Marketing Math Blog

Oct 22
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What is the Outlook for 2013

By Advertisers, Marketing Agency Network No Comments

marketing spend forecastAccording to the International Monetary Fund’s world economic outlook, the “risks for a serious global slowdown are alarmingly high” in the coming year.  So how will the economic uncertainty impact the advertising industry? 

Marketing budgets are already under pressure as the U.S. economy plods along at steady, but lackluster growth rates and international markets struggle with the uncertainty surrounding the European Union.  Like it or not, Europe is an important part of the “growth” conversation.  Why? Europe accounts for approximately one-fifth of both the U.S.’ and China’s total exports.  Thus, if the economic situation in Europe takes a downturn, the repercussions on the world’s two largest economies could be significant.

In spite of the challenges posed by the global economic situation, from a marketing perspective, Zenith Optimedia is forecasting a 4.5% spending growth rate in 2013 to $524.7 billion.  Of note, a majority of the growth will occur in the United States.  Zenith’s CEO commented that while marketing spend levels are “solid,” companies are “seeking to ensure that any expenditures are delivering strong return on investment.”

With demand generation a desired, but uncertain outcome for marketers, the role of marketing accountability increases in importance to help keep all stakeholders focused on performance.  Establishing clear marketing KPIs that are aligned with an organization’s business goals, and translating those KPIs into specific performance criteria for each agency in an advertiser’s marketing services agency network, is a critical first step in any accountability program.

Once performance goals have been established, everything will fall in place, right?  Not necessarily.  Advertisers may want to evaluate agency remuneration programs, staffing plans and statements of work to insure that these foundational elements of an agency stewardship system are properly constructed and conducive to aligning their agencies’ resource investments with the desired outcomes.  Layer on a continuous monitoring program which provides all stakeholders with the requisite information for assessing progress and adjusting resource allocations on a timely basis and the chances for improving the efficacy of one’s marketing investment will be significantly enhanced. 

While there are no guarantees when it comes to ROMI, experience has shown that a deliberate systematic approach to marketing resource management can boost results.  In the words of Sir Edward Coke the noted English barrister;

“Precaution is better than cure.”

In a slow growth environment, with budgetary pressures likely for the foreseeable future, this may very well be the “cost of entry.”  In our Agency Contract Compliance & Performance practice, we see the results of marketer commitment to sound accountability practices first hand.

Interested in learning more, contact us for a complimentary consultation on, “Building a High Performance Marketing Agency Network.”  Simply contact Don Parsons, Principal at dparsons@aarmusa.com to schedule a convenient time.

Oct 15
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Incenting Extraordinary Agency Performance

By Advertisers, Agency Compensation, Client Agency Relationship Management No Comments

performance incentive compensationThe ANA’s 2012 “Trends in Agency Compensation” survey found that forty-nine percent of the advertiser’s surveyed utilized “performance based compensation” as part of their agency remuneration programs.  Further, of those advertisers using performance incentives, two-thirds noticed an improvement in agency performance.

However, like most issues, incenting extraordinary agency performance isn’t as simple as throwing more money at it.  A study by the 4A’s found that performance incentives accounted for approximately three percent of agency holding company revenues.  So it is highly unlikely that the implementation of a performance incentive program, in and of itself, will achieve the desired results when it comes to elevating agency performance. 

We believe that there are six keys to incenting extraordinary performance:

  1. Clear delineation of agency roles & responsibilities
  2. Alignment of agency resource investment with client  goals
  3. Establishing performance expectations for each agency
  4. Non-monetary incentives
  5. Incentive compensation
  6. Systematic performance monitoring

Based upon our experience, driving agency performance is a process which requires teamwork within the client organization and between client and agency.  Further, the process is one that relies heavily on non-monetary incentives to balance the relationship.   Non-monetary incentives include intangible relationship attributes such as; stability, communication, access and respect. 

