Advertisers have contracts with a wide variety of marcomms suppliers – media, creative, digital, sales promotion, event management, CRM, design, PR, 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 appropriate governance of the media agency’s management of media billings only. While creative and other below the line (BTL) agencies have rarely, to date, been touched by discussions about transparency, the recent investigation by the US 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 4 largest ad agency groups – WPP, Publicis, Omnicom and IPG – highlighting that transparency and conflicts of interest should be of major concern to all advertisers. Transparency on how agencies spend and allocate the creative – and other – budgets is every bit as important as media transparency. Once again, as with media, the Contract is an important document for ensuring the client interests are being protected.
When we conduct contract compliance reviews of creative agencies, we often find contracts that have either been prepared by the agency or simply by a lawyer who doesn’t understand the business/industry. As a result, they often fail adequately to define the advertising-specific issues that should be included in that contract – most particularly in 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 (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 USA.
- 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 FTE/fee
- We have even come across creative directors who are included on three different clients’ FTE models at 50% each time, allowing the agency to recover 150% of the the costs associated with that director.
Over the years, many large advertisers have centralized 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,” they often ask us, “realise any meaningful cost savings or efficiencies?”
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, it’s time to re-examine those contracts. It’s important to ensure they provide transparency, accountability, and represent good financial governance. And before that’s done, it would also be 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.
We often find that 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. Advertisers should ensure that all contractual relationships with every marcomms partner are equally transparent and accountable.