Marketing Math Blog

Dec 30
Love0

Is the Tide Turning on Trolls?

By advertising legal, Marketing No Comments

patent trollsWhat is a “troll?”  Simply stated, a troll is an entity that purchases a patent and or copyright, often from a bankrupt firm, and then enforces their rights against those who infringe upon their  rights… even though they have no intent to produce or license content, no software development capabilities, no manufacturing capabilities and no intent to use their patents.  A troll’s sole reason for being is to assert infringement claims against industries and or individuals to collect fees.

For unwitting defendants the costs can be staggering, while the legal expenses of the trolls (often groups of attorneys) are relatively small.  Couple this with the fact that the trolls typically sue to enforce their rights in “plaintiff-friendly” forums such as certain districts in the state of Texas, defendants are often forced to seek resolution by settling cases without the benefit of due process.

Needless to say, the omnipresent threat of these trolls and the potential costs associated with litigation have had a stifling effect on business innovation, particularly in the marketing area where the use of third party content, software applications, widgets and links have exploded in the era of digital media.

Consider the perspective of White Castle’s Jamie Richardson, Vice President of Government and Shareholder Relations who testified before the House Energy and Commerce sub-committee in November, 2013 on behalf of the National Restaurant Association.  During his testimony, Mr. Richardson indicated that his organization had faced patent infringement claims for the use of tools ranging from online store locator applications to the company’s use of QR codes on packaging during promotional events and its use of hyperlinks in social media.  According to Richardson, “These examples have major implications for the future of our promotional and loyalty programs, development of our website, and the enhancement of our mobile smartphone app.”

Well, perhaps the tide is finally turning against the trolls.  In a recent court ruling in the East St. Louis district of Illinois, a Federal judge ruled against a group of attorneys accused of being “copyright trolls.”  In the case in question, the attorneys obtained copyrights to adult movies and then brought suit against individuals and entities that downloaded those movies.  In issuing his ruling, U.S. District Judge G. Patrick Murphy called the actions of the plaintiffs (three lawyers) “abusive litigation” and ordered them to pay the defendants $265,000 to cover their court fees and legal costs.

This action, while small in the scheme of the National blight which trolls have inflicted on the U.S. economy, it is a moral victory which is significant in light of the trend of courts and judges around the country becoming more critical and more outspoken on this topic.  Perhaps most enlightening was the language used by U.S. District Judge Otis Wright II in California, who when issuing a recent order in a copyright’s infringement case stated, “So now, copyright laws originally designed to compensate starving artists allow starving attorneys in this electronic-media era to plunder the citizenry.”

The aforementioned East St. Louis district ruling provides evidence that the executive actions and legislative recommendations issued in June of this year by the Obama Administration may in fact have teeth, contrary to the prevailing sentiment at the time.  It should be noted that one of the legislative changes recommended to Congress was to allow Federal Judges to force abusive trolls that lose in court to pay the expensive legal fees of those that they sue.

While the war against infringement rights “piracy” is far from over, the tide just may be turning against non-operating entities seeking to exploit their patent and copyright ownership interests.

If you are interested in learning how your exposure to “Trolls” can be managed in the context of your agency agreement, contact Cliff Campeau, Principal of Advertising Audit & Risk Management at ccampeau@aarmusa.com.

 

 

 

Dec 02
Love0

4 Common LOA Oversights

By Advertisers, Advertising Agencies, Contract Compliance Auditing, Marketing Procurement No Comments

client agency contractsWithout question, the single most important relationship management instrument for both advertisers and agencies alike is the letter-of-agreement (LOA).  At its most basic level, the LOA establishes the ground rules for each party along with their respective responsibilities during the relationship and afterwards, identifies agency deliverables and staffing commitments and spells out how the advertiser will compensate and evaluate the agency.

From an advertiser’s perspective, the LOA establishes critical legal and financial controls. These controls are designed to provide a level of protection and transparency required to assist the advertiser in effectively monitoring the agency’s stewardship of their advertising investment.  However, in spite of the importance of LOAs in safeguarding advertiser interests it is an area in which many advertisers fall short when it comes to securing their rights and protecting their interests.  The reasons for this range from insufficient industry specific experience among an advertiser’s legal and procurement team to the lack of an advertiser-centric agency contract template for utilization across an advertiser’s agency network.