Why are these attributes important to an agency?  For an agency to deliver extraordinary performance, it requires an investment of both strategic and executional resources and a commitment to assembling and retaining the best and brightest account team available within the agency to assist the client in achieving superior results.  An agency is much more willing to make that commitment if it is confident that it can realize a return on their investment.  If agency management senses that their insights and recommendations are desired and valued by the client, that they have access to and the respect of senior client management and that the agency is viewed as a valued partner rather than a vendor this leads to a stable relationship which has the ability to withstand the test of time.

Client-side procurement professionals have access to a number of tools that can aid and abet the organizations desire to generate a greater return on its agency network fee investment.  These include the following instruments and processes:

  • Clear, concise, client-centric contracts and statements of work
  • The inclusion of a “Right to Audit” clause within the LOA
  • Identification of a reporting and control process to monitor performance
  • Utilization of a 360° agency evaluation process
  • Customized agency remuneration programs for each agency

These tools are beneficial to both the client and agency teams in establishing expectations and creating a transparent environment which encourages both parties to discuss progress and address concerns immediately, rather than letting issues fester and become a detriment to the relationship.   

Change in an advertiser’s marketing services network is expensive and can create risks.  Considering the relatively short tenure of a CMO, 23 months according to Spencer Stuart and the decline in the length of client-agency relationships (estimated to be less than 3 years, down from 7+ years in 1984) action must be taken by the client organization to mitigate those risks.  It would certainly appear as though the reduction in CMO tenure is contributory to shorter client-agency relationships.  Too often when we learn about a “changing of the guard” in the marketing C-suite this is followed by the announcement of an agency review.  

In order to break this cycle change for change sake, client organizations should view their marketing services agency networks as a “corporate asset.”   This perspective can positively shape the client’s agency stewardship approach, involving a multi-functional team comprised of representatives from across the organization.  The shared corporate responsibility for nurturing the growth and contribution of the marketing services agencies can elevate the asset value of the network while directly supporting the CMO’s demand generation and brand building efforts. 

A “well-oiled” agency network operates more efficiently.  Combined with a contract compliance and performance monitoring program the approach can lead to extraordinary performance and enterprise savings.  Consider the results of a recent study conducted by the procurement outsourcing group Proxima which surveyed 300 London-listed companies.  Their research found that; “a one percent reduction in non-labor costs could boost average annual earnings before interest, tax, depreciation and amortization by 3.6%.”

If you’re interested in learning more about how your organization can incent extraordinary agency performance, contact Cliff Campeau, Principal at AARM at ccampeau@aarmusa.com for a complimentary consultation.

Oct 09
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The Future of Marketing is Now. How Will You Optimize ROMI?

By Marketing, Marketing Agency Network No Comments

key to marketing futureWe’re all familiar with the key trends that have shaped the last several years within the advertising sector; media convergence, fragmentation, consolidation, data proliferation and emerging media.  Now that it is clear that these are not passing fads, the question faced by marketers across the globe is “How can we focus our efforts and resources in a way that acknowledges the fundamental changes which have occurred and leverages our opportunities?” 

In a recent article in AdAge entitled “Marketing’s Next Five Years: How to Get from Here to There” author Matthew Creamer shares a compelling perspective on how marketers can use the knowledge gleaned in the recent pass to chart a path forward.  When one considers the growth of internet and mobile as a percentage of ad spending, much of it at the expense of traditional media, marketers will need to adjust both their resource allocation decisions as well as their performance expectations with regard to crafting and delivering their brand messages to the intended target audience. 

One of the most intriguing changes is in the area of audience measurement and media attribution and the role it will play in influencing marketing strategy.  Consider for example television, which is and will remain the largest ad spending category.  Today, it is estimated that less than 2% of the advertising on television is “data-denominated with guarantees of GRPs and sales attribution.”  As second-by-second audience ratings data continues to proliferate, the impact on addressable TV will be profound.  The role of TV will shift from a cost-efficient means of reaching the masses to that of a media which has the ability to micro-target specific consumer segments to delivery specific or niche product messages in a very direct manner.  

