FirmDecisions is the largest independent global marketing compliance specialist. We provide financial transparency in the client-agency relationship to the world’s biggest advertisers.
Fiona Foy, Managing Director, North America
FirmDecisions is the largest, independent, global marketing contract compliance specialist. But even some of our long-established clients don’t realise we’re also very active in creative and production auditing. As Fiona Foy, MD North America, and Reggie Avisado, Senior Audit Consultant at FirmDecisions reveal, there are numerous ways in which advertisers routinely fail to get best value from ad production. At the same time, it’s also straightforward for advertisers to get the most from their creative budgets and run them more efficiently. As with media, it all starts with the contract.
1. Challenges for advertisers running creative and production budgets
In-house agency studio vs outsourcing: production contracts don’t always specify when and why creative agencies should use their in-house studio production facilities and when they should / can outsource elements of production to third-party businesses. Many also do not require agencies to specify which elements of a given budget were carried out in-house and which by partners. This can have consequences that prevent advertisers securing an optimal return on their investment, including:
- Overcharging or double-charging for the same work – paying a core retainer for an in-house creative team and then paying again for the same resource in the in-house studio
- A lack of transparency in cost comparison exercises run to procure elements of production and the basis on which buying decisions are made; did the agency follow a standard, three-bid process?
- Little clarity about the consequences of production consolidation. In theory, requiring one or a small number of preferred third-party vendors to provide similar services should lead to faster turn-around, discounts, and rebates. But this is often not transparent to advertisers, and many creative contracts do not require agencies to pass this information back to their clients. In this way, agencies can end up benefiting from bonuses – so-called production discounts – that should rightfully go to the advertisers.
JR D’Alessandro at the Production Consultancy CS/VO agrees that the role of the agency has changed dramatically.
“Where they were independent and objective, they are now making decisions that impact their bottom line, having invested millions of dollars to develop new production services to develop new streams of revenue. The recent Department of Justice investigation of agency bid rigging in the US has called out what we in the production world have known for years. There is an inherent conflict of interest for an agency to both procure and provide production services. Clients have to respond to this.”
Slow reconciliation of budgeted vs actual spend: creative agencies typically pre-bill against what they anticipate to spend on production. As a result, advertisers can find themselves continually playing catch-up with their agencies, who often take several months to provide a comprehensive reconciliation. The process of reconciliation – of items as diverse as cameras and crew, lighting and catering, talent and props – is laborious and time-consuming, given the volume of third parties that can be involved. Agencies rely on their supplier partners to invoice them, the invoices need to be paid, and then matched against line items on individual budgets. Agencies – and, to be fair – advertisers are keen to get on with the next ad and the next project, and reconciling projected vs actual spend gets in the way of that process.
Non-returned contingencies: to ensure they’re not out of pocket and spending money on their clients’ behalf upfront, creative agencies often pre-bill a percentage of the production budget plus a generous contingency – of 10% or more – before a job begins. It is well known in the production industry that, on occasion, contingencies are not returned to advertisers.
Project to project transfers: where agencies are running multiple campaigns for their clients over the course of a year say, and a particular project runs over budget, it is not unknown for agencies to transfer expenditure to as-yet unspent or currently under-spent budgets. Advertisers should always be asked to approve such transfers, but many advertisers don’t write such clauses into their contracts and are powerless to prevent transfers of this kind. As a result, it becomes difficult for advertisers to track their monies, because project to project transfers are often carried out without clients either approving the transfers or realizing the consequences.
No agreed rate card for studio costs: many advertisers don’t agree on rate card costs for predictable and recurring items in production budgets. This means that agencies are at liberty to charge different amounts for the same things on a case-by-case basis. Advertisers should insist on rate cards for predictable line items and ensure that agencies apply these agreed costs to their budgets.
Inappropriate application of agency commission: agency commission rates can provide significant incremental revenue, but there are some production costs – for example the sales tax incurred on expenditure, and freight or transportation – which are non-commissionable. However, when reconciling all production costs on a budget, there are times when all elements are added together in a spreadsheet and agency commission rates are applied globally. Close monitoring is required to ensure that only commissionable line items actually attract commission.
Errors in FTE calculations: this challenge is not unique to creative agency invoices. It is also known to occur in media agency fees, as well as in many other professional services businesses whose budgets are based on FTEs. What can happen is this: when an agency agrees on a campaign with its client, the number of FTEs at different levels of seniority (and charge-out rates) is agreed, but the plan is not necessarily delivered by the projected team. The team can be under-resourced; individuals leave and are not replaced and/or their jobs are done by less experienced (and less expensive) individuals. Equally, some agencies will budget on an FTE basis but charge on actual hours expended, as if advertisers were responsible for paying overtime to staff on fixed salaries. Advertisers should assess FTE commitments and actual delivery on a regular, at least quarterly basis to ensure both that the right team is in place, at the right level of skills and seniority, and that this is, in fact, the team that’s running their business and delivering what’s been contracted.
2. Best practice advice in running creative and production budgets
Advertisers should get involved with and scrutinize creative and production budgets with the same degree of focus and energy as they are now doing with media budgets.
Advertisers should ensure that their creative agencies make the transactional chain required to deliver creative executions clear and write this into the contract. The supply chain is not nearly as complex as those in digital media, but it is certainly not without its complexity or opportunity for ambiguity.
Advertisers should demand visibility of rebates and bonuses made available to creative agencies while working on their business and seek to have these returned to them – as is their right – under the terms of their contracts.
Marketing has willingly ceded control of media budgets to procurement in recent years, but the relationship with the creative agency can be much more closely guarded by marketing, given the impact on brand. Advertisers should welcome their internal procurement partners into the creative and production budgeting process just as they have already with media.
Wherever possible, advertisers should employ production cost controllers to work with them on their production budgets. Removing the agencies themselves from the procurement process is best practice, and eliminates the potential for conflicts of interest. It’s much better for independent cost controllers to negotiate with impartially-selected, competitive suppliers. Fees are offset against cost-savings performance, and we have often seen agencies themselves recommend advertisers employ consultants in this role. But production cost controllers alone can only fulfil part of the due diligence requirements. Working with production cost controllers should be supplemented by a creative agency contract compliance audit. Find out why in Elliot Sherrington’s article here.
If the agency is not using a client-preferred vendor, advertisers should require their agencies to run a formal and open, competitive-bid process, with three vendors. This should cover: talent, crews, printing, filming, category … all aspects of the relevant production process.
Advertisers shouldn’t try to learn everything about production. Making an ad is complex, and budgeting all the different elements that go to make a successful shoot is a science in itself. Advertisers should work with experts and consultants to help them deliver great work, on time, within budget, and at the best possible value they can.
Once campaigns air, campaign actuals should be reconciled against projected budgets within six to eight weeks. Strict timelines should be included in contracts as standard best practice.
Fundamentally, it’s up to advertisers to make sure that the entire creative process is clearly outlined in the contract they have with their creative agency. Every step of the way, advertisers need to ensure that all aspects of the relationship are clearly defined in a way that ensures the creative agency works most efficiently and cost-effectively.
As with media, it’s all about a straightforward, unambiguous, tightly-written contract that forms the basis for a harmonious partnership.