In our agency contract compliance audit practice we have had the opportunity to review several hundred client-agency contracts including those that incorporate industry “Best Practice” language and others that limit an advertiser’s rights and leave them legally and financially exposed.  Over the course of this experience we have identified four common LOA oversights that advertisers should be mindful of when negotiating their agency agreements:

  1. Lack of a viable “Right to Audit” clause
  2. Failure to require the agency to track and report on their time investment and to reconcile fees
  3. Inadequate definitions surrounding agency remuneration models
  4. Failure to legally extend the agency’s obligations under the agreement to their affiliates

Without a comprehensive Right to Audit clause an advertiser is forgoing the single most important control mechanism available to protect and monitor their interest.  Advertisers would be well served to heed the words of Ralph Waldo Emerson;

“All promise outruns performance.”

Thus, advertisers should secure their right to review any facet of the agency’s compliance to the LOA and or their stewardship of the client’s advertising investment.  This would include, but not be limited to; fees/ commissions paid to the agency, the accuracy of agency time-of-staff reporting, assessing the accuracy and timeliness of third party vendor billing activities or reviewing the agency’s compliance with competitive bidding requirements.  Importantly, the Right to Audit clause should survive the termination of the relationship for a period of two to three years.    

Regardless of whether an agency is compensated based upon staffing investment levels, retainer fees tied to a statement-of-work (SOW), project fees or commissions it is imperative that the advertiser require the agency to track their time.  Ideally, time should be tracked by person, by day in quarter-hour increments by project/ task and reported back to the advertiser on a monthly basis.  This allows both client and agency the opportunity to assess the efficiency of the processes that are in place to guide project workflow and to identify means to refine and improve those processes.  Similarly, whether the remuneration is tied to an agency’s direct-labor investment or commissions tied to advertising spend the LOA should require that the fees/ commissions paid be reconciled on a quarterly basis.  Further, the LOA should specify how differences in planned activity or resource levels (over or under) will be squared up at the time of the quarterly reconciliation.

As agency compensation models have evolved over the years, so to have the number of components that go into the calculation of agency remuneration.  Of note, none of these components have standardized definitions.  Thus it is critical to clarify client-agency intent and understanding within the LOA by specifying what constitutes a full-time equivalent, what comprises direct labor or indirect overhead, is the commission rate established off of a gross or net base, etc…  Additionally, when and where possible, incorporate the use of examples to show the method to be utilized to calculate specific outcomes.

Finally, with the proliferation of agency holding companies and the myriad of mainstream agency and specialty services providers which they own it is likely that an advertiser is being served by many of those firms, with or without their knowledge.  Beyond creative, media, and digital resources these could include research firms, barter companies, production companies and trading desks.  The LOA should require that an agency fully disclose all intra-company transactions and assert that the LOA terms and conditions apply to and bind each of those affiliate companies as well as the agency-of-record.  This will insure full transparency for the advertiser while enhancing financial controls.

If you’re interested in learning more about how you might improve your agency contracts or the benefits of advertising agency contract compliance audits contact Cliff Campeau, Principal with Advertising Audit & Risk Management at ccampeau@aarmusa.com for your complimentary consultation.   

 

Dec 02
Love0

What is the Key to Client-Agency Success?

By Client Agency Relationship Management, Marketing Agency Network No Comments

client-agency relationship successCollaboration? Two-way communication? Transparency? Respect?  Certainly.  But these positive relationship traits are present in many client-agency relationships that fail to withstand the test of time. Thus there must be another reason that the average tenure once measured at 7.2 years in 1984 and 5.3 years in 1997 and pegged by many at less than 3.0 years today continues to wane. 