Needless to say, defining the roles of each medium in an ever evolving media set will require the ability to process and analyze “big data” to generate insights that drive an advertiser’s creative and media delivery decisions.  Data analysis will also factor heavily into the establishment of campaign performance criteria, which will likely be more “outcome” focused and the real-time monitoring of progress toward an advertiser’s demand generation and brand development goals.  

These trends will clearly impact the client-agency relationship and the subject matter expertise that will be required of an advertiser’s marketing services agency network.  The clear delineation of roles and responsibilities, the need to harness technology and tap the services of data and consumer strategy and insight specialist and, yes, how agencies are compensated will be seminal issues that need to be addressed within client-agency letters-of-agreement. 

That being said, it is an exciting time to be in marketing whether on the client-side, at an ad agency or working in the marketing accountability field.  According to Mr. Creamer; “even the worst-case forecasts have our economic malaise nearing an end” and a “true recovery taking shape with low unemployment and revitalized consumers.”   Interested in learning more?  Check out the article in its entirety in AdAge.

Oct 01
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Do Performance Incentives Have a Place In Agency Remuneration Systems?

By Advertising Agencies, Agency Compensation, Letter of Agreement Best Practices No Comments

Agency Performance CompensationThe direct answer is “yes” bonus compensation systems can be a viable means of incenting proper resource allocation decisions, behavior and performance among an advertiser’s agency network… just as they are with driving employee performance within an organization.

Perhaps a better question is; “What type of outcomes should be recognized?”  While the answer to that important question will vary by advertiser, as Stephen Covey wisely stated:  “Begin with the end in mind.”

This is clearly the case in designing performance compensation systems for marketing services agencies.  Properly structured, incentive compensation systems are an excellent tool for aligning an advertiser’s agency network partners with the organization’s long-term business goals.  Yes, that’s right, long-term goals.  That is not to minimize the importance of the near-term sales and profit needs of the business and the role that marketing communications can play in successfully realizing those goals, but those outcomes should be the focus of the “base pay” portion of an agency remuneration system.  A solid base compensation program is a requisite first step toward insuring that an agency makes the appropriate investment in staffing, consumer research & analytics, market insights and efficiency enhancing technology tools necessary to achieve next quarter’s demand generation goals. 

Securing agency “buy-in” and participation in supporting the broader strategic objectives of the organization are essential for long-term brand health and market share success.  This is where we believe a performance compensation program should be focused.  Too often we have seen incentive programs focus on tactical or executional outcomes at the expense of tapping into an agency’s strategic reserves as a means of upping the value of their contribution to an organization’s long-term success. 

One of the keys to success in this area is to involve the top management of both the advertiser and the agency.  Bringing senior management together to discuss the client’s vision for success, business goals and the performance criteria that should be put in place to assess progress has a dual benefit.  One, it can elevate the perspective of the agency from “vendor” to “partner” status in the eyes of the client’s management team and gain their appreciation for the agency’s strategic capabilities.  Secondly, the opportunity for a broader level of “strategic engagement” with a client can be an incredibly compelling proposition for senior agency management.  In turn, the combination of the respect exhibited by the client for the agency’s ability to contribute and the corresponding financial reward tied to their mutual success will fuel an agency to make the desired resource investment.

When structuring the performance criteria for an incentive compensation program, the need to blend both quantitative and qualitative measures is very real.  While written in the context of organization’s incenting their employees to take a long-term perspective, we were intrigued with a recent article in the McKinsey Quarterly and its relevancy to this topic.  Entitled; “Encouraging Your People to Take the Long View” authors Gibbs, Heywood and Pettigrew surmised that “over time, traditional hard performance metrics can encourage short-term success at the expense of an organization’s long-term health.”  However, they recognized that both measuring and strengthening the “capabilities that help companies thrive over the long haul” can be challenging.  Their answer?  Structure an evaluation process that effectively assesses contributions to “corporate health” by embracing the following principles:

1) Root-Out Unhealthy Habits 

2) Prioritize Values

3) Keep it Simple

We would certainly echo the notion of “simplicity.”  Too often in our contract compliance auditing practice, we encounter incentive compensation systems that are confusing, overly complex and metric laden to the point that they may incent very little in the way of extraordinary performance.

