Marketing Math Blog

Sep 10
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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
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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
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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.

 

Aug 30
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Insightful Approach to Marketing Services Procurement

By Contract Compliance Auditing, Marketing Procurement No Comments

marketing services procurementIt was with great interest that I read a blog post on Procurement Leaders from Danny Ertel dealing with the topic of strategic sourcing’s role in the procurement of complex services. 

The article provides an insightful approach to dealing with the services business owners within the organization to gain their confidence and importantly, their buy-in to an active collaboration with the procurement team.  In our experience working with marketers, the chief fear cited by Mr. Ertel when it comes to marketing leaders hesitation to actively engaging with procurement is the fear that their “trusted advisor” will be abandoned in favor of a lower-cost provider that is not as capable of supporting the branding and demand generation needs of the organization.  From a marketer’s perspective this potential outcome carries an inherent level of risk that can be difficult to overcome when attempting to forge a productive relationship between marketing and procurement.

There has been a significant shift of late in assessing the procurement team’s “value proposition” to their internal marketing clients due in large to the recognition that the sourcing of complex services is different than that of direct procurement categories.  It is generally agreed that the former carries more risk and in turn can yield greater strategic value to the organization when a productive, long-term relationship can be forged or enhanced with a marketing partner such as an advertising agency, public relations firm or marketing insights provider.  In the words of M. Kathleen Casey:

“Do not free the camel from the burden of his hump; you may be freeing him from being a camel.”

So how should procurement fashion their appeal to professional services owners?  According to Mr. Ertel, “procurement needs to consider ways to help address what such stakeholders might actually consider to be in need of fixing.”  While simple in nature, this is an incredibly straight forward approach which too often is not followed.  The primary reason for this is a lack of a basic understanding of the marketing services value chain and the role which suppliers play in assisting the organization in achieving its sales and profitability goals.  Further, it requires procurement and marketing professionals to work in tandem to map out those areas where the marketing services team’s needs align with procurement’s resource and capability offering to find “win-win” opportunities. 

While the end result of such collaboration could be savings, in all likelihood the rewards will be much greater and encompass future cost avoidance, process improvements, the mitigation of risk, alignment of corporate governance oversight and better resource management… for both the organization and its marketing supplier network. 

When there is a perceived risk involved in the sourcing process, such as with the procurement of complex services, careful analysis of those risks relative to the cost: benefit proposition is paramount.  This cannot be accomplished solely by the procurement team.  For strategic service providers such as an advertising agency of record, deep category knowledge is required which will necessitate the active involvement of the internal marketing stakeholders and potentially independent advisors with specific skill sets in the area of search, agency remuneration and contract compliance. 

The consequences of a poor decision in the sourcing of complex professional services are too great to be ignored. Therefore, the logical path forward necessarily requires a solid working relationship between procurement and marketing built on the notion of trust, a clear delineation of project goals and a mutually agreed upon division of roles and responsibilities over the course of the indirect procurement process. 

Marketing investment is a substantial component of an enterprise’s overall cost structure which often runs as high as 3.0% to 5.0% of gross revenues –  way too substantial to believe that this investment category can forgo the type of internal scrutiny and control rigor applied to other areas of the company.  Thus, it is imperative that procurement and marketing strive to address their differences and forge ways to collaborate that unlock the value gains which are inherent in a marketing services supplier network. 

 

 

 

Aug 06
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Does Agency Size Benefit Advertisers?

By Advertisers, Advertising Agencies No Comments

ad agency sizeIn the wake of the announced “merger of equals” between Publicis Groupe and Omnicom much has been made of the clout which the combined organizations will yield in the advertising marketplace.  The question to be asked is; “Who benefits from that clout?” 

The merged entity will generate revenue of $23 billion and will yield efficiencies ranging from the elimination of redundant resources, real estate commitments and headcount.  To this end, management has already indicated that their union would generate “$500 million in efficiencies.”  Certainly the investors in both companies stand to gain from any post-merger enterprise expense reduction initiative.  And while it is anticipated that there will be some client fall-out due to account conflicts, revenues will still be significant.

Conceptually, in a blending of agency holding companies clients could benefit from having expanded access to a range of resources and competencies spanning multiple geographies and marketing disciplines.  However, blending the cultures, systems and processes of the various agency brands which will comprise the merged entity will require a significant investment of time and money and realistically could be years in the making.  