The factors often cited for this decline include; client-side marketing turnover, shortened tenures of CEOs and CMOs, agency leadership turnover and clients outgrowing an agency’s capabilities to support their marketing needs.  There is no question that these events can play a contributory role in changing the dynamics of an advertiser’s relationship with its agencies.  However, these are also factors which have been effectively dealt with by advertisers and their agency partners enjoying long-term relationships.

Think about the typical start to a client-agency relationship:

  1. Review conducted
  2. Agency selected
  3. Contract negotiated
  4. Work commences
  5. Both parties settle in to the day-to-day pattern of creating and distributing ad messaging

Most experienced marketers and agency executives have seen this routine repeat itself time and time again.  The common denominator is that events progress from a competitive review to initial campaign development in short-order at the expense of a deliberate, considered on-boarding process.  Out with the “old” partner and in the “new” with virtually no transition overlap or time for the new agency to truly get up to speed on a client’s business.

So what is the missing link?  Most advertisers have not embraced the discipline of supplier relationship management (SRM).  Too often, advertisers invest few if any resources in strategically planning for and managing the interactions with each of their agency partners or in clearly identifying the roles and responsibilities of each agency in their marketing services vendor network.  

Letters of agreement, statements of work, agency staffing plans and remuneration agreements are necessary relationship management tools which provide guidance to both advertisers and agencies in the area of contractual expectations, controls and reporting.  However, few would consider these items as a replacement for sound operational planning that clearly lays out a governance framework, the tenets of organizational interactions, expected behaviors, ground rules for collaboration and a definition of what constitutes success in the context of the relationship and in-market performance. 

When one considers the size of an organization’s marketing budget and the importance of that investment in the areas of demand generation, brand building and share accretion it is curious that the industry hasn’t more readily adopted SRM. 

Changing agencies is costly and can be fraught with risks to an advertiser’s market position and financial performance.  Thus it stands to reason that an organization should be prepared to make the requisite investment in its marketing supply chain to develop solid, long-term agency relationships predicated on the effective and efficient stewardship of their marketing spend to attain superior results. 

Given the potential benefits of SRM to marketing agencies, it is a wonder that they are not leading the charge on this front as a means of extending their tenure and enhancing their positions as strategic contributors to their clients’ business.  Regardless, the benefits to stakeholders on both sides of the client-agency relationship are to numerous and meaningful to ignore. 

So, if you’re contemplating a change in agencies, use the event as a starting point for the application of SRM to your organization’s agency network.  In so doing you just may reap the benefits of the words intoned by Henry Ford;

“Coming together is a beginning.  Keeping together is progress.  Working together is success.” 

 

 

 

 

Nov 14
Love0

What is the Right Approach to Agency Compensation?

By Agency Compensation, Agency Fee & Time Management, Client Agency Relationship Management No Comments

agency compensationThe topic of effective, mutually beneficial ad agency remuneration methodologies has been discussed ever since the mid-1980’s when full-service agencies and 15% commissions became passé.   

There has been no shortage to the variations on compensation structure that have been explored, adopted and debated over the last thirty years, well before the emergence of procurement in the agency sourcing and contract negotiation mix.  The perception among many industry professionals is that agency compensation is a “zero-sum” proposition… somebody wins and somebody loses.  Further, agency representatives have long alleged that procurement wants one thing, year-over-year rate decreases in spite of the fact that advertisers are asking their agency partners for increasing levels of support. 

Experience has taught all of us who have been participants in constructing agency compensation packages that there is no silver bullet.  The variables which come into play to customize a fair remuneration program which optimizes an advertiser’s return on agency fee investment while properly incenting the agency vary greatly from one relationship to the next.  In our agency contract compliance practice we have reviewed commission only, fee only, base fee plus commission, direct-labor based fees, retainer fees tied to SOWs, flat fees and on and on.  Each has its pros and cons. 

In our opinion, the key to crafting a proper remuneration package comes down to one item, measurement.  It has been said, “If you aren’t measuring, then you are just practicing.”  Time and time again we find that neither the advertiser nor the agency has the requisite inputs to assess and effectively negotiate and or monitor a balanced compensation program.  Ultimately, the way to create a “Win-Win” scenario in this area is for an advertiser to tie agency compensation to agency deliverables.  Unfortunately, advertising is a complex sub-set of the professional services arena and valuing deliverables is a major challenge. 