Finally, we would recommend integrating an annual client-agency 360° evaluation process that involves the same senior managers that were party to constructing the terms of the performance compensation program.  The ability to mutually assess progress and to identify areas for refinement in the coming months can boost the chances for successfully achieving the client’s goals and for building the client-agency relationship. 

Interested in learning more about the role of performance compensation programs in agency remuneration systems?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation. 

Oct 01
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The Flip Side

By Contract Compliance Auditing No Comments

compliance auditingRather than focusing on how the client / agency relationship is out of alignment as the basis for a financial compliance audit… consider this.  Proactive marketers, with highly satisfactory advertising agency / media buying relationships use “best practice” compliance auditing as a mechanism to maintain a good relationship and to support staying with their current marketing partner. 

One AARM client example.  The client’s marketing department recently (together with procurement’s support) initiated an agency media performance and billing compliance audit.  The stated audit objective was to confirm Marketing’s past experience and opinion that their agency has done an exceptional job over the last 6 years.  The audit was an agreed-to preemptive strike.  

The client’s procurement group is required, via corporate policy, to initiate a competitive RFP process every 5 years on each material vendor’s services.  Stakeholders engaged the audit process with full expectations that their agency would be found to be in compliance in all the requisite and important financial / stewardship areas.  Results were then to be used to support an ongoing relationship with the Incumbent, and as a means to avoid the potentially disruptive and costly RFP cycle. 

There was a catch.  The audit could not be a “wand-over” quick-check with sampling or haphazard testing procedures.  And could not be conducted by the company’s internal audit group, or by an external generalist firm.  Management required a specialist firm be engaged, to enable an unbiased assessment as to the health and clarity of the agency’s financial treatment.  A software enabled deep-dive data auditing capability was to be employed, industry best practices were to be compared and all agency billing areas were to be covered; including retainer-fee basis, commission application, labor charging practices, and pass-through costs. 

From a service provider’s perspective, it is refreshing to see the client / agency relationship being considered, in more than a neutral fashion but as a basis to inspect and a rationale to stay the course.  Agency change is disruptive and not guaranteed to meet expectations.  The time (market opportunity and real) it takes to bring any new agency partner up to speed and integrate them into the corporate fold is material.  We always suggest, where possible, an advertiser exhaust all reasonable effort to remedy a relationship with the existing service provider in the marketing area, rather than make a knee-jerk or non-required change. 

Our client in this case is doing it right.  They have set expectations, they are testing against those expectations as a good control practice, they plan to adjust process or control issues that come out of the review, and they will go forward with an even stronger proven relationship.  The agency is on-board, clearly has a vested interest in cooperating with the inspection, and will also benefit from any new level of financial transparency and understanding derived from the work. 

Audit should not be primarily about suspicion, gotcha, cost recovery, or selective issues.  Audit is about consistency, learning, strong financial awareness, compliance and continuous improvement. 

An additional benefit from a consistent / proactive audit program is the ability to challenge any new CMO’s suggested agency changes.  If industry statistics serve, it is likely that any given large advertiser will have a new CMO within the next 12 to 18 months, and they may want to change agency partners – what can you do? 

Go audit, stay happy!

Sep 17
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Do Advertisers Get What They Pay For?

By Advertisers No Comments

do advertisers get what they pay forToo often, the answer is “No” advertisers do not get what they’ve paid for.  These shortfalls typically manifest themselves in two camps: 1) Lackluster service levels and work quality; and 2) Financial stewardship missteps.  Needless to say, both can have a negative impact on the efficacy of an organization’s marketing investment.

How can this be?  You ask.  There is a truism in the advertising world that what is inspected is respected.  Organizations that don’t apply this standard to their agency partners and third-party vendors are, quite simply, at risk. 

