Marketing Math Blog

Aug 13
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What is the Line Between Being a Maverick or a Rogue CMO?

By Marketing No Comments

rogue cmoContrary to the old adage, when it comes to business, rules are not meant to be broken.  Companies put processes, guidelines and reporting mechanisms in place to insure that their employees adhere to the expectations established by the organization and to provide their company with transparency into the decisions that are being made by its personnel.  Of note, these rules apply to each and every employee from the C-suite to the front line.

Thus, it is always intriguing, in the context of marketing executives, when the labels “Rock Star CMO” or “Maverick” or “Risk Taker” are attached to senior marketing executives.  More concerning is when those personalities buy-in to such labels and begin to believe that their actions are somehow exempt from the guidelines established by their organizations.  This does not reflect well on those individuals, their companies or the marketing profession.  Further, as evidenced by the recent fall from grace of GM’s Global CMO, the story typically doesn’t end well for those involved.

Some might argue that there is a fine line between those personality traits and business ethos that separate a “Maverick” marketer from a rogue CMO.  I would challenge that notion entirely.  Professional marketers understand the benefits of charting a bold course, or taking prudent risks in the context of their brand’s position and their company’s culture.  They recognize the need to achieve the buy-in of their senior management peers and to build consensus among the rank and file for the strategies to be implemented.  Importantly, they set about these tasks in a transparent and ethical manner.

There is no excuse for individuals that knowingly seek to short-circuit an organization’s rules and regulations.  There can’t be.  For if we excuse the actions of a CMO or a CEO or a CFO how can we hold others in the organization accountable?  How can we reassure our Boards and our shareholders that our corporate governance initiatives and controls are beyond reproach?

It is not alright to maneuver around corporate signing authority limits.  It is not appropriate to hide costs by spreading them around multiple budget line items.  It is never acceptable to hide the truth about one’s actions when confronted by corporate counsel or internal audit.  For those individuals who think differently and conduct themselves in an inappropriate manner, the price to be paid is a heavy one, both economically and in terms of the perceptions about that person’s character.  In the words of Charles Dudley Warner the noted 19th century essayist:

“We are half ruined by conformity; but we should be wholly ruined without it.”

Stalwart marketing professionals play by the rules, invite scrutiny and pro-actively embrace their company’s accountability initiatives while conceiving of and executing demand generation strategies.  That is the cost of entry for senior marketing executives.   For Finance, Audit and Procurement professionals the recent events at GM reinforce the need to establish controls to insure transparency into the investment decisions being made by the marketing team and their agency partners.  Not for a lack of trust or congeniality, but because it is a necessary check and balance to insure compliance to the organization’s accountability initiatives.

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.

Aug 07
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There Were Two Glaring Omissions from AdAge’s “Top 100” LNA List

By Advertisers No Comments

the white houseAs you know, Advertising Age publishes a list of leading National advertisers (LNA) based upon their annual U.S. advertising spending levels.  In reviewing the publication’s most recent “Top 100” LNA list, it occurred to me that there were two well known, billion dollar plus advertisers who should be recognized based upon the size of their U.S. advertising investment.  Intrigued?  Perhaps you have already ventured a guess as to the identity of these two “Leading National Advertisers?”  Without any further intrigue, when these two advertisers are incorporated into the LNA list, the rankings would look this:

  1. P&G ($4.18b)
  2. Verizon Communications ($3.02b)
  3. AT&T ($2.79b)
  4. Presidential Candidates ($2.51b)*
  5. GM ($2.20b)
  6. Pfizer ($2.10b)
  7. Johnson & Johnson ($2.06b)
  8. Walt Disney ($2.00b)
  9.  Time Warner  ($1.85b)   
  10. L’Oreal ($1.83b)
  11. Kraft ($1.75b)     

*Sources: Center for Responsive Politics, Smart Media Group, Federal Election Commission 

That is correct, based on current projections, Mitt Romney will spend $1.35 billion and President Obama $1.16 billion on their respective runs for the White House.  Looked at another way, they will each spend more than top brands such as Chevrolet at $923 million, Lipitor at $247 million or Cover Girl at $205 million.  Further, projected total spending for all Federal election campaigns in 2012 is $5.8 billion… a staggering amount of money by any measure. 