The good news is that consultants such as Farmer & Company have made inroads in the area of connecting compensation to outputs.  Like most things worthwhile, the initiatives are challenging, but can be tackled.  Farmer & Company takes an in depth, data-driven approach to compile historical project / task level information that many agencies and clients have not maintained.  Why?  They’ve simply never tracked variables such as the effectiveness of the client briefing process, time-on-task, rework levels and or the quality of the outputs.  All are achievable and rewarding, but require a commitment among both client and agency stakeholders to begin capturing this data at the requisite level of detail. 

Recently, I came across an article written for Procurement Leaders by Danny Ertel a partner with Vantage Partners entitled: “Complex Services: Alternative Pricing Models.”  The article addressed the topic of service purchasers achieving their “budgetary concerns with pricing models that do a better job of aligning incentives.”  Importantly, marketers and agencies alike can take solace in the balanced approach proposed by Mr. Ertel for a more “strategic” approach to negotiation, rather than focusing on “trading volume for discounts.”  To quote noted actor and martial artist David Carradine: 

There’s an alternative.  There’s always a third way, and it’s not a combination of the other two ways.  It’s a different way. 

If you’re interested in learning more about balancing risks and outcomes, you will find the article to be thought provoking.  Separately, if you’re interested in discussing how to lay the groundwork for valuing outcomes on this important topic, contact Cliff Campeau, Principal at AARM at ccampeau@aarmusa.com for a complimentary consultation.

Oct 29
Love0

Policing Digital Advertising Is a Shared Responsibility

By Digital Media, Marketing Accountability, Media No Comments

digital media fraudIn a recent article in AdAge, author Ari Bluman addressed a handful of thought provoking questions regarding the challenges facing digital advertisers.  Entitled; “Is the IAB Doing Enough?” the challenges cited by Mr. Bluman range from the determination of relevant performance metrics to content piracy and fraud prevention.

The direct response with regard to the question on the IAB is that addressing the issues referenced in the article is an industry responsibility.  That includes first and foremost advertisers who are fuelling increases in digital spending, ad agencies who are responsible for placing and monitoring those investments and publishers who are selling inventory either directly and or indirectly to advertisers.

Beyond the “frontline” players, the IAB, ANA, AAAA’s, Media Ratings Council, Association of American Publishers and the Federal Communications Commission all have a responsibility in addressing the issues which plague one of the world’s fastest growing business segments… digital media advertising.  According to PQ Media, digital media spending “accounted for 58.7% of worldwide expenditures on overall digital and traditional media content & technology in 2012.”  In terms of the size of this market, analysts have projected that total digital spending could top $1 Trillion in spending in 2013 and will continue to grow at a 10.8% CAGR over the next five years.

One could argue that the industry is clearly “chasing its tail” on these issues, which should have been at the forefront of every stakeholder’s agenda when advertising investment began to flow into this fast growing media sector.  Yet, there have been a number of recent articles which suggest that not only does the industry not have a handle on the issues, but that too many participants actually profit from the reporting of fraudulent impressions and clicks.  It should be noted that many of these firms are members of the IAB and AAP, which is why relying solely on one or more of the industry associations would likely prove fruitless.

So just how pervasive are these issues?  Wenda Millard, President of MediaLink recently made the claim that a quarter of the online ad market is fraudulent.  Looking at just one segment of the digital marketplace, U.S. digital ad revenues, this would equate to $9.5 billion per year in “stolen [ad revenue]” according to Millard. 

Being responsive to shifts in consumer media consumption behavior is a good thing.  However, rushing headlong into an emerging media sector such as digital, without the regulatory oversight, controls, transparency and or technological safety nets is clearly not without its risks.