There are a number of factors that can impact service levels and work product.  These can include excessive agency staff turnover, deficient levels of involvement by senior agency personnel on the business, process limitations that squander time or fail to produce “memorable” work that is on strategy.  These items can result in high levels of project rework, scope creep, relationship dissonance and, if not kept in check, can negatively impact an advertiser’s demand generation efforts.  Make no mistake about it, this carries economic consequences that limit an advertiser’s return on marketing investment (ROMI).

Sound financial stewardship of an advertiser’s funds by their agency and third-party vendors is the fiduciary responsibility of each and every supplier.  However, an advertiser cannot leave anything to chance.  Tight contract controls regarding agency staffing, scope of work, remuneration parameters and reconciliation and reporting guidelines are a must and represent the first line of an accountability defense. 

Additionally, advertisers should require their media agency partners to conduct thorough post-buy analyses, conduct regular third-party billing reconciliations and to secure compensatory media weight and or cash for audience under delivery on a timely basis.  In the creative services arena, agencies should be monitored to insure adherence to the organization’s cost controls, production management and third-party accounts payable guidelines to insure that an advertiser’s billing and accounts payable expectations in these areas are being met. 

The financial impact of shortcomings in any of these areas can be significant.  In our agency contract compliance auditing practice it is not unusual to identify one-time errors or systemic oversights that can represent between 1.0% and 9.0% of an advertisers budget.  So what can an advertiser do to insure that they are securing maximum value for their advertising expenditure?  In the words of noted businessman and author Albert E.N. Gray:

“Inspect what you expect.”

Clients that have clearly articulated their expectations regarding agency staffing, deliverables, performance criteria and reporting have a much better chance to achieve their objectives and ensure they’re getting their “money’s worth.”  However, an advertiser must go beyond this important first step and incorporate a transparent process for auditing agency contract compliance and assessing performance relative to their stated goals.  The notion of an audit inspection should not send a negative message.  To the contrary, it is respected aand understood as a necessary control process like any other, such as balancing the cash-register daily in retail.   Call it what you would like (review, continuous monitoring, compliance testing, advertising audit), it’s simply a thorough way to ensure the millions of dollars spent on advertising are tracked appropriately.  Too many large marketers do not have such a process in place.  The combination of these actions will afford an advertiser the opportunity to drive each of the stakeholders that comprise their marketing supply chain to extraordinary performance.

It should be noted that supplier accountability management is not a one-and-done proposition.  Implementing and executing a system which has an ongoing monitoring component, often utilizing independent auditors, is necessary to ingrain the requisite processes into the culture of the advertiser and each member of their marketing services agency network.  In the words of the great philosopher Aristotle:

“We are what we repeatedly do.  Excellence, then, is not an act, but a habit.”

Interested in learning more about marketing accountability and how to implement the appropriate controls and transparency?  Contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com for a complimentary consultation on this topic.

Sep 10
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There are no guarantees. Are there?

By Agency Compensation No Comments

profit guaranteeWhether it relates to new product launches, store openings, catalog sales or a new advertising campaign, there are no guarantees that marketers will meet with success.  No matter how sound the strategy or crisp the execution or the level of investment made to support these initiatives, there is no certainty that response rates, sales, market share or profitability results will achieve expectations.

The same can be said of an organization’s investment in marketing.  Just because a firm spends 5.0% of revenues on advertising support, the investment alone doesn’t automatically guarantee an upward move in the organization’s key indicators.  Further, there is always the risk of campaign failure, or under-delivery, which can have negative consequences on an advertiser’s bottom line. 

Despite this risk, many advertisers continue to contractually guarantee a profit margin to their advertising agency partners.   And yet, agency pundits continue to lament how “unfair” current remuneration programs are, and that the agencies don’t fully participate in the “upside” results of their clients’ demand generation efforts.

Turn it around.  If a client-side CFO knew  they could book guaranteed profits as a result of the advertising investment made by their organizations they would surely take that deal.  Further, the industry would see a steady increase in advertising spending.

Shared pain, shared gain.  As investors know, generally financial returns are directly proportionate to the risks incurred.  In light of this truism, should there be any upside potential when agencies benefit from the security of a guaranteed profit floor?  

