Erosion of Client-Agency Trust in the Procurement Era -- J. Francisco Escobar

TRANSPARENCYAs the spendbased commission system has become virtually irrelevant as a total form of agency compensation the predominant use of laborbased models has opened the door to clientside procurement and strategic sourcing to exploit transparency in the interest of lowering the cost of services The use or rather misuse of benchmarks all in an attempt to get agencies to fully disclose their proprietary financial information and business economics has at times been ludicrous What our industry clearly needs are rules of the road for what is acceptable and unacceptable in what may be called amp8220limited full disclosureamp8221Trust is eroded when a client feels like its agency is withholding information or when an agency feels like its client is overreaching eg requesting individual salariesWe must heed the wise words of business guru Peter Drucker from his 1954 classic The Practice of Management amp8220amp8230 the purpose of business is to create and keep a customer the business enterprise has two and only two basic functions marketing and innovation Marketing and innovation produce results all the rest are costs Marketing is the distinguishing unique function of the businessamp8221 So long as we allow relationship stakeholders to view marketing as a cost to be reduced rather than an investment to be optimized the issue of inappropriate financial transparency and benchmarking will not go awayMore recently the subject of transparency has been at the center of two burning issues in media remuneration rebates and programmatic buying The former is an ageold controversy and the latter a newage dilemmaREBATESMedia rebates are a totally normal and acceptable business practice in many countries In some cases they are the dominant form of income for media agencies Thus it boils down to just two issues of transparency in any given clientagency relationship First has the media agency disclosed to its client the markets in which it is receiving rebates Second has the client expressly written into its agency contracts how rebates will be treated A lack of either disclosure or specific contractual language creates an opportunity for and perception of foul playPROGRAMMATIC BUYINGIn the rapidly expanding digital media space programmatic buying realtime bidding and other activities generated by demandside platforms DSPs have created significant revenue growth opportunities for technology providers and a host of marketingmedia services providers The capital investment required by these firms to play in this exchange marketplace is significant coupled with the clear risk associated with carrying media amp8220inventoryamp8221Large players in the industry have taken differing positions on the financial transparency of their amp8220tradingamp8221 companies from full to very limited disclosure of profitability on individual and cumulative transactions There is currently no right or wrong answer it is up to individual clients and agencies to ensure they are having sufficient dialogue in this area so that there is a clear understanding about current business practices as it relates to their unique relationship Anything less will keep a client wondering if they are being exploited further eroding trustEQUITYThere is no greater enemy to trust than the lack of equity in a relationship When it comes to assessing fairness in clientagency relationships one needs to look no further than the contractual agreement between the parties While there are way too many instances to discuss the subject of equity in contractual matters there are three areas where the greatest transgressions take place1 AUDITWhen a clientagency relationship begins to exhibit trust issues the contract is unearthed to ascertain what is contained in the audit provision It is vitally important that this provision be so unambiguous as to not be subject to liberal interpretation by either party At minimum audit provisions should include the followingamp8226 Reasonable notice period and conducted during business hoursamp8226 Require an audit plan with clear objectives shared with agency beforehandamp8226 Auditors under nondisclosure with agencyamp8226 Mutually acceptable external audit firm not compensated on a contingency basisamp8226 Restrictions amp8212 no access to personnel data agency overheadprofit other client dataamp8226 Limited to one audit every 365 days unless there is evidence of contractual breachamp8226 Findings favoring agency go to offset findings that favor clientamp8226 Audit results shared with agency prior to finalizing report to clientamp8226 Reasonable length of time in which audit may take place after termination 1 to 2 years2 COMPETITIVE EXCLUSIVITYWhile there are certain untenable competitive situationsamp8212such as CokePepsi ATampampTVerizon and Home DepotLoweamp8217samp8212most others are often 80 percent perception and 20 percent reality A wellwritten and equitable exclusivity clause should force the client to list its competitive concerns Additionally these restrictions should apply mostly to identifiable key agency personnel on the staffing plan And most importantly the clause should bring the parties together in dialogue3 PAYMENT TERMSWithout exception there is no more contentious damaging and inequitable issue facