FirmDecisions is the largest independent global marketing compliance specialist. We provide financial transparency in the client-agency relationship to the world’s biggest advertisers.
Stephen Broderick, CEO
The secret to a fantastic marriage between client and agency is a great contract. Nick Manning and Stephen Broderick explain how to ensure yours covers all the important issues.
A recent survey by the World Federation of Advertisers showed that advertisers are rather bemused, to put it mildly, by the inexorable rise of agency profitability at a time when they themselves are finding it hard to drive growth. Eighty-eight per cent of respondents were concerned by this, and 84% saw the emergence of agency trading desks in online media as a “threat to transparency”. Privately, many advertisers say they have lost faith in their media agencies and what is seen as an inherent lack of transparency in the media market.
A recent survey by the Association of National Advertisers in the US found that only 34% of the advertisers polled had detailed language in their contracts specifying that they should receive all discounts and rebates generated on their behalf. ANA members are especially worried that the ‘disease’ of rebate culture could creep into the formerly rebate-free US market. The greatest concern among clients seems to be that media vendor rebates can, and indeed do, distort the planning process. It is not unknown for media scheduling to be clearly driven by volume deals struck by the big buying groups. The frontline media agencies may be unaware of the nature of those deals but they know where they’re supposed to place clients’ money.
The question of transparency and the desire to avoid planning distortion can potentially be solved in one fell swoop, by having the correct contract. If clients have the right contract, supported by compliance procedures and audit rights, then both concerns can be managed.
However, even if a media agency has no vested interest in rebates coming from a particular media solution, it may still be encouraged by its parent buying group to channel budget into those media vehicles where the deals are. Even with transparency protocols, clients still need to be wary of planning distortion and ideally have an independent planning perspective to help them to spot anomalies.
A marriage by contract
The advertising world has always relied heavily on the bond of trust between the brand-owner and its chosen agencies. This bond has never been more important than in today’s multi-channel world, where clients employ more agencies than ever before to service their needs across multiple consumer ‘touchpoints’.
The relationship between advertiser and agency is vital – it goes far beyond the traditional buyer/seller model – and at its best is a strong partnership, maybe almost a marriage.
Agencies and advertisers don’t fall in love – so perhaps it’s better to think of it as an arranged marriage, one that needs a contract to detail both parties’ obligations to each other, especially if things go wrong.
The agreement of a mutually binding contract should now be a ‘given’, even in an industry where contracts have often been seen as flexible, at least by the agencies. Contract compliance needs to become front and centre in the client/agency relationship, with associated compliance processes.
The centrepiece of these obligations should be the agency’s ability to demonstrate delivery of value to the client. After all, every marketing and procurement team will want to reassure the finance director that they are getting a fair return on investment from what is one of the largest items in their budget.
Measuring the delivery of value needs to include the checks and balances that enable companies to follow the money through the transactional and invoicing process, even if the focus of the relationship is understandably on the launch of Product A or promotion of Brand B, rather than the ‘nitty gritty’ of who pays how much for what.
In most companies, as long as the purchase orders match the approved plans and schedules, and these agree with invoices from the agencies, then very little retrospective financial analysis takes place. As a result, many inadvertent overcharges, rebates and unpaid balances could be, and in many cases are, retained by the agencies. Clients are entitled to recover these monies. But with advertisers moving around the agency landscape more frequently than in the past, opportunities for such sums to be left at a previous agency are increasing.
Add to this an employment market where headcount is down and all staff, including finance and back-office personnel, are constantly moving and you have the potential for millions of pounds, dollars and euros to be left un-reconciled and unreturned to clients each year.
Too little detail
The driver of the financial relationship between the client and its agencies is the contract, but too many contracts simply do not set out clearly enough the terms of billing, reconciliation, rebates, discounts and other basic deliverables. The result is that agencies can retain balances owed to the client, and those clients that do not audit comprehensively, remain none the wiser. Contracts need to specify a policy of regular financial reconciliations or audits.
The starting point for the contract, whether it’s a renewal or a new appointment, is that the contract must be client-drafted. Often, agencies will insist that clauses be inserted, clauses that appear innocent and straight forward, and advertisers should be aware of the implications of such commitments. The benefit of a clear contract is that any financial issues can be effectively dealt with in a sound working relationship; if they are not addressed and resolved, they can rapidly damage the relationship between the client and its agency partners.
Central to a successful relationship is a contract that ensures transparency and specifies regular and full compliance and financial audits. Almost all compliance audits uncover financial issues, ranging from a few thousand dollars to seven figures sums. An audit will put the issue on the table and when resolved, will often make the relationship stronger with greater trust between the two parties going forward.
Finally, clients should be careful to not just focus on their ‘visible’ agencies, such as their media and creative partners, but need to be applied to all partnerships, including third parties.
Like any chain, the client/agency bond is only as strong as its weakest link. For the marriage between an agency and advertiser to last, setting out the terms of that relationship clearly and concisely is essential. Detailing in advance how much visibility each side has over the other’s activities is vital to building trust.
Having an expert auditor review financial matters regularly does not betoken a lack of trust, but demonstrates a commitment by both parties to contract compliance, leaving the client and agency free to concentrate on the job of building brand engagement.
Top five tips for clients
1. Originate the contract with the agency. This will ensure that all angles are covered in the detailed transactional chain.
2. Leave no stone unturned. Contracts are usually heavy on deliverables but light on financial process; seek expert guidance on what needs to go in to ensure the correct process.
3. Align your audit rights with the financial process and work out what you need, and when, to guarantee compliance.
4. Ask your agency to put in place voluntary compliance protocols to ensure that minds are concentrated on the agreed contractual processes.
5. Insist on complete transparency in all channels, including Agency Trading Desks, with the onus on the agency to volunteer clarity of transaction.
Nick Manning is Managing Director of Business Development at Ebiquity.