With the move toward direct labor based compensation programs, agencies are able to recoup their sunk costs (i.e. labor, employee benefits, rent, corporate expense, etc…) and to secure a guaranteed profit margin typically ranging from 12% – 18% (excludes additional profit from in-house studio and the like).  Perhaps it is time for advertisers to begin to question the efficacy of this practice.  Don’t get me wrong.  I believe that an agency should have the opportunity to earn a profit on each of their client account, and I don’t believe that agencies should bear inordinate risks to their remuneration for items and outcomes that are beyond their control.  However, it seems that agency profitability should be more aligned with resource investments and the outcomes of their efforts.

Further, from a financial control standpoint, without the benefit of tight controls and audit oversight, a cost-plus / fixed profit margin remuneration system can inflate an advertiser’s fees as a percent of marketing spend.  Too often client-agency contracts fail to adequately define key components of agency overhead or to identify employee compensation levels, agency staff utilization and out-of-pocket cost expectations.  Beyond inadequate contractual clarity on these items, there is another factor which compounds an advertiser’s risk in this area… the lack of a disciplined process to verify actual financial performance for each of these categories.

To optimize agency fee investments and enhance transparency into this aspect of advertising spend, there are three items that an advertiser can include in their letter-of-agreement (LOA):

  1. Comprehensive definitions of key remuneration program components and examples of how various factors will be calculated.
  2. Quarterly reconciliation process for agency fees, time-of-staff investment and billings.
  3. An advertiser’s “Right to Audit” clause and an “Agency Records Retention Policy.”

Successful optimization hinges on a commitment to actually following through on the right to audit, whether through the advertiser’s Finance/ Audit team or by engaging a 3rd party agency contract compliance auditor. 

To kick off the process, we would suggest an open dialogue and information exchange between client and agency to discuss profit expectations and to review those items which impact agency costs and client fees.  This conversation should take into account a client’s total spend with the agency and its parent company, which offices the client’s account is serviced from, agency employee compensation, retention & training philosophies and the agency resources that will be brought to bear on the client’s business.

In the end, it is in each parties best interest to develop an agency remuneration program that incents an agency to deliver superior performance, recognizes an agency’s resource investment and where there is a shared investment in market-based performance stemming from the client’s and agency’s efforts. 

If you would like to gain the benefit of what we’ve learned through first-hand experiences and would like to schedule a complimentary consultation on “Client-Agency Contract Trends,” please contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com.

Sep 04
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The 3 Keys to Successful Agency Relationships

By Client Agency Relationship Management, Contract Compliance Auditing No Comments

There are a lot of very capable advertising agencies and no shortage of experienced, intelligent marketing professionals on the client-side.  So what distinguishes successful client-agency relationships from those that fail to yield the desired results?  Based upon my experience it comes down to three key elements: People, Process and Perspective.

Other than scale and talent, often there is little that distinguishes one advertising agency’s service offering from the next.  They offer a comparable array of resources delivered through professionals representing a consistent range of agency functions.  Yet some client-agency relationships withstand the test of time, producing memorable work and significant in-market results, while others struggle to synchronize their efforts that result in failure to produce the desired results.    As a rule, individuals and business entities enter into relationships committed to the notion of success.  However, in a people business such as professional services, achieving success requires more than commitment and good intentions.

Constructing an effective team begins with assembling the right people with the cumulative experience and skills necessary to address the client organization’s market challenges and opportunities.  Assigning roles and responsibilities to each team member will assist in improving the group’s efficiency and productivity while minimizing conflict.  Over time, it is important to hold a team together to leverage the group’s shared learning, brand knowledge and market insights to achieve incremental gains year-over-year.  As we all know, in an industry marked by high employee turnover, this is often easier said than done.

Implementing a sound process to guide both the team’s efforts and resource investment decisions is a critical component to a successful relationship.  The process plays an important role in assisting the team in executing their tasks in an efficient manner, maintaining a goal orientation and providing feedback on the team’s progress to key agency and client-side stakeholders.  In the end, an effective process will mitigate risks (i.e. legal, financial, in-market performance) and improve transparency for all members of the team while enhancing the cumulative contributions of each team member.