What lessons can be gleaned from a political process where a sitting president must spend over $1.0 billion on a re-election campaign rather than running on the merits of their first-term job performance?  What can marketers learn about the viability of negative advertising in trying to build their brand by deriding the competition?  How does the market benefit from the lack of transparency which shrouds a Political Action Committee’s source of funds?  Admittedly, there is probably little in the way of practical insight that one could take away from political campaigns that would be of any value to marketing, financial, procurement or audit professionals. 

Political positions aside, the infusion of federal campaign spending has been a boon for the U.S. advertising market, with expenditures having grown 87.1% since 2000.  Who benefits?  Media property owners, ad agencies, PR firms, digital marketing shops, consumer research organizations and tchotchke manufacturers to name a few segments of the marketing world that participate in this “every-four-year” bonanza. 

In light of the largesse of politics as a force within the marketing world, it caused this marketing professional to ponder on a few topics: 

  • Are President Obama or Mitt Romney members of the ANA?
  • Do the campaigns conduct media post-buy analysis?
  • Do they conduct 3rd party vendor billing reconciliations?
  • What are the campaign’s days-payable-outstanding vendor payment averages?
  • Are agency employees who work on campaigns required to fill out time sheets?
  • Are the campaigns marketing services firms required to complete “non-disclosure/ non-compete” forms? 

Idle musings of a contract compliance auditor to be sure. 

One can certainly debate the need for political spending reform, the resulting impact on the electorate or the need for tighter regulatory oversight on campaign funding sources or message accuracy.  However, there is no debate about the positive impact federal election campaigns have on the U.S. media market.  From a marketing perspective, when it comes to political spending, if a little is good, more is certainly better, or as John Quinton so aptly said: 

“Politicians are people who, when they see light at the end of the tunnel, go out and buy some more tunnel.“

Jul 31
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GM Marketing. Bold Moves or a Business Case for Procurement’s Role in Marketing Services?

By Marketing Agency Network, Marketing Procurement No Comments

General Motors and its CMO just parted ways, suddenly and unceremoniously.  The Wall Street Journal, which broke the story, cited sources “familiar with the matter” when suggesting that the CMO had failed to “adequately appraise the financial details of a recent British soccer sponsorship deal.”  Of note, under that multi-year deal, GM will allegedly pay Manchester United up to $600 million over a seven-year period for Chevrolet to become the club’s jersey sponsor, which includes a $100 million “activation” fee.

Without passing judgment on GM, on their recently departed CMO, or on decisions regarding its $4.4 billion global advertising budget, even a casual observer might ask, “What’s up with GM Marketing?”  Prior to appointing Joel Ewanick to head up marketing for the organization in the spring of 2010, GM had gone through three Marketing Chief’s in the prior twelve months.  

In the two years since Mr. Ewanick’s arrival from Nissan, GM’s Marketing Team implemented a number of dramatic changes, including an overhaul of their marketing services agency network.  This included the abrupt termination of Chevrolet’s agency of record Publicis, firing Bartle Bogle Hegarty on the Cadillac account after five short months without a review (they learned of their fate by reading of GM’s move in the press), consolidating global media buying with Aegis’ Carat, and in March of 2012 GM pared their global creative agency network by 70 to 90 shops and awarding the business to a yet to be constructed agency, Commonwealth Detroit. 

Of note, Commonwealth Detroit is the combination of two agencies; Goodby Silverstein & Partners and McCann Erickson from Omnicom Group and IPG respectively and involves recruiting, building and relocating a team of disparate ad professionals from different agency cultures/ backgrounds to the MotorCity to handle GM’s global business.  Certainly a cross-holding company entity is an interesting approach that is historic in both its boldness and scope.  However, the process of nurturing two distinct creative agencies from two separate agency holding companies to share creative responsibilities, revenues and profits is unheralded.  Does anyone remember Dell and Enfatico?  The irony is that Enfatico was created by recruiting top personnel from agency brands all from within the WPP family. 

Any change in agency alignment is challenging.  Change of this magnitude in an organization’s marketing agency network is both difficult and risky.  Often done under the guise of future “expense reduction” the measures used to forecast those savings typically don’t hold water.  The reason being is that they often fail to account for factors ranging from the cost to unwind the incumbent relationships to the impact of new agency learning curves on account assimilation to the risks this can present to the advertiser on the demand generation side of the ledger. 

