Under the Looking Glass
"Some agencies are uncomfortable about auditors checking they are on the straight and narrow."
THESE are tough times for agencies of all shapes and sizes. They are under scrutiny as never before with auditors and procurement specialists crawling all over their businesses. In recent years pressure for transparency has seen the rise of a new form of checks and balances, in the shape of contract compliance auditing. It is a trend that not everyone has welcomed.
These specialists go through agency deals to make sure that the financial behaviour of both parties conforms to the precise terms of agreement. Those who object say the process is one-way only.
Hamish Pringle, director-general of the institute of practitioners in advertising, says such operators usually only look for agency underspends and ignore the overspends. They rarely take account of the extra work an agency might do as a result of the client changing the brief, for example. Or that while one job might be cheaper than expected, the next could be more expensive.
Such comments do not attract that much sympathy from advertisers. "Of course they are anti because agencies are still not transparent in their dealings with their clients," says Deborah Morrison, director of membership services at the Incorporated Society of British Advertisers.
Contract compliance may not be that new. ISBA says about 40 per cent of clients run the slide rule over their agencies on such matters. However, many do so via internal auditors. What is different about the contract compliance specialists is that they are run by ex-agency finance bosses. "What has changed is that there are audit firms who know what they are looking for. That is the only thing that has changed," says Alison Sanderson, director of new start-up.
Significant sums of money have been returned to clients, says Stephen Broderick, UK and Europe managing director at FirmDecisions. Such cash can come from many sources. Provisions put aside for eventualities that do not actually occur, billing clients on the basis of estimated costs and not reconciling those with the actual invoices, or media space that is never billed for.
Broderick recognises that such occurrences can happen entirely innocently. Agencies, he says, are very focused on the next ad, the next campaign, and sometimes the back-end management suffers.
In addition, a local office in a small market may never have seen the contract that headquarters and the global client agreed half a world away. "It is important to ensure that the relationship is working in the way that the contract was set up," says Broderick.
BT head of media, Grant Millar, says: "I have no doubt that there are some agencies that have supplemented their income by areas that perhaps you could agree are shades of grey. These are the growing pains of a still relatively young business." Millar says such audits can help tidy up working practices on both sides of the client-agency divide.
Stuart Cox, media manager at Nestlé in the UK, says: "It is an ongoing relationship with our agencies to make sure that we are completely transparent with each other."
And both Cox and Millar say that agencies which are unhappy with such a process would be viewed sceptically. "This is a real litmus test of media, whether you are prepared to open up your business, whether you are prepared to have a proper, grown-up relationship with your client," says Millar.
However, not all agree that this is the right approach. Pringle says there is no evidence of agencies making excessive profits and an overzealous procurement approach will have a detrimental effect. "These are professional businesses trying to build brands for clients. They are not just mechanistic, clock-watching, pennypinching operations. They add value by creating intellectual properties, not by producing widgets costed on a time and materials basis," he says.
It is suggested that the need to operate in this way stems from the pressure for business. As agencies have fought tooth and nail to win clients, they have had to reduce their headline margin. We have got ourselves into a bad place and I wish we could get out of it. Probably the only way we can is by agencies trying to get better and tougher in negotiating the contract," says Pringle.
But not all agencies are unhappy. "It is just another step towards the rise of accountability," says Peter Mitchell, managing director at WWAV Rapp Collins Media.
Jim McDonald, commercial director at the Allmond Partnership, which has been inspected by Firmdecisions, is also open to the process. "All they do is want to see the paper trails between client, ourselves and media owner, which to me is absolutely fair and proper," he says.
Perhaps some of the resentment comes from a sense that agencies are increasingly being asked for more and more information. Pringle says, "I'm all for transparency but on both sides. How would the client feel if we started asking questions they are asking us?"
Published in FT Creative Business 28 October 2003