“A bad system will beat a good person every time.”  – W. Edwards Deming

Having a shared perspective is a necessary component of all successful relationships.  This does not mean that the client and agency must agree on everything.  Differing opinions and the ability to discuss the merits of disparate points-of-view is an essential element of producing break-through work.   Undoubtedly, a shared perspective involves clarity around a brand’s position, its target audience and an understanding of what moves the needle when it comes to demand generation.  However, it also involves a knowledge of and respect for each organization’s culture and values.  These crucial insights help drive team interactions and assist in resolving conflict when disputes inevitably arise.

Of note, client-agency agreements represent the ideal venue for establishing the “rules of the road” for aligning people, process and perspective.  A well-constructed letter-of-agreement (LOA) will clearly define an agency’s roles and responsibilities, identify key deliverables and layout the criteria for assessing performance.  Additionally, LOAs should incorporate an agency staffing plan which identifies agency personnel by name and title with their utilization levels.  This is a pre-requisite for assembling and “locking-in” a team and, in conjunction with the scope-of-work, forms the basis for the agency remuneration agreement.  The LOA should also establish the processes and controls that will govern all aspects of the relationship thus providing both parties with clarity around the advertiser’s expectations, particularly when it comes to accountability and transparency.

Finally, it is important to remember that the LOA is a living document which must be socialized among key constituents within the client and agency organizations and must be reviewed and reconciled on a regular basis to insure that both parties are conducting themselves in an appropriate manner.  Many advertisers consider it astute to engage an independent consultant to conduct a contract compliance audit to assess agency performance and gain valuable insights that  improve both the return on advertising investment and the relationship.

Interested in learning more about the “3 P’s” and their role in “Building a High-Performance Agency Network?”  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com to schedule a complimentary consultation.

Aug 27
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What’s Fueling Agency Holding Company Profit Growth?

By Advertising Agencies, Contract Compliance Auditing No Comments

agency holding company profitsAccording to a new report from Marketing Services Financial Intelligence, agency holding company profits for 2011 were up almost 30% on an 8% revenue increase.  The firm tracks publicly traded holding companies such as WPP, Omnicom, Interpublic, Havas, Publicis and Aegis along with some smaller organizations.  Of note, it was reported profit margins also rose for the group, “averaging 15%.”

Clearly, in spite of what has been a tough global economic climate, the agency holding companies continue to perform well from a financial perspective.  In addition, they have continued to expand their footprint via a robust level of merger and acquisition activity as well.

So what can we make of the stellar results?  Certainly, life is good for the holding companies.  Perhaps more intriguing is to ponder how a collective of holding companies managed to achieve a 4X multiple on profit growth vis-à-vis topline revenue.  On the surface it’s easy to understand, control expenses and boost the margin yield on incremental revenue.  However, the agency business falls into the “professional services” category.  Their primary expense is direct labor.  So as revenue increases, so do direct labor costs.  Right?  If not, how do you add business without expanding staffing coverage at the same rate?  Wouldn’t this negatively impact client service levels or the caliber of the work?

So if agency staffs are growing commensurate with revenues, what is the source of the extraordinary profit?  While the answer may be complex and varied there are certainly aspects of the agency holding company model that likely have contributed to this growth:

  • Increased utilization of agency owned resources/affiliates on existing client business ranging from in-house studios to trading desks, barter firms and production companies.
  • Improved employee utilization rates, whether in the form of associates working longer or devoting a higher percentage of their time to billable activity.
  • Non-transparent revenue growth on existing client business including but not limited to interest income associated with float, growth in agency volume bonification (AVB) revenues along with other vendor discounts and credits.

Let’s be clear.  There is nothing wrong with an agency holding company making money.  Further, there is nothing wrong with the aforementioned practices as a means of driving profitability.  The issue that advertisers should more clearly understand relates setting transparency standards and clear financial rules between themselves and the agency.