On the financial front, it is conceivable that clients could see a reduction in overhead rates and potentially a reduction in agency labor expense as the two firms balance salary levels across the organization… conceivable, not probable.  Further, some in the industry would like to believe that the combined media spending clout represented by the merged companies will yield media rate efficiencies for their clients.  Beyond this, it would appear as though there is little in the way of direct financial benefit to the client.  

Further, on the media rate front there is little in the way of hard evidence to support the notion that as media agencies have grown in size that they have leveraged their combined clout to drive savings for their clients.  A quick comparison of media inflation rates to the Producer Price Index would indicate that there are forces at work beyond media agency clout (i.e. supply and demand) which are driving media costs: 

       Year                PPI*               Media Inflation*              Variance 

       2012                 1.3%                       3.9%                             2.6%

       2011                 4.7%                      10.5%                             5.8%

       2010                 3.8%                       6.5%                              2.7%

*Source: Annual Producers Price Index for Finished Goods and Media Inflation Watch (MIW) 

As with previous agency holding company mergers and acquisitions, the near-term impact of the Publicis Groupe merger with Omnicom is not likely to benefit their clients in a material way.  Rather, clients will be asked to be patient and supportive through what will be a confusing and potentially frustrating transition period as the firms integrate systems, processes, personnel and cultures.   

Experience would suggest that agency size and certainly the size of an agency holding company to the extent that it impacts their ability to amass the requisite resources and attract talent may have some impact on advertiser success.  However, it is important to note that there are numerous examples of advertiser/ small agency collaborations that have resulted in demonstrable benefits to the advertiser which reminds us that size in and of itself is not a precursor to success.   

 

Jul 26
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Are Agency Relationship Managers a Luxury or Necessity for Advertisers?

By Advertisers, Client Agency Relationship Management No Comments

madison avenueIn the “good ole” days of full-service ad agencies, 15% commission and powerful, independent ad agency brands… responsibility for an advertiser’s agency relationships was typically limited to a handful of executives within the organization, up to and including the CEO. 

Over the course of the last 30+ years, agencies decoupled, remuneration programs evolved, ad agencies went public, and agency holding companies rose to power and the number of agency partners on a client’s roster have greatly increased.  Unfortunately, as agency rosters grew in breadth and their interaction with client personnel expanded across the organization, there was one area that was overlooked.  Simply, “Who” would be responsible for these important relationships?  Factor in CEO and CMO turnover rates and one can begin to understand why client/ agency relationship lengths are now measured in years rather than decades.   

For those who believe that advertising agencies play vital strategic roles in building and positioning brands for long-term success, driving near-term demand generation and in furthering an advertiser’s understanding of their customer base, agency turnover is a risky and expensive proposition.   

“Remember upon the conduct of each depends the fate of all.” ~Alexander the Great 

In order to stabilize client/ agency relationships and to optimize performance across their agency network, many advertisers have invested in the addition of Agency Relationship Management specialists.  Working across an advertiser’s organization to assist Marketing, Procurement, Legal and Finance with the various nuances of effective agency stewardship this position can be a vital component of any supplier relationship management initiative.   

From contracting for agency services to developing remuneration programs and performance evaluation processes to overseeing contract compliance assessments and cost benchmarking audits there is much work that goes into maintaining an effective and efficient marketing supplier network which may include dozens of agencies.  The Agency Relationship Management specialist brings the subject matter expertise to counsel internal stakeholders on industry “Best Practice” and the experience to help shape decisions pertaining to key aspects of the organization’s agency stewardship efforts. 

As importantly, from an agency perspective, this position can and should serve as an advocate and an ombudsman providing an objective perspective when it comes to resolving issues or mediating disagreements.  By further providing unambiguous, consistent two-way communication between the partners and their respective stakeholders coupled with the establishment of clear expectations regarding agency performance the odds of building strong, enduring relationships are greatly enhanced.

This service can either be maintained internally at the client (by appropriate personnel with both broad and deep advertising experience – client and agency side) or the service can be outsourced to a select qualified and dedicated specialist or group. 

For those advertisers who view their agencies as partners rather than vendors, and who want to foster increased involvement, contribution and interactivity, a strong case can be made for the addition of the Agency Relationship Manager role.  Responsibilities would entail being the “hub” of all things related to agency stewardship, developing a marketing agency database cataloging all aspects of the client/ agency relationship and agency performance, disseminating information to all stakeholders and sharing industry “Best Practice” insights on this important area.  It is a role which requires a tremendous amount of patience and tact, but one where the value provided far outweighs the salary investment outlay required to improve an organization’s agency stewardship and financial management practices. 

