Advertisers have contracts with an endless supply of marketing communications suppliers. These include folk from media, creative, digital, sales promotion, event management, design, public relations and ad tech. The list gets longer as the discipline gets broader.
And yet, because most of a typical advertising budget is spent on media, most clients focus on ensuring full transparency and governance of the media agency’s management of media billings only. While creative and other below-the-line agencies have rarely, to date, been touched by discussions about transparency, the recent investigation by the United States Department of Justice into production bid-rigging has brought them into the spotlight.
By the end of December 2016, the DoJ had subpoenaed agencies within each of the four largest ad agency groups – WPP, Publicis, Omnicom and IPG – highlighting that transparency and conflicts of interest should be of major concern to all brands.
However, cases like this have so far been a rarity. All too often, creative agency transparency falls under the radar – and yet it is every bit as important as the media spend. Client interests need to be protected in all areas of marketing expenditure, and that must always start with the contract itself – something woefully neglected by many of the creative agencies.
When we conduct contract compliance reviews of these agencies, we often find contracts that have either been prepared by the agency themselves or simply by a lawyer who understands neither the business or the industry. As a result, they often fail adequately to define the advertising-specific issues that should be in that contract. This happens most often when it comes to financial control. Issues can include:
Many agencies elect to bill their jobs per estimate and often fail to reconcile actual third-party costs against the original estimate.
Does the agency retain the difference? Or credit it to the client? It’s rarely made clear.
The total of the estimate is treated like it is a quote and, when reconciling the job, the ‘savings’ on third-party costs are sometimes offset against the extra (and unapproved) internal time. This can and should be explicitly prevented by tight-enough contractual terms.
As with many media agency contracts, trading entities related to creative agencies are often treated as if they were third parties and billed to their estimate, including an undisclosed margin. This area is also related to the bid-rigging investigation that is now underway in the US.
Studio charges are often calculated per a rate card that hasn’t been agreed with the advertiser and which is rarely attached to the contract. Often studio work will be carried out and billed by staff already being paid via the full-time equivalent fee.
We have even come across creative directors who are included on three different clients’ FTE models at 50 per cent each time, allowing the agency to recover 150 per cent of the the costs associated with that director.
Over the years, many large advertisers have centralised their creative development work into a small number of regional hubs. This means that many local relationships have developed to deliver strategic and adaptation work, and very little creative origination and execution. That’s why some clients feel unable to justify a separate audit of their creative or other BTL agencies because billings are relatively low. “Will we realise any meaningful cost savings or efficiencies?,” is the question often thrown our way.
However, as the list of potential issues outlined above shows, there’s every reason to check whether creative agency contracts deliver a genuinely transparent financial relationship and that agency remuneration is clearly defined. As marketing budgets become ever tighter, allowing unnecessary leakage of funds is, simply, a waste and hard to justify.
Of course, for some clients the relationship with creative agencies can be very different from the one they have with their media agency. As a result, some advertisers fear that an audit may disrupt the relationship and interrupt the creative alchemy.
However, the reality is that auditors work with agency finance departments where it’s all about the finances. On many occasions, the agency’s account management team have been quite surprised at our findings as they hadn’t been aware of some of the systems or processes taken up by the finance department.
So, for clients who haven’t examined the contractual terms they have with their creative and other BTL agencies, now is the time to re-examine those contracts and ensure they provide transparency, accountability, and represent good financial governance.
Beforehand, it’s even worthwhile conducting a financial compliance review of the creative agency’s management of the existing contract. This can help ensure that any revisions to the contract both accommodate any idiosyncratic aspects to the relationship and protect the client’s best interests.
A simple, cost-effective approach is to conduct media and creative agency compliance reviews simultaneously. This can moderate audit fees and allow the client marketing team to receive feedback across all aspects of their marketing budgets at the same time.
The bottom line is that transparency isn’t only relevant to the media agency contract. That only scratches the surface. Everyone in a relationship with a client as a marketing communications partner must be equally transparent and accountable in every respect.
David Brocklehurst is the Asia-Pacific managing director of the audit company Firm Decisions. This article was first published on Firm Decision’s website.