FirmDecisions is the largest independent global marketing compliance specialist. We provide financial transparency in the client-agency relationship to the world’s biggest advertisers.
Elliot Sherrington, Client Services Director at FirmDecisions
Elliot Sherrington, Client Services Director at FirmDecisions, argues that the advertisers should invest in the services of both production cost controllers and contract compliance auditors to manage creative budgets. This is the best way to keep production costs in check and in line with industry benchmarks and to ensure that creative agencies deliver against their contractual commitments.
Salt and pepper. Bacon and eggs. Peanut butter and jelly. Some things are just meant to go together. They complement each other and end up being more than the sum of their parts.
It is now generally agreed by many of the world’s leading advertisers that – to secure best value from their media investments – they should invest in audits of both media spend and contract compliance. The former helps to optimize media buying efficiency, while the latter ensures media agencies deliver what they should. This is particularly true as advertisers are spending their budgets across the increasingly-complex, digital media ecosystem. Contractual obligations are best delivered under the terms of a well-written, equitable contract.
What is less well-established is the need for advertisers to subject their creative agency partners to the same intensity of scrutiny as they do their media agencies. Many advertisers today work with production cost controllers to keep creative spend in check. But just as a media audit without a contract compliance audit is necessary but not sufficient, so employing production cost controllers without subjecting creative agencies to a contract compliance audit too is only doing half the due diligence. What is encouraging is that this is starting to change.
Production cost controllers play an incredibly important role in helping advertisers to secure full control and transparency of their creative spend. They help ensure that the price being paid by advertisers for production activity is competitively priced and that the agency is paying its specialist suppliers at market rates. Yet despite their expertise, product cost controllers are not a specialist in issues of contract compliance, and they are not tasked with ensuring that all the financial terms of an advertisers’ contract with its creative agency are met. In fact, they are not often even privy to the contract itself.
Where contract compliance auditors can complement production cost controllers – where they really excel – is in helping advertisers to answer the following types of questions:
- Are we being properly reimbursed when the expenditure is fully reconciled against the original budget?
- Are historical production discounts being returned to us as they should be?
- Are bread-and-butter projects being controlled as tightly as big-ticket TV productions?
- Are production balances being held over to fund future projects? What control or transparency do we have regarding these balances, and what happens to them when our team members transition to other roles within the business or different projects?
- Is our creative agency using any related-party suppliers? If so, does our contract extend to cover all related-party costs?
- Do the agency and its suppliers benefit from volume discounts or other sales incentives – incentives such as cash rebates or subsidized rents? If so, are the agency and its suppliers passing these incentives on to us as they should?
- Are our travel and expense guidelines being adhered to?
- What are the payment terms between the different partners in the creative and production transactional chain? Does the agency hold onto production fees for extended periods – and so accrue interest – before paying its supplier network?
Essentially, contract compliance auditors enable advertisers to know whether or not the terms of their contracts with their creative agencies are being adhered to – and to seek remedial action if they’re not. One particularly significant area on agency fees concerns is staff day rates. Advertisers and production cost controllers go to great lengths to ensure that day rates of FTEs are negotiated hard and are benchmarked against industry-standard remuneration. Where contract compliance auditors add real, additional value is in assessing which actual staff are in fact deployed to deliver the agreed production.
What’s more, specialist contract compliance firms can help advertisers verify that advertisers receive the seniority of expert resource they’re paying for, and that any key individuals are retained on the business. It’s well known that agencies often use their most impressive, most senior staff at pitches, and advertisers need to be certain that the team allocated to their account is the one working on their business. Contract compliance auditors can also confirm whether the agency is charging for time from team members whose time is fully recovered on other advertisers’ business – a phenomenon known as “double dipping”. They can ensure the integrity of the time management and timesheet systems being used to record and charge time. And where contracts are based on a cost-plus model, contract compliance auditors can ensure that the contractual margins on standard hours are being applied. Where overhead rates are applied, auditors can assess whether or not these are based on the agency’s actual overhead.
Advertisers are increasingly coming to realise the benefits of using both production cost controllers and contract compliance auditors in monitoring and managing the relationships they have with their creative agency partners. Rather than additional and duplicated expenditure, many realise that this partnership is the key to getting best value from the creative process. Contract compliance auditors are the yin the production cost controllers’ yang.