As a first step, to understand the current state of affairs and use it as a basis for improvement going forward, it is a best industry practice for the any advertiser to implement a detailed contract compliance audit.  This initial review boosts the advertiser’s understanding of the agency’s billing practices, and their basis, to assess time value of money treatment, fees vs. agency time-of-staff investments, AVB calculation methodology, adequacy of financial terms, manual vs. system treatment and the like.  The advertiser can then answer the questions – “where are my financial risks?” and “how do we mitigate them?”

Once accomplished, then perhaps the advertiser won’t have to “ponder” agency holding company profit growth rates and can join their agency partners in celebrating their hard earned financial success.

If you would like to gain the benefit of what we’ve learned first-hand through our agency contract compliance auditing practice and would like to schedule a complimentary consultation on “Transparency in Action,” please contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com.

Aug 20
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Marketers; “Are your agency contracts relevant?”

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

client agency contractsThe world of marketing is evolving at a rapid pace and the notion of change is a constant.  Technology advancements, media consolidation, agency mergers & acquisitions and evolving regulatory considerations ranging from consumer privacy issues to intellectual property concerns are but a few examples of events that can have a meaningful impact on client-agency agreements. 

Unfortunately, client-agency letters of agreement are not the “living” documents that they are professed or intended to be.  Too often they are outdated, invalid and or untraceable.  Further, seldom are they shared and understood by key internal stakeholders at the advertiser who are responsible for managing agency relationships… including key marketing team members.   

So, how can you assess the relevancy of your organization’s agency contracts?  Start by answering the following questions: 

  1. Can you locate an executed copy of your agency contract(s)?
  2. Are the terms of the agreement and the accompanying exhibits current?
  3. Are the scope of work and staffing plan detail incorporated into the original agreement reflective of the agency’s role and responsibilities today?
  4. Do your contracts contain a “Right to Audit” clause?
  5. Is there specific language defining a fee reconciliation process and agency time reporting requirements?
  6. Does your contract extend coverage, control and transparency to both the agency brand you work with along with its affiliates and holding company?
  7. Are there clear definitions in and around intellectual property ownership and licensing arrangements? 

If you answered “No” or “I’m not sure” to any of the aforementioned questions, then your agency contract may not be providing your organization with the level of risk mitigation, financial and legal control that is consistent with your supplier governance standards.    

In our agency contract compliance auditing practice it is not uncommon to discover that the client-agency letters of agreement (LOA) have either expired and or are simply out-of-date.  Since the LOA is the document which governs these important relationships, why are client organizations so lax when it comes to maintaining this legal instrument?  Below are a few “reasons” and observations that we have identified across 100+ contract compliance engagements: 

  • The “Master Agreement” or contract was negotiated as an “evergreen” document with the core terms and conditions remaining in place unless either the advertiser or the agency terminates the agreement.  In this scenario, it is typical that the scope of work, staffing plan and remuneration program are to be updated and reviewed annually.  Unfortunately, sometimes these important legal exhibits are not updated on a timely basis or in a manner consistent with the terms of the Master Agreement or actual current practices.
  • Turnover within the client-side procurement and or marketing departments often leads to a knowledge gap when it comes to marketing agency LOAs and the attendant “rules of the road” that were arduously poured over at one time and put in place to guide the company’s agency relationships.
  • Many client organizations simply do not have standardized marketing services contract templates/ terms and conditions nor do they have a central repository for maintaining any and all LOAs, addendums and statements of work pertaining to their agency network… let alone a process for periodic review/updating. 

The legal and financial issues that can arise from an outdated, expired or inadequate client-agency contract are significant and can create a number of risks for advertiser and agency alike.  If you have identified issues, we would urge you to take action immediately by working in conjunction with your agency partners to update and evolve these agreements.  If you’re looking for guidance on industry “Best Practices” in this area you can contact the Association of National Advertisers to access relevant articles and guidelines on this topic. 

As another consideration, if you would like to gain the benefit of what we’ve learned through first-hand experiences and would like to schedule a complimentary consultation on “Client-Agency Contract Trends,” please contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com.