Jul 17
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Transparency is the Key to Agency Financial Accountability

By Advertising Agencies, Billing Reconciliation, Marketing Budgets No Comments

agency financial management

A job estimate is generated. A purchase order is issued.  An invoice based upon the estimated job cost is generated by the agency and sent to the client.  This part of the advertiser/ advertising agency billing cycle is visible and clear. 

However, what happens with client funds once that invoice is paid is often anything but transparent.  For instance:

  1. How much does the agency actually pay third party vendors? 
  2. Which third party vendors are utilized?
  3. Do any third party vendors pass along prompt pay discounts or agency volume bonification (AVB) rebates to the agency (and is the agency passing these back to the advertiser)?
  4. Is the agency competitively bidding outside services purchased?
  5. What percentage of the advertiser investment is being directed to agency owned business units?
  6. Are jobs being closed and actual costs reconciled to estimate?
  7. What is the agency vouching process to insure that third party vendors have fully delivered on the products/ services owed for the investment made?
  8. How much time has the agency invested in the process?
  9. Did the agency adequately earn their compensation?
  10. Is the financial process and reporting efficient?

These are not trivial topics, yet strangely it is rare that an advertiser invests the time and or energy to pursue answers to these important financial stewardship questions.  Too often, payment of the initial estimate billing from the agency is the end of the client’s review process, rather than the beginning of an important accountability process, when it comes to billing management and contract compliance.  Ironically, even when advertisers establish processes, controls and reporting requirements within the client-agency letter-of-agreement these parameters often go unchecked.  Perhaps there is some redeeming value in the words of renowned educator, David Starr Jordan:

“Wisdom is knowing what to do next; virtue is doing it.” 

If an advertiser cannot readily answer the aforementioned questions, the associated lack of transparency and lax control environment increases an advertiser’s risk quotient… financial, legal and supply chain management related risks.  In our agency contract compliance practice, we uncover many recurring reasons as to “Why” advertisers fail to enforce the requisite level of financial accountability within their marketing supplier relationships.  These can range from staffing limitation issues (competence, knowledge, turnover, etc…) to organizational process gaps or cultural morays which simply don’t place the requisite value on accountability in this area.   

Experience tells us that once advertisers understand the monetary impact of “flying blind” on these key topics, attitudes toward marketing supplier accountability and contract compliance quickly change.  The financial impact of limited visibility and or lax controls in this area can put millions of dollars at risk, year in and year out.  This doesn’t have to be the case.   An in depth independent agency contract compliance review can yield valuable insight into the financial stewardship aspects of a client-agency relationship including industry “Best Practice” standards that can be implemented to enhance visibility, mitigate risks, boost marketing ROI and strengthen the client-agency relationship. 

“The time is always right to do what is right.” 

~Martin Luther King, Jr.

Interested in exploring the benefits of enhanced transparency when it comes to strategic supplier management in the marketing area?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation.

 

Jul 01
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A Perspective on Evolving the Agency Stewardship Model

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

marketing control environmentSmart Marketing is critical for most businesses to thrive. 

Smart Marketing Investments are significant and material. 

So who, within the organization, should be responsible for keeping the marketing smart and for effectively managing the important shareholder / stakeholder financial investment in marketing?  Can the Marketing group do an effective job alone?  Should a Marketing Operations group be formed?  Should Finance be involved?  How about Procurement?  Internal Audit?  Legal?   

Believe it or not, in our view, a smart and effective Marketing Control Environment is created and maintained through well-coordinated interaction between each of the functional groups mentioned above. 

Who does what, and when, then becomes the question.  Each of the groups mentioned (jointly lets call them the Marketing Effectiveness Group) has at least four (4) necessary critical inputs and ongoing oversight roles to produce a well managed marketing control environment.  One example for each group is as follows: 

Marketing – Core:

Drives the demand generation process, but is required to follow financial control structures established to safeguard corporate assets. 

Marketing – Operations:

Should be led by a Manager with a technically strong financial accounting background.  Interact externally with agency finance to set up reporting template(s) and timelines. 

Procurement:

Owns Financial Terms, Definitions, and Understanding; Coordinates with Marketing Operations to review Quarterly Agency reporting. 

Legal:

Deals with all contracting language work in tandem with Procurement and Marketing to incorporate business knowledge and definition into agency agreements. 