According to Bloomberg News, GM posted a global sales increase of just over 2.9% during the first half of 2012 while rival Toyota grew 34.0%, putting Toyota on pace to reclaim the global sales lead this year in the wake of last year’s tsunami in Japan.  In the U.S., GM’s sales rose by approximately 4.0%, in a category that grew 15.0%.  According to Autodata Corp, GM’s first-half U.S. market share fell to 18.1 percent from 19.9 percent a year earlier.  What is the value of a share point you ask?  The answer:  $910 million according to IBISWorld’s Car & Automobile Manufacturing market research report in which they forecast the U.S. automotive market will achieve $91 billion in revenue in 2012.

So what are the chances for success?  Time will tell.  We certainly wish GM and their interim CMO well in addressing the challenges associated with the breadth and depth of changes to their agency roster and the attendant impact on marketing strategy development and execution.  Let’s hope that a sense of reason governs their moves going forward and that the change at the CMO level doesn’t usher in another round of changes in their agency network.  The costs are too high and the risks too great.  While it wasn’t that long ago that GM severed ties with its century old agency of record, Campbell-Ewald, it seems like an eternity.  Interested in reading more on this subject?  Check out the coverage in Automotive News.

Jul 24
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Marketing Agency Relationship Management; “Who’s Responsible?”

By Advertisers, Marketing Agency Network No Comments

contractWho owns the relationship between your organization and your network of marketing services agencies? Simple question, right? We would suggest that the answer to this straightforward inquiry is more convoluted than you might think.

Here is a process for self-assessing whether your organization has the most basic, yet overlooked, supplier governance characteristics in place:

  1. Identify the functional area(s) and or individual(s) that you believe are responsible for the stewardship of your marketing agencies.
  2. Request of them a current copy of the executed letter-of-agreement (agreement), along with amendments and all relevant statements of work related, including the basis & calculation methodology for current agency compensation.
  3. Request of them a copy of the latest independent agency contract compliance audit results, performance assessment document, and agency fee reconciliation.

From our experience in working with advertisers large and small, chances are very likely that securing the aforementioned documentation will prove to be much more of a challenge than it should be. The reasons are many and varied, and range from the rate and rapidity of turnover within the marketing organization to the lack of a clear established process for managing and monitoring the marketing services vendor network.

In most organizations there are multiple touch points over the course of the lifecycle of an agency relationship that usually involve representatives from Marketing, Procurement, Finance, Legal and Internal Audit. Typically, certain of these groups plays a role on the front-end in on-boarding an agency, negotiating the agreement, ensuring proper controls are set, and developing the compensation program. The groups should then stay involved. However, in practice once initial terms are set, involvement of non-marketing personnel tends to end. This leads to relationship “drift” and creates risks for the advertiser that are directly related to a lack of (or a lax enforcement) of controls and transparency into the stewardship of its marketing funds.

How much does your organization spend on marketing? According to a 2009 Businessweek article, “What Should You Spend On Advertising?” the authors indicated that retailers typically spend between 1.5% – 5.0%, automotive advertisers between 2.5% – 3.5% and consumer packaged goods marketers between 4.0% – 10.0% of revenues on marketing. No matter how you view it, the absolute dollar marketing investment is significant and is worthy of a commitment to solid contracting and contract maintenance procedures, as well as a consistent program to monitor contract compliance and agency performance; all in an effort to optimize the return on marketing investment (ROMI) and manage risk.

Implementing a pro-active marketing services agency vendor management program starts with the perspective that members of an organization’s agency network are valuable contributors to the organization’s demand generation efforts. Secondly, the enhanced asset value generated through clarifying agency roles and responsibilities and synchronizing their efforts can yield asset value well in excess of the advertiser’s agency fee investment. Thirdly, developing performance criteria and agency remuneration systems that align an agency’s resource investment with the organization’s business goals is a critical component of the process. Finally, it is imperative that agency performance vis-à-vis both contractual obligations and KPIs is monitored and feedback provided to insure that each link of the marketing services supply chain is properly focused on what is important to the advertiser.

With the average tenure of a “Top 100” branded company CMO right at 23 months (source: 2004 Spencer Stuart, Blue Paper “CMO Tenure: Slowing Down the Revolving Door”) businesses must provide a level of “continuity” insurance to counter the level of turnover among CMOs, and to avoid unnecessary vendor churn.

Without a commitment to continuity the predictable cycle of upheaval and change within an organization’s marketing agency network will begin anew every two years.