The key for the industry to work its way through the challenges embedded within the digital media marketplace can be summed up in one word, “accountability.”  Importantly, this must begin with advertisers and their willingness to link media investment levels to quantifiable audience delivery metrics and verification that what was planned, is aligned with the inventory that was purchased and that the value (qualitative and quantitative) of the media delivered is consistent with the amount being invoiced.  It is the advertiser community that must task agencies and publishers with fulfilling their fiduciary responsibilities and stewarding their media investments at each phase of the media investment cycle, from planning and placement to monitoring and auditing delivery.  In turn, agencies and publishers will place equal emphasis on accountability with their personnel and partners to insure the accuracy and efficacy of the digital media industry’s audience delivery claims. 

While there are clearly reasons to be concerned, there is also a significant opportunity to be realized by embracing digital media.  Perhaps In the words of Henry Tweedy, noted Congregationalist minister and professor; “Fear is the father of courage and the mother of safety.”  Let’s hope that the industry has the courage to address these issues in a unified manner, rather than simply passing the buck to one sector of the advertising supply chain.

Interested in learning more about safeguarding your digital marketing investment?  Contact Cliff Campeau, Principal at AARM at ccampeau@aarmusa.com for a complimentary consultation on the topic.

 

Oct 14
Love0

There Must Be a Reason Agencies Do What They Do…

By Agency Compensation, Agency Fee & Time Management, Client Agency Relationship Management No Comments

deliverables based compensationI just finished reading an excellent AdAge article entitled; “How Much Longer Can Agencies Afford to Undersell Themselves” by Syracuse University Associate Professor of Advertising, Brian Sheehan a long-time advertising agency executive which deals with the notion of basing agency remuneration on “deliverable units.”  Of note, I wholeheartedly agree with the Mr. Sheehan’s premise regarding the efficacy of this approach and its ability to strike the requisite creativity/ profitability balance so often referenced in the context of agency compensation discussions.

The core issue, however, is less about the path forward and more about the reasons for agency resistance to this concept, which also serves as the root cause of the challenge with valuing agency delivery… the lack of systematic controls, processes and a disciplined commitment to accurately tracking time-of-staff investment and agency outputs in a timely and transparent manner to enable all parties to correlate agency resource investments to delivery.

Let’s be fair.  No agency ever signed a contract it didn’t choose to.  While client procurement teams may be wired to push for advantageous terms and pricing, agency-side negotiators are no less clever or determined in their approach to insuring their profitability when sitting down at the negotiating table.  The issue isn’t what is negotiated into the letter-of-agreement (LOA), but how (or whether) the agency delivers against the statement of work and or staffing plan agreements.  To be sure, this is necessary for clients to have confidence in the agency’s performance vis-à-vis the LOA.  However, it is even more important to the agency in assessing its return on their resource investment.

As Mr. Sheehan rightly points out, “other” professional services providers, such as management consultants have been able to bridge this gap.  Thus, the issue appears to be rooted in culture rather than a technology or methodology.  Agency holding groups, which represent a disproportionately high share of sector revenues, are publicly traded organizations, run by some of the most astute management and financial executives in the business.  That being said, there must be a reason for agencies “deep aversion to regular tracking of their scope of work” as the author suggests.  This can be evidenced by the fact that there has been little movement to change current charging practices and begin attaching value to agency deliverables. 

Part of the reason, I believe, is that agencies have done an excellent job of integrating technology into their work processes to enhance efficiencies which have boosted outputs per salary dollar invested.  When combined with guaranteed profit levels of between 12% – 15% (which are typical of most LOAs), incremental intercompany revenue yields on core client business, the non-transparent revenue generation opportunities being realized and the agency community’s unquenchable thirst for new business, one might assume that agency bottom-lines aren’t under stress at all. 

With regard to agencies being rewarded for the “value” of their work and or their ability to “completely transform business performance,” how are they any different than other professional services providers such as management consultants?  It can easily be argued that the technological, logistical, financial and marketing strategies which emanate from a management consultant are no less transformative than the creative ideas generated by the advertising community.  Too often we forget that for every “Aflac Duck” success, at the other end of the spectrum, there is a Schlitz beer, a Lisa computer or an Edsel automobile.  Advertisers are the ones who are financing these brands and incurring the risks associated with the marketing and advertising campaigns which support them.  When there are successes, today’s LOAs provide incentive compensation opportunities which reward agencies for their contribution.  And let’s not forget the most important financial reward of all… the opportunity to continue working with an advertiser to insure a future revenue stream.

