Articles

Counting the Cost of Advertising

Stephen Broderick, CEO

An audit could be the best way to get to grips not only with advertising costs but also the whole advertiser/advertising agency relationship, as Stephen Broderick reports.

Advertising is frequently the biggest expense to appear in a company’s marketing budget but is usually the cost that directors of finance understand the least. Each year companies spend billions of US dollars on advertising – a figure large enough to attract the attention of the finance department. This year advertising budgets will come under even tighter scrutiny.

Same Value For Less Money

The Financial Times reports that British companies made their deepest cuts to advertising budgets for almost two years in the last three months of 2007. In fact, the Institute of Practitioners in Advertising has embarked on its own promotional campaign to encourage the country’s largest advertisers not to slash budgets in the face of economic uncertainty.

It is only to be expected that finance directors worry about getting a good return on their advertising investment and want to probe whether they can get the same value for less money. This, however, is the wrong tack.

The question they should be asking is whether the company’s advertising investment is being managed properly by both the marketing department and its advertising agency partner. Finance directors probably won’t like the answer.

Unique Business Arrangement

It is important to understand when reviewing the relationship between a company’s marketing department and advertising, or other creative agency, that it is unlike any traditional buyer/seller model.

It is a unique business arrangement – more like a marriage than a contractual partnership.

The marketing department and the creative agency are constantly looking forward to the next big event, be it a brand launch or product re-launch, and as a result there is very little retrospective financial analysis.

As long as the purchase orders and activity plans correspond with the agency invoices everyone is happy.

It is not uncommon for rebates and unpaid balances to be inadvertently retained by the agency or overcharges to be made. Many of these errors will go unnoticed, even after the existing contract has drawn to a close and the relationship with the agency has terminated. This can be attributed to two key factors.

Rapid Turn-over

Once upon a time the advertising partnership between a company and its agency would last for decades whereas these days the marriage is much more short-lived. Agencies are quickly dropped if they don’t deliver the instant results their clients demand.

At the same time there is a rapid turn-over of personnel at all levels with the agency – both creative and also finance and back-office staff – as well as within company marketing departments.

Against this backdrop it is understandable why annually millions of pounds are left un-reconciled and un-returned an issue which could be avoided by regularly auditing the advertising finances.

Undertaking regular financial audits of marketing service suppliers is the only sure way to maintain ongoing financial transparency.

Retained Balances

It is important to handle audits sensitively, however, in order not to damage the special relationship that exists in a successful advertising/marketing relationship by creating unnecessary disruption to the agency finance department.

The greater the knowledge of how an agency works, the issues agency staff face on a corporate and day-to-day basis and being effective with on-site time, can all contribute to the success of an audit.

The financial driver of the client/agency relationship is the contractual agreement and frequently these fail to set out the terms of billing, reconciliation, rebates, and discounts which lead directly to the problems of retained balances amongst others. In most companies the relationship is owned by the marketing department.

It is they who set the agenda for activity and set targets in terms of brand awareness, customer recognition and trial, sales volumes and such.

Market For Compliance Marketing

As part of their role to improve the value of the brand it would be unrealistic to expect marketing employees to constantly check invoices, reconciliations and balances.

This is where the finance department and specialist auditors can help. If financial discrepancies are not identified and resolved they can ruin an otherwise perfectly working partnership.

These factors together with industry issues such as the IDS SOX review and the IPG re-statement of accounts means that regular auditing of agencies has never been more important.

In fact, the market for compliance auditing within marketing has doubled over the last three years.

In order for finance directors to discuss economies in the market budget they should establish what the real cost investment in advertising is.