Often when a new CMO comes on board, a number of agency reviews are launched to bring in “their team” and before the new agency even has two full planning seasons under their belt, the cycle begins again. And make no mistake about it, changing marketing agencies carries a level of risk and cost that negatively impacts an advertiser’s ROMI – due to the agency / client business learning curve, cultural assimilation, and transition management, amongst others.

Best Practice: Constructing and implementing a successful vendor management program for marketing services should NOT be the sole purview of marketing. In order to achieve a level of stability and sustainability with an organization’s professional services providers in this area, cross-functional involvement is an important and necessary ingredient.

Thus, shared ownership, strong stakeholder continuity outside of Marketing, along with independent compliance and monitoring support to provide objective feedback on marketing agency performance, can assist an organization in building a responsive, highly productive agency network.

Interested in learning more about a marketing services vendor management program? Contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com for a complimentary consultation; “Building a High-Performance Marketing Agency Network.”

Jul 17
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Media Rebate Follies Continue

By Advertisers, Advertising Agency Audits, Media Rebates No Comments

media rebatesThe Association of National Advertisers (ANA) conducted a survey among 180 members with regard to the prominence of media rebates within the U.S. media market.  Of note, both the ANA and those members surveyed expressed concern about the existence and appropriateness of this practice. 

By way of background, media rebates or volume over-rides have been in use within the European advertising market for several years.  In essence, media properties offer advertising agency holding companies a financial incentive tied to their overall purchases of space and or time.  These rebates can take the form of cash rebates or no charge media weight which is banked by the agency holding company.  These rebates can range between 1% and 15% of the media commitment.  The agency community has long contended that this practice did not take place in the U.S.  Advertisers on the other hand have always had their doubts about those denials and with apparently good reason. 

In the recent ANA survey, 28% of the respondents indicated that they “were aware” of incentives being provided by the media to advertising agencies.  Further, 85% of the ANA members surveyed felt that those rebates should be passed along to the advertiser.  Yet in spite of these beliefs, only one-third of the respondents had client-agency contract language to that effect.   Of note, Bill Duggan, EVP of the ANA stated that; “Frankly what I find personally surprising is that agencies are doing this.  It’s in my opinion a totally inappropriate practice.”  Some of the ANA members echoed those sentiments indicating that it was a “dark and murky” area of the business that required greater transparency. 

Why the concern?  Quite simply, the notion that a media seller would offer a media buyer with a financial incentive to increase the level of media purchased from them raises a serious conflict of interest issue.  In fact, I cannot think of one cogent argument for the agency to participate at any level in the retention of volume over-rides at either the holding company or operating agency level.  The media agency has a fiduciary responsibility to its clients.  The advertiser needs to know with certainty that the resource allocation decision being made by its media agency are driven by sound, fact-based analysis tied to optimizing the advertisers return on media investment… not tied to the agency being able to supplement their revenue base. 

Having contract language that clearly defines what constitutes a “rebate,” how the advertisers pro-rata share of that rebate is to be calculated, in what currency that rebate is to be paid (cash or media) and the timing of those payments is a must.  However, that may not be enough.  Why?  The utter lack of transparency regarding these deals between global media concerns and global agency groups creates a series of challenges for the advertiser to assess the validity of the rebate amounts identified.  In our advertising agency contract compliance auditing practice we have often encountered scenarios where the advertiser was receiving quarterly “rebate” checks, but had no basis for calculating or forecasting the amounts of those rebates.  Of note, more often than not, the CFO of the operating agency does not have insight into how the holding company is allocating the rebates back to the client base. 

In our opinion, independent contract compliance auditing is a necessary compliment to solid contract language to protect the advertiser’s interest.  The knowledge gleaned across multiple audit engagements and the subject matter expertise necessary to even identify the presence of a rebate program, let alone calculate payment levels is crucial. 

Let’s remember one fact.  The multi-national agency holding companies are publicly traded entities.  They are responsible for accreting shareholder value… their shareholders, not the advertisers.  The incremental profit margin on volume over-ride programs, interest income from float, the mark-up on in-house studio or trading desk charges and the like is significant.  To be clear, no one begrudges an agency from profiting on the investments which they make in building out their infrastructure and resource offering to improve performance or operating efficiencies.  The issue is quite simply one of transparency.  In the case of rebates, it is the advertisers’ money being invested, not the agency’s.  Therefore, any economic benefit should come back to the advertiser, plain and simple. 