Sep 10
Love0

Expanding Your In-House Agency?

By Advertisers, in-house ad agency No Comments

in-house advertising agencyAccording to a recent survey by the Association of National Advertisers (ANA); “More companies are leaning on in-house  resources for their marketing needs in place of external shops.”  In fact, the survey showed that the “penetration of in-house agencies shot up to 58% in 2012 from 42% in 2008.” 

While there are many reasons that might prompt an advertiser to consider such a move, ranging from budgetary pressures and content ownership rights to responsiveness, “cost efficiencies” were cited by 88% of the ANA survey’s respondents.  A recent announcement from Apple reinforces this trend.  Apple indicated that it sought to bring more of its advertising in-house, hiring outside creative talent, including “senior level creatives known for innovative work” to bolster their in-house design team.  Of note, Apple indicated that this group could grow from 300 people today to over 500 in the near-term. 

While the notion of “cost savings” may sound alluring, advertisers should tread cautiously in this area.  Boosting headcount comes with its own challenges, risks and costs… some of which may be transparent and others that may be unknown.  Perhaps the first question to be asked is; “How do you know whether or not moving work in-house will yield savings?”  Validating this hypothesis would require that the advertiser  has historical information on “what it cost” to execute work utilizing their advertising agencies; a level of detail that goes well beyond agency billings, agency labor hours and bill rates, and studio rate sheets. 

As part of the discovery process for analyzing potential benefits associated with transitioning work from agencies to an in-house staff, advertisers may want to consider gathering very detailed project time and costing information..  This would include securing answers to questions such as: 

  • What are the typical project lead-times provided to the agency by the various client stakeholder groups?  What would the impact on lead times be in an in-house model?  Would there be efficiencies and and thus cost savings by adjusting the cycle?  Can this be achieved in-house?
  • What about project turn-around time parameters?
  • Does the separation between client and agency cause communication issues and re-work?  At what cost?
  • What % of the work is highly complex? Moderate?? Or Simple?  What are the costs for each category?
  • What is the cost of innovation vs. adaptation?  Should an agency relationship be maintained for one or the other?
  • What level of staff proficiency/ experience is required?
  • And MOST importantly, can creativity, and overall advertising effectiveness be continually improved in an in-house model? 

For many advertisers, this type of data may not be readily available from the project tracking and summary documents utilized by your agencies today.  

Thus it makes sense to identify the key decision making criteria which will be utilized to benchmark any efficiency gains tied to bringing work in-house.  Once identified, there are at least two avenues an advertiser can consider: 

  1. Go Forward – Amend current project tracking reporting to incorporate measures which support the aforementioned decision making criteria and monitor performance against those criteria for a pre-determined period of time.
  2. Historical – Work with the agency to conduct a review of project activity over the course of the prior 12 to 24 months to establish an historical database of information to aid the organization in preparing a “business case” for such a move. 

Depending on the timeline for the decision, the “Historical” approach may prove to be both more practical and will likely yield a more accurate perspective on organizational behaviors which can impact project costing.  

So, “Where to begin?” you ask.  It may be a worthwhile investment of time and resources to engage an independent consultant to work with you and your agency to accumulate this information.  Of note, most client-agency agreements afford advertisers access to the data necessary to conduct a thorough audit of past project costs (i.e. agency fees, time-of-staff, 3rd party invoice detail, in-house studio charges, etc…).  The key then becomes conducting a comprehensive analysis of the DATA, timeframes, time value of money, vendor costs, studio costs, labor costs, overhead costs, etc., rather than “hard copy” assessment of a limited sample set of projects, which is necessary to make an informed decision across the hundreds if not thousands of jobs initiated/ completed on an annual basis.  

Armed with a detailed, historical perspective an advertiser will be able to accurately assess if the “efficiency gains” are substantial enough to warrant a further examination of building out an in-house resource. 