Finance:

Owns the highest-level understanding in areas of proper accounting financial calculations. 

Internal Audit:

In order to gain comfort, controls IA will want to ensure are in place and operating effectively (at a minimum):

  • A well written, approved, and up to date agency agreement
  • A well structured agency financial reporting process
  • Agency oversight provided by Marketing Operations & Independent Experts
  • Agency oversight provided by Legal 

As Marketing contract compliance consultants, at review onset our teams rarely see a Marketing Control Environment that that is wholly optimized.  Too many silos and politics are built up creating a lack of coordination between the parties and or the company simply does not focus in on this important area.  Given the materiality of most Marketing Budgets, investing a fraction to ensure risk is mitigated and investments are optimized.  If you are interested in further discussion on this, or related topics, please feel free to reach out to Don Parsons at dparsons@aarmusa.com.

Jun 24
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The Problem with Focusing on Payment Terms

By 3rd Party Vendor Billing Management, Advertisers, Advertising Agencies, Billing Reconciliation No Comments

agency floatNever one to forgo an opportunity to harangue client-side Procurement and Finance professionals, Sir Martin Sorrell couldn’t help but single out those two groups during a session at the Cannes Lions International Festival.  While the topic was client payment terms, Mr. Sorrell suggested that their influence on marketing decisions is putting pressure on the system and the supply chain.

For the record, I am not an advocate of marketers extending payment terms.  The reason is simple, the savings are illusory as those costs simply get factored into the “cost of doing business,” it incents bad behavior and the trickle-down effect of such policies negatively impacts a range of marketing suppliers in the creative, production and media sectors. 

However, for the agency community in general, and Mr. Sorrell in particular, to rail on the client-side procurement and finance teams for the actions of a handful of advertisers who have extended payment terms to their agencies seems disingenuous.  Why?  For years agency holding companies, such as WPP have exerted their influence which is a bi-product of their increased size and clout to arbitrarily extend their payment terms to 3rd party vendors.  The difference between advertisers such as P&G, Mondelez, AB-InBev and Johnson & Johnson and their counterparts in the agency community is that they at least went public with their policies. 

Agency income from float, the interest earned on the agency’s  between the time a vendor invoice is due and when funds are actually dispersed by the agency to pay that vendor, can be significant.  As part of our contract compliance auditing practice, AARM conducts billing reconciliation and days-payable-outstanding analysis pertaining to agency payments to 3rd party vendors.  It is not uncommon to see average day’s payable levels in excess of 75 to 90 days.  When one considers that most agencies bill their clients upfront, on an estimated basis, the interest income that can be earned by agency holding companies on their use of client funds is rarely, if ever, openly discussed or factored into agency remuneration.  Unfortunately, save for a small number of large multi-media conglomerates, suppliers downstream simply have no recourse when agencies extend their days-payable-outstanding.  

Thus when the chairman of one of the world’s largest agency holding companies intones that client-agency relationships are  “in danger of being eroded” due to a handful of advertisers extending payment terms it rings shallow.

Regardless of whether an advertiser views their ad agency suppliers as “partners” or “vendors” is immaterial in the context of this discussion.  One thing everyone should agree on is that the ad agency should never be put in the role of “banker.”  Clients should structure payment terms so that their funds are on hand for the agency to pay 3rd party vendors when those invoices come due.  To extend this concept further, client-agency agreements should contain language requiring agencies to promptly reconcile all 3rd party vendor activity and to process payment to that community within a pre-determined timeframe.

There are numerous opportunities for advertisers to improve treasury management practices when it comes to the handling of their marketing investments.  However, issuing edicts to extend agency payment terms is short-sighted and belies the ripple effect that this practice can have on inflating the cost of doing business for those advertisers.  It is time for advertisers and their agencies to deal with the issue of payment terms; client to agency and agency to 3rd party vendors, in a constructive and transparent manner.  The fact that either side would look to achieve a financial edge at the other’s expense when it comes to the disbursement of funds is not where the focus should be.  As Voltaire, the noted French philosopher once said;

“When it is a question of money, everybody is of the same religion.” 

The focus, lest we forget should be on leveraging that marketing investment to build brands and drive consumer demand for the client’s product and service offering.

Interested in learning more about improved treasury management practices when it comes to agency stewardship and 3rd party vendor payment processing?  Contact Cliff Campeau, Principal at AARM at ccampeau@aarmusa.com for a complimentary consultation.