Hopefully the ANA’s recent survey on this topic results in meaningful dialogue within the advertising community over this practice and how to monitor and control its use within the U.S. market.  However, no one should be surprised with regard to the existence of these programs.  In a March 3, 2008 BusinessWeek article entitled; “An Adman Tests the Limits” Irwin Gotlieb Chairman of WPP’s Group M media operation stated that the agency had begun to pursue rebate programs with U.S. based outdoor advertising companies and that they were looking at other media channels to expand the concept to in the U.S. market.  

Interested in learning more about the utilization of rebates and how to implement the appropriate controls and transparency?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on this topic.

 

Jul 10
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Drive Contract Compliance, Boost ROMI

By Contract Compliance Auditing, Marketing Agency Network No Comments

ROMIDoes your organization believe that its marketing investment can have a profound impact on growth, revenue flow and profitability?  If the answer is “yes,” then implementing a strong marketing accountability program can help boost financial outcomes.

Establishing performance criteria within the marketing function, and across the organization’s marketing agency network, is an important first step on the path to improved results and a higher level of accountability.  This can be accomplished by integrating agency financial performance metrics into the letter-of-agreement, and by linking agency remuneration and or incentive compensation to the desired outcomes.  Each metric and incentive goal should be well defined and directly tied to the organization’s business goals.  However, well thought out and agreed-to measures only lay the foundation – a constant review and feedback cycle is required to achieve the desired sound accountability.

A successful accountability plan must be sustainable and is dependent on the development of an agency performance monitoring discipline, relative to the letter of agreement, whereby progress and success criteria can be regularly tracked and communicated to stakeholders.  Unfortunately, too few organizations follow through and make the relatively minor investment necessary to implement and sustain such an initiative.

Perhaps the best way to jump start the control and feedback cycle is through the initial use of an agency contract compliance audit.  Let’s assume that the letters-of-agreement and agency remuneration programs were properly constructed and aligned with desired business outcomes.  Conducting an independent audit over marketing agency partner (creative agency, digital agency, media agency, PR firm, sales promotion agency, diversity agency) activity provides the requisite unbiased focus.  A well-scripted audit process will focus on testing past agency activity and reporting, detection of outlying transactions, review of parameters in place, metric refinement, and identification of process improvement opportunities to further enhance the program.

Reasons for an independent audit are many and varied, but here are a few key considerations:

  1. The organization may lack the depth of resources or subject matter expertise to conduct a thorough assessment of an agency’s contract compliance and performance.
  2. Independent auditors can provide agency stewardship insights and “Best Practice” feedback that can strengthen the client/agency relationship while laying the groundwork for improved performance.
  3. Contract compliance audit firms have the tools and experience to probe on all aspects of the marketing investment cycle ranging from agency staffing investment assessments and fee reconciliations to comprehensive billing reconciliations of both the agencies’ and the organization’s 3rd party vendors.
  4. The compliance and performance metrics gleaned from the audit process can enhance an organization’s marketing, financial and legal controls while supporting the firm’s corporate governance initiative.

In our experience, advertisers that have achieved success in optimizing their return on marketing investment (ROMI) have done so with the aid of a top-down accountability program.  At the end of the day, all stakeholders want marketing to succeed and to lead the way toward attaining its organization’s cash generation and brand equity building goals.  None more than the marketing team and their agency partners.  With solid stakeholder support, linking your marketing goals with your organization’s desired financial outcomes, creating a culture of accountability, and a dedicated effort to monitor performance, the path to success will become infinitely easier.

Interested in learning more about the potential benefits of a contract compliance and performance audit that can accrue to your organization?  Contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com for your complimentary consultation.

Jul 02
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Who’s Got Your Back?

By Contract Compliance Auditing, Digital Media No Comments

Earlier this week news broke regarding a click fraud scandal at SheKnows.com, the large web portal targeting women.  The fraud was perpetrated by two editors who encouraged writers for the site to click on sponsor ads in an effort to keep sponsors “happy.”  Below is an excerpt from a memo sent by one of the editors:

“Our click-through rates are not as great as our impressions (which is not your fault). But we can help everyone out a bit if we get in the habit of clicking on any ads you see alongside your articles, on the site, in your section, ANYWHERE. Our advertisers are the reason we all have paychecks each month so it’s important that they’re happy. Literally all you have to do is click on the ad – you don’t have to stay on their site for a certain amount of time and don’t have to buy a thing. Just click! Click 100 times if you want to!”

