fair share of talent. As the American inventor and businessman, Charles Kettering once said: 

“We should all be concerned about the future because we will have to spend the rest of our lives there.” 

Importantly, this is a decision which the agency community owns. Their ability to pay higher salaries to attract young graduates is not hindered by the fees being paid by advertisers. Unfortunately, many advertisers have little exposure to many of the agency “worker bees” deployed on their account, spending most of their time interacting with more senior “point people” such as account directors, creative directors or senior media planners. As such, advertisers may have little transparency into the high turnover rates being experienced within the agency community. 

That’s not to say that advertisers aren’t paying a price from a learning curve perspective, which can affect the caliber of an agency’s work or the number of iterations required to generate satisfactory outputs. 

What is intriguing when looking at the fully-loaded hourly rates being charged by agencies, is that there appears to be plenty of room to increase compensation for junior to mid-level personnel. 

There are a couple of issues which impact an agency’s willingness to free up funds to address the pay scale issue. The first is the growing salary disparity between entry-level personnel and senior executives. One need look no further than the 4A’s own 2014 talent survey, which found that in the same year in which entry-level personnel were earning on average between $25,000 – $35,000, they had an agency report a $1,000,000 base salary for a Chief Creative Director position. 

Additionally, agency holding companies are growing and require resources to fuel their expansionary appetite. This growth comes largely via acquisitions of specialist agencies and investing to support in-network horizontal integration strategies which have spawned the birth of digital media trading desks and the creation of global cross-platform production hubs. 

Ultimately, market dynamics will force the agency community’s hand when it comes to a reapportioning or prioritization of resources to address the competitiveness of their salary offerings. Smart agencies will move to address this issue, recognizing that the lack of success in recruiting top college graduates combined with 30% staff turnover rates, is clearly not a formula for success.