Why advertisers should audit all their agency partners

Market context Most companies spend more on marketing than on any other discretionary expense. According to the annual Chief Marketing Officer (CMO) Survey, on average brands spend just under 10% of revenue on marketing. Business-to-consumer (B2C) brands devote almost 16% of revenue to marketing, while for business-to-business (B2B) brands the figure is just under 9%. Media typically represents around a third of all marketing spend, making it the largest single line item in many advertisers’ budgets. This means that media agencies are many brands’ biggest single suppliers. Audits of media planning and buying agencies are now firmly established as a “must do” to ensure full stewardship of these costs. Extending best practice beyond media However, it’s not just media and media agencies that advertisers should audit on a regular basis to secure transparency and drive efficiency and effectiveness in marketing spend. They should also audit those agencies and suppliers involved in the development, creative execution, and deployment of their advertising campaigns and marketing materials. These include partners who provide services including creative and production, in-store merchandising, web and app development, print and event management, influencer marketing, PR and SEO management to name just a few. Since advertisers have focused much of their attention on media transparency issues in the last four years, they have paid less attention to contractual and financial best practice in other marketing services and disciplines as a result. Many brands don’t have fit-for-purpose contracts with these partner agencies. If contracts are in place, typically they are not signed and not updated, leading to risks for both agency and advertiser. Even if there is a contract in place, when our expert auditors carry out contract compliance reviews of marketing services providers, they often discover that these contracts have either been drawn up by the agencies themselves or else by lawyers who are not specialised in the field. As a result, they often fail adequately to define advertising-specific issues that should be included in that contract, most particularly in the area of financial control and accountability. Here are some risks that you should look to mitigate by having a contract in place with marketing services partners that is fit-for-purpose. Estimates: many contracts allow agencies to bill their work according to agreed estimates. It is vital that these estimates separate the cost of agency time from third party costs. Frequently, however, agencies do not reconcile actual third-party costs against the original estimate. As contingencies will be built into estimates, this often leads to underspends, and there are rarely clauses in place to return the difference to the advertiser. Who stands to benefit is not typically made clear. Cost Reconciliations: Many contracts require a “true-up” of costs at the end of the project. We have seen reconciliations offsetting underspends on third-party costs against additional – but unapproved – time of agency staff. Be sure that your contract explicitly prevents this practice by getting the terms right. Another common practice is for underspends on one project to be offset against overspends on another project. An extension of this practice is the creation of “pots” of money paid by client for costs which have not been incurred. The reallocation of the funds leads to a mis-statement of the cost of a project, can allow the agency to be less accountable in the management of client budgets, renders any ROI calculation redundant, and undermines purchase controls. Related parties: as can happen with media agency contracts, trading entities connected to marketing services agencies are often treated as if they were third parties and costs are billed to their estimate, including an undisclosed margin. This represents a fundamental lack of transparency. The selection of vendors should be subject to the same controls that your own procurement department would employ and therefore the use of related parties should be justified via benchmarking and provided on an arms’ length basis. Vertical integration: this is particularly prevalent in Event Management where the company will itemise costs in a budget (such as the use of assets, car hire, uniform cleaning) but will not clarify that these individual services are actually being provided by their own staff or subsidiaries and there is no third-party cost. By building margin into these line items they can reduce the level of agency fees in a proposal, thus suggesting to a prospective client that they represent better value for money than they actually do. Rate cards: studio charges are often calculated according to a rate card. More often than not, this is a rate card that has neither been agreed nor approved by the client. Creative agencies, as an example, rarely attach the rate card to the contract. If the agency plans to charge in this way, be sure to get sight of, rigorously scrutinize, and question each line item on the rate card. If the rate card relates to time, then make sure that the studio has a time recording system to support time-based charges. Clients should also be aware that creative and production staff may be in a time based fee but also provide services through the studio. Time reconciliations: almost every agency we have audited records more time than the contract predicates. This does not mean that they have actually spent this time in a way that is of value to the client. Beware: substitution of junior staff; reworking by the creative teams to meet the requirements of the brief; excess hours recorded where no cost to the agency is involved; vacancies unfilled; and, poor access controls. Double counting: clearly, the best talent needs paying for. But there are examples where individual staff have been included on three different advertisers’ business at 50% time per client. This enables the agency to recover 150% of the costs associated with that team member. Hard as agency staff undoubtedly work, this is a practice your contract should explicitly prevent. In summary Media typically only accounts for up to a third of all marketing investment, and brand owners need to drive transparency into all aspects of their spend. That’s why the Association of National Advertisers’ (ANA) 2017 report into production transparency was such an important contribution to best practice in agency management. It helped empower advertisers to apply the same rigour and discipline into the relationships they have with their creative agencies and the often-complex chain of production companies that work with creative agencies to develop and deliver the assets that bring their campaigns to life. But this report did not interrogate the practices of the broad array of other marketing services partners and agencies in the marketing supply chain, all of which require the same level of scrutiny and accountability as the more well-known disciplines such as media, creative, and production. Advertisers should review the contracts they have in place with marketing partners regularly and ensure that these contracts are updated to include evolving best practice and changing business imperatives. Among the clauses they should insist on are the right to audit, and they should exercise this right to audit, working with specialist expert auditors with specific knowledge of marketing processes and the supply chain. Balanced, executed, and current contracts are critical to ensuring a healthy commercial relationship between advertisers and their agencies. Performing compliance audits provides transparency over the agency’s stewardship of marketing budgets. Stephen Broderick is Global CEO of FirmDecisions.