Perhaps this editor took John Egan, the 19th century Irish-Canadian businessman and political figure too literally when he said; “The absolute fundamental aim is to make money out of satisfying customers.”

Why is this story important?  SheKnows.com, which is one of the U.S.A.’s leading sites catering to women, has been in business since 1999, claiming 50 million visitors monthly to its website.  Sponsors have included the likes of Panera Bread Company, Unilever, Johnson & Johnson, American Girl, Barilla and others (Panera announced their decision to pull advertising from the site following the news). 

Thus, the revelations about click fraud at a large and well established online publisher is troubling on a number of fronts.  One, we should all take umbrage at the fact that a supervisor at a publisher (or any organization for that matter) is instructing its employees to conduct themselves in an unethical manner.  This raises a serious question, “Were these the actions of a rogue editor or symptomatic of the culture of this particular organization or of online publishers in general?”  Secondly, the fact that the actions encouraged were intended to defraud sponsors and that they caused economic harm to advertisers on the site is amoral and borders on criminal.  Finally, the click fraud was never detected.  The fraud came to light only after internal memos were leaked.  In fairness to SheKnows.com, they have dealt with this issue in a professional and contrite manner and if the click fraud was solely due to the actions of two misguided editors, then they, like their sponsors, are victims as well.

This scandal comes at an interesting time for the online advertising industry.  It is true that online media continues to increase its share of advertiser spending, with growth rates that have far surpassed those of traditional media channels.  In fact, according to eMarketer’s January 2012 survey, online media spending in the U.S. is forecasted to top $39 billion in 2012, more than magazine and newspaper advertising combined.  However, there remain challenges and questions that the online industry must face as it reaches maturation, ranging from declining click rates to attribution measurement to legislative challenges to the industry’s right to self-govern. 

So how does this impact advertisers?  In short, caveat emptor.  With advertisers eschewing investments in traditional channels to fuel spending in online media, including many unmeasured media tactics such as search engine marketing, online video and some forms of social media, there are risks.  The risks are in the form of a lack of advertiser transparency and declining performance levels due to increasing ad clutter and consumer ad avoidance behavior.  It is estimated by ClickZ that click through rates (CTRs), one measure of online ad performance, range from less than .05% for online display ads to 1.0% to 7.0% for search.  It is these lackluster CTRs that provide unscrupulous players the incentive to perpetrate click fraud.

The question to be raised is: “Who is safeguarding the advertiser’s online media investment?”  As referenced earlier, the SheKnows.com click fraud was not uncovered by the Interactive Advertising Bureau or by the advertising agencies for the sponsors on the site, nor by 3rd party ad servers or ad networks nor by the client-side digital marketing teams for those advertisers.  The truth is, if not for a disgruntled employee who leaked an internal communique the fraud would have gone undetected. 

It is for this reason that online advertisers should consider engaging an independent auditor to assess agency and publisher contract compliance, review buying processes and controls, conduct an online billing reconciliation and audit the performance of their media investment in this area.  Interested in learning more about the SheKnows.com click fraud? Check out AdWeek’s feature story.

If you would like to sign up for a complimentary session to discuss the benefits of a 3rd party digital media audit, contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com to schedule a time convenient for you. 

Jun 26
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It’s Your Money and Your Reputation

By Advertising Agencies, Contract Compliance Auditing No Comments

advertiser's reputationDo you know what happens to your organization’s money, once it has paid the advertising agency?  If you’re like most advertisers you probably don’t know and may not even care.  Perhaps you should. 

Advertising agencies, regardless of the contractual definition of their role (agent vs. independent contractor), act on an advertiser’s behalf to procure and pay for services, space, time, etc… purchased from third-party vendor organizations that are related to producing and distributing the client’s advertising and communications messaging.  In turn, the advertiser is billed by the agency, typically upfront on an “estimated” basis for those goods and services with payment due to the agency in 15 to 30 days from receipt of invoice.  Terms between agency and client are usually set to insure that the agency has the client’s funds prior to the time third-party vendor invoices are presented for payment. 