 

 

 

Sep 09
Love0

Agency Charging Practices Questioned

By Agency Fee & Time Management, Client Agency Relationship Management No Comments

ad agency charging practicesEarlier this week Digiday, a media company serving digital media, marketing and advertising professionals ran an interesting article regarding agency compensation and the “tricks” played by agencies to boost their bottom lines. 

In short, the article asserts that; “For ad agencies, it’s harder than ever to get paid. Their services are becoming increasingly commoditized, and their margins are getting squeezed as a result.”  According to the author, Jack Marshall, this in turn is “driving some to get creative with the ways they bill clients, as they exploit loopholes and tricks in an attempt to maximize their rewards.”  Examples of the bad practices employed by some agencies in this particular area include:

  • Artificially inflating the salaries of their employees when developing compensation programs
  • Double-charging clients by including items such as medical expenses in both salary costs and overhead calculations
  • Slow rolling projects and or throwing more people at a project than is required to boost billable hours

Andrew Teman, one of the agency executives interviewed by Digiday for the article suggested that;

“The problem with big agencies is they don’t make money being efficient; they make money billing more hours.”

For practitioners within advertising industry, the aforementioned revelations are not newsworthy.  Attempts to game the system have been ever present and serve as a reminder of the decades long struggle clients and agencies have had in structuring mutually beneficial agency remuneration programs in a post “15% commission” world. 

Ironically, advertisers and agencies want the same thing… a fair and efficient compensation program which incents extraordinary performance, good behavior among the stakeholders and which leads to a solid client-agency relationship.  To that end, neither party’s needs are being effectively served by the games and subterfuge described in the Digiday article.  The solution to the issue, which seems elusive, is actually rather straightforward: 

  1. Development of detailed scope(s) of work (SOW) to serve as the basis for agency resource investment modeling.  This is an important first step, since it is the SOW which will drive agency staffing and the resulting schedule of charging practices.
  2. Completion of a comprehensive agency staffing plan, with personnel names, titles, functions, utilization percentages and billing rates.
  3. Implementation of an agency remuneration program which aligns the client’s goals with the agency’s resource investment.  Of note, there should be full transparency into the various cost elements used to calculate agency fees, overhead and profit levels.
  4. Reporting and control mechanisms to monitor agency time-of-staff investment, performance and outputs to protect the financial interests of both clients and agencies. 

Unfortunately, as straightforward as the solution may appear, few clients and or agencies have effectively implemented the four steps suggested above at a sufficient level of detail as part of their continuous relationship management processes. 

Some would suggest that the real challenge has been in effectively scoping the work required on behalf of an agency.  According to Michael Farmer, Principal of Farmer & Company which specializes in assisting advertisers and agencies in developing and implementing accurate, effective Scope of Work practices and tools, “New metrics are required to track and measure workloads, prices and resource productivity. That’s the only way agencies can evaluate and negotiate changes in the fees they are paid in today’s marketplace — and halt the erosion in agency operational health.” 

We would suggest that putting in place an effective monitoring program in this area is long overdue at most advertisers.  If not addressed, the institutionalization of the bad behavior referenced in the Digiday article sets a dangerous precedent for treating relationship ailments with trickery rather than frank dialog between clients and agencies.  

 

 

Sep 03
Love0

Estimated Billing: Time for Reform?

By Advertisers, Contract Compliance Auditing, Marketing Accountability No Comments

estimated billing processAccording to ZenithOptimedia global ad spending will exceed $520.0 billion in 2013.  Based on common industry practices, the majority of this money will be prepaid by the advertiser based on its agency’s “estimated billing” invoicing process.  Simply put, estimated billing occurs when an advertising agency bills their client upfront, based upon planned expenditures, in advance of performance and in advance of the agency being billed by the advertisers 3rd party vendors. 

With such a material level of expenditure at stake, the question to be asked is quite simply; “Is estimated billing the best approach?”  In our advertising agency contract compliance practice, we are engaged by global advertisers to conduct financial management reviews and provide consulting support for effectively stewarding an advertisers marketing investment. In two decades, we have seen many repetitive inefficient practices tied to estimated billing. 

