By Jenny Kuan, Managing Director – SEA, FirmDecisions
It’s increasingly common best practice for advertisers to audit agency partners, assessing the degree to which actual performance complies with the terms, conditions, and clauses set out in their contracts. Historically, some advertisers steered clear of contract compliance auditing because of four false assumptions. We’ve often heard the following justifications:
“It shows we don’t trust our agency” – not so. Testing the contract is good corporate governance and ensures that the contract keeps pace with the rapid pace of change in marketing services. Agencies understand this.
“It’ll take up all of our and our agency’s time” – again not so. A contract compliance audit is simply a review of the agency’s back office financial operations.
“We have a good relationship with our agency and that means they’ll be following the contract to the letter.” Guess what? That’s not so, too. Positive, personal relationships are no guarantee of financial contract compliance. What’s more, many non-compliance issues are accidental and just happen, no matter how strong the relationship.
“I used to work at an agency. I would know if there was non-compliance” – not so, once more. Most often, ex-agency clients worked in account management, not in finance departments.
Focus on transparency
In 2016, the U.S. Association of National Advertisers (ANA) published a landmark study revealing a systemic lack of transparency in the U.S. media marketplace for the first time. Examples included:
- Undisclosed cash rebates provided by media companies to agencies without clients knowing
- Undisclosed rebates in the form of free media inventory credits
- Rebates structured as ‘service agreements’, in which media suppliers paid agencies for non-media services, such as low-value research or consulting projects, often tied to the volume of agency spend. According to the ANA study, these services were used to obscure rebates
- Undisclosed markups on advertiser media purchases through principal transactions, ranging from 30 to 90 percent. The report found media buyers were sometimes pressured or incentivised by their agency holding companies to direct client spend to this media, regardless of whether such purchases were in the clients’ best interest
- Dual rate cards in which agencies and holding companies negotiated separate rates with media suppliers when acting as principals and as agents
Over the past five years, transparency has been firmly on the agenda. National and global representative bodies – from the ANA to the World Federation of Advertisers and ISBA in the UK – have issued guidelines and contract templates to help brands drive transparency into media trading. The age-old, well-established practice of advertisers doing nothing and hoping agencies would stick to the letter and spirit of their contracts is thankfully ancient history.As in many areas of business, Covid has fast-tracked trends already under way. The disruption and constraints put on commerce and comms by the pandemic mean that advertisers face ever-greater pressures to reduce waste and deliver optimal ROI. It’s in this context that even more brands are waking up to the importance of auditing their agency partners for contract compliance.
Internal affairs: the case to do it yourself?
When starting out on this path, many brands are tempted to run audits themselves, using internal audit or finance functions. It is our experience that this approach can be counter-productive and set advertisers up for failure and frustration. There are six reasons why.
- The audit often takes place in addition to the day job. This can result in an extended process that frustrates all stakeholders. We recently saw one audit conducted by the client’s procurement staff that took more than a year to complete.
- Internal audit teams frequently are unfamiliar with agency processes and systems. This can lead to inefficiencies and excessive demands on agency time, without any certainty or confidence in the accuracy of the findings.
- The media and marketing ecosystem is evolving quickly, meaning that in-house audit teams typically lack the specialist knowledge of the sector, from programmatic trading to influencer or key opinion-leader (KOL) marketing.
- Advertisers auditing colleagues presents conflicts of interest. When you’re “marking your own homework”, there is often a disincentive to expose flaws in the contract or identify a lack of compliance that those client-side have inadvertently allowed agencies to exploit.
- In-house audit teams can be unfamiliar with the terminology and jargon of media and marketing, making it challenging to know what processes and practices they’re actually auditing and easier for agencies to mis-direct attention.
- Inaccurate and uninformed audit results that give the all-clear to agency results can inspire false confidence and continued value erosion in unidentified areas of non-compliance.
Why outsourcing beats DIY
To run an effective, quality audit, advertisers should steer clear of the “do it yourself” approach and look to outsource contract compliance auditing to a partner that ticks all four of these boxes.
- The auditor is independent
Contract compliance auditors should operate completely independently of the media supply chain – of the advertiser themselves, of their agency partners, and of all media suppliers and platforms. Auditors should be remunerated on a fixed-fee basis and have no vested, financial interest in either the supply chain or the outcome of the audit.
- The auditor is qualified
Contract compliance auditors need to be qualified accountants or auditors and current members of a professional trade body. This ensures a high level of ethics and competence and regular monitoring and regulation by respected organisations, including the ACCA, CPA, and ICAEW.
- The auditor is knowledgeable and competent
Specialist knowledge of the marketing services sector should be table stakes. Agencies take many forms – from media to creative, KOLs to field force, brand activation to event management – and the agency landscape is constantly evolving. Advertisers need contract compliance auditors to analyse the financial paperwork and interpret this within the context of the contract. In this way they can apply their specialist knowledge of media and other marketing agency types to highlight the risks and make specific, actionable recommendations.
- The auditor is experienced
Because of the dizzying pace of change in media and marketing, the best contract compliance auditors in this space employ staff with recent financial management experience inside marketing agencies. They provide senior, seasoned specialists to run the audits, not recent graduates who are required to learn the ropes – and get a grip on the industry – at the client’s expense. Staff should be on payroll – not contractors – to protect both agency and client confidentiality.
Contract compliance auditing of media and marketing agencies is increasingly common and popular for advertisers around the world, and the rate of adoption is speeding up in Asia in particular. But the case for doing it yourself – marking your own homework – is difficult to make with conviction. Advertisers need partners that are independent, qualified, knowledgeable, and experienced.
FirmDecisions is the largest independent global marketing contract compliance specialist.
About the author
Jenny Kuan is Managing Director – SEA at FirmDecisions, based in Singapore. She has worked for more than 20 years in finance roles in the global media industry, for Saatchi and Saatchi, Zenith Media, and most recently IPG Mediabrands, where she was Finance Director. Jenny is a Chartered Accountant (CA) Singapore and a Fellow of Association of Chartered Certified Accountants (FCCA).