For most advertisers, there is little transparency into the financial transactions between their advertising agencies and their third-party vendors, which number in the hundreds, if not thousands.  This lack of transparency results in diminished advertiser control and increased risks associated with third-party vendor reconciliation and accounts payable management.  Risks typically fall into four areas: 

  1. Clear and unambiguous title to any and all intellectual property/ work product
  2. The advertiser’s reputation among 3rd party vendors
  3. Treasury management “opportunity” costs
  4. Exposure in the case an agency became unable to pay its creditors 

AARM conducts agency contract compliance and financial audits of advertising and marketing agencies on behalf of advertisers.  In our experience it is rare to see a client-agency contract that identifies clear terms and conditions for the agency’s handling of third-party vendors or in establishing processes and controls to allow the advertiser to monitor performance in this area.   Don’t advertisers want to know if and when third-party vendors have been paid?  If vendors were paid at the agreed upon rate or something less?  If the reconciliation process resulted in credits, discounts or rebates that are due back to the advertiser?  Who are the vendors being utilized? 

Based on our financial audit experience, there has been a clear trend in recent years of agencies stretching out disbursements to third-party vendors well beyond their payment terms, as measured by “Days Payable Outstanding” or the time lag from vendor invoicing to agency payment to the vendor.  There can only be two reasons for this performance and neither is particularly sound.  Firstly, the agency may have flawed vendor reconciliation processes and or they are putting inadequate resources against this “non-revenue generating” area of their business.  Secondly, the agency is seeking to maximize interest income from float.  Simply defined, “float” is the amount of money that the agency has collected from the advertiser but has not yet disbursed to a vendor.  In almost all instances, agencies both earn and retain the interest income on this float. 

Within the agency community it is often joked that interest income (from float) is an agency’s best client; “It pays on time and never complains.”  However, when it comes to the advertiser’s reputation the risk of being labeled a “slow pay” is no laughing matter.  Whether deserved or not, such a reputation can carry both opportunity costs and economic costs in the form of vendors charging higher rates to compensate for their “carrying costs” or not offering preferential treatment.  Nor do many client-side CFO’s find much humor in lost interest income opportunities, aged vendor credits or delayed earned but unprocessed discounts and rebates.   

When the size of an advertiser’s budget is considered and the fact that this investment is being managed through a small group of agencies, who in turn handle purchases and payments on behalf of the advertiser with hundreds of diverse third-party vendors ranging from media property owners to production studios to third-party ad-servers, it may be time to perform an independent assessment of performance in this important area. 

After all, we’re all familiar with the adage: “What is inspected is respected.” 

Interested in learning more about the financial portion of an agency contract compliance audit?  Please contact Don Parsons, Principal at AARM at dparsons@aarmusa.com for a complimentary consultation.

 

Jun 18
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Performance Integrity

By Contract Compliance Auditing, Marketing Agency Network No Comments

In the world of athletics, independent performance assessments are the rule.  In baseball, umps call balls and strikes, in tennis linesmen determine whether a ball is in or out, in football referees call out players for rule infractions.  Given the competitive nature of athletic competition at all levels and the economic impact performance integrity can have in collegiate and professional sports, it is unfathomable to think that the governing bodies overseeing these entities such as the MLB, USTA, NFL or NCAA would allow athletes to self police their contests. 

Is business any less competitive?  When companies consider the value of a point of market share, the impact of positive sales on earnings-per-share or the investment level being made in marketing as a percentage of their selling-and-general-administrative expense the answer would most certainly be “No.”  So why is it that when it comes to marketing performance integrity, self-assessment is the rule rather than the exception? 

In business, as in sports, there are winners and losers.  There are several characteristics that impact whether an organization can be categorized as a “winner.”  These characteristics include, but are not limited to, a company’s market position, year-over-year sale’s increases, customer loyalty/satisfaction and return on shareholder equity.  An organization’s marketing investment and the resulting performance of that investment largely determines an organization’s in-market success.  Given the potential impact marketing has on company performance, don’t you believe that stakeholders (i.e. Share Owners, Board of Directors, Senior Management) would want to insure the integrity of that “performance?” 

Perhaps it makes sense for business to take a lead from their sporting organization counterparts and commit to the independent performance assessment of their marketing partners as a mechanism for optimizing this important investment.  This is certainly not a foreign concept in business – just as public corporations are required to utilize independent auditors to vet the accuracy of their financial statements it would be reasonable, and make good sense, to apply this concept by engaging 3rd party agency contract compliance and performance auditing firms to assist in assessing the efficacy of one’s marketing spend.  The learning and any resulting financial reconciliation related to the audit process would yield dividends on multiple fronts well into the future.  In the words of one of America’s founding fathers, Thomas Paine: 

“Character is much easier kept than recovered.” 