By in large, advertisers trust their agency partners to act in a proper fiduciary manner when managing the marketing funds entrusted to them.  As well intended as agencies may be, errors happen, delays occur and yes there can be  non-desirable manipulation of funds limiting an advertiser’s ability to optimize the return on their advertising investment.  Further, limited transparency into the unused portions of prepaid monies compounds the risk to an advertiser.  

It is understood that the premise of estimated billing was that advertisers did not want their agencies to function as their bankers, fronting money to 3rd party vendors to cover commitments made on the advertisers behalf by the agency.  By billing upfront, once funds have been approved, agencies assure themselves that they will have the advertisers’ funds in hand once 3rd party vendors begin to invoice the agency for the products, time and services purchased on an advertiser’s behalf.  Conceptually this makes perfect sense.  No one in the marketing services supply chain wants the agency community to be at risk or to front funds to compensate 3rd party vendors for their clients’ purchases. 

However, throughout this process, it is the client’s expectation and incumbent upon the agency community to treat client money as client money, not its own.  Aside from routine billing errors, certain observed financial practices would suggest this expectation is not always upheld: 

  • Estimated invoicing not being accurately reconciled to actual expenditures
  • Inordinately long delays for reconciling actual expenditures
  • Securing and retaining prompt pay discounts and volume rebates offered by vendors
  • Delays in processing payments to 3rd party vendors 

Some agency practitioners operate as though possession is nine-tenths of the law, deploying advertiser fronted funds to their, rather than their clients’ advantage.  When client controls are lax in this area, abuses of the fiduciary relationship frequently go unnoticed.   

One aspect of an agency’s fiduciary responsibilities is to transact client business in an open and timely manner, fully disclosing all commitments, incentives, balances and risks. Further, the agency must be willing to open their books at the client’s request, allowing the advertiser to review the accuracy of the agency’s financial management practices along with their compliance to the terms of the client/ agency letter of agreement. Instances where an agency provides push back on a client’s request for open-book accounting should be dealt with directly and immediately to mitigate any further financial risk to the advertiser. 

Given the amount of an advertiser’s budget directed toward media, this is one area which requires a keen level of oversight on the advertiser’s part. The combination of the consolidation of ownership among media companies and the growth through mergers and acquisitions in the size of agency holding groups creates a concentration of power which may not always be applied in the advertiser’s best interest.  Clearly, “Big Media” and the agency holding groups have forged their own relationships and specialized deals involving data sharing, content development, inventory and financial incentives which are designed to benefit those entities, yet are reliant on the investment of funds by advertisers.  

Even when an advertiser successfully structures an agreement with their agency in which the advertiser believes that their business goals and the agency’s remuneration are aligned and clearly articulated, there is often more wiggle room than an advertiser would deem acceptable.  That is “if” they had a complete understanding of the agency’s use of funds in an estimated billing framework.  Net, net… it can be argued that agencies often make a higher level of profit than what the letter of agreement describes.  One source of this “incremental” profit being directly tied to the use of advertiser funds.  A week here, a week there when it comes to paying 3rd party vendors, one or two percentage points when it comes to treasury management, AVBs, intra-company purchases of services… it all adds up.  As Aristotle once intoned; 

“The least initial deviation from the truth is multiplied later a thousandfold.” 

Advertisers provide financial inputs which allow the marketing communications industry to exist, to grow, to innovate and to prosper.  Therefore, it is the advertiser who should benefit from the financial gains tied to the use of their funds.

Perhaps it is time for advertisers to consider rethinking the estimated billing process, particularly with regard to media purchases.  Linking payment to the timely and complete reconciliation of media purchases would greatly reduce the likelihood of others profiting from the advertisers investment.  Additional benefits would include the likely improvement in the time required to reconcile invoices, account for performance and to pay 3rd party vendors.  This is in addition to the improved controls, reduction in A/P processing costs and treasury management benefits afforded advertisers in a move away from estimated billing.