The practice of engaging agency compliance auditors to provide a fair and balanced look into the performance of an organization’s marketing agency network is relatively commonplace in Europe.  This movement has also been gathering momentum within the world’s largest advertising marketplace… the United States of America.  Employing independent auditors is not done to impugn the character of the agencies whose compliance and performance is being evaluated.  Rather, it is performed to validate that the advertiser has, in fact, the appropriate legal, financial and governance controls, fraud detection and performance monitoring processes in place and that the reporting and subsequent level of transparency which it affords the company are satisfactory.  

Given that we started this article with a sports reference, it is only appropriate that we end with a pearl of wisdom from one of major league baseball’s most accomplished players, Hall of Famer Yogi Berra: 

 “You can observe a lot by just watching.” 

Interested in learning more about the benefits of agency contract compliance and performance audits?  Contact Don Parsons, Principal at dparsons@aarmusa.com to schedule a complimentary consultation today.

Jun 12
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Accountability Doesn’t Obviate the Need for Governance

By Advertising Agency Audits, Contract Compliance Auditing, Internal Audit No Comments

It has been ten years since Sarbanes-Oxley was enacted by the United States legislature.  The SOX Act, as it is commonly known, covers a number of issues ranging from corporate governance to internal controls and reporting accuracy.  The law came into being as a result of high profile corporate and financial scandals at Enron, WorldCom, Adelphia and Tyco International.  The monetary impact of these events on investors around the globe was both profound and devastating.

As firms began to grapple with SOX compliance requirements, they implemented processes and procedures designed to enhance transparency and improve governance at all levels of the organization.  In the context of a business, Wikipedia offers this definition of governance: “Governance relates to consistent management, cohesive policies, guidance, processes and decision-rights for a given area of responsibility.”

While it took awhile and in some organizations, a longer period of time than in others, marketing’s turn to go under the microscope has come to pass.  In light of the investment level being made by companies, this is certainly no surprise.  Given the complexity of the marketing-advertising supply chain, the use of agents, independent contractors and 3rd party vendors, and the lack of transparency often afforded advertisers, the only surprise is that it has taken this long for organizations to begin to “peel back the skin of the onion.”

For progressive companies that have created a culture of accountability, increased governance and its impact on marketing spend, and all that it entails, represented few challenges.  However, in many organizations the notion of “governance” was interpreted by client-side marketing and advertising agency representatives to be a full-frontal attack on their integrity.  Further compounding the process was the fact that marketing was, and to some extent remains a bit of a “black box” to corporate finance, audit and procurement departments.  In many instances, these departments simply don’t have the subject matter expertise on-staff to help guide their efforts to understand the nuances and complexities of the marketing area.

What do we mean by “complex?”  From the size of an organization’s marketing agency network which could include dozens of firms (earlier this year PepsiCo pared their agency network from 150+ shops to 50) to the hundreds of statements-of-work and purchase orders issued in a given year to the thousands upon thousands of bill-to-client invoices and 3rd party vendor invoices which are processed.  Remember, these include a staggering number of revisions to the ad industry’s typical modus operandi, an “estimated billing” approach in which the advertiser is billed upfront for all or a portion of the creative and or media activity for a given period.   In an estimated billing scenario, it is the advertiser who fronts the money, not the agencies and not the media sellers that bear the risks for their investment.

The good news is that there are a number of competent, highly-regarded, independent agency contract compliance audit firms that can provide capable assistance to an advertiser.  The subject matter expertise which they bring includes insights into most all facets of the marketing supply chain as well as industry “Best Practice” in the area of accountability.  Further, they provide an excellent bridge to enhance communication and further understanding between marketing and their agency network and the governance process championed by finance, audit and procurement.

The time has come that there should be few corporate marketers and fewer marketing agencies that resist an organization’s governance initiatives.  There is no reason, and frankly, no excuse in any quarter for not “stepping up” to enhance transparency and improve the reporting and controls a company has in place to safeguard its marketing investment.  In the words of Stephen Covey:

“Accountability breeds response-ability.” 

Interested in learning more about the role of contract compliance auditing in supporting your company’s governance efforts?  Contact Don Parsons, Partner at Advertising Audit & Risk Management at dparsons@aarmusa.com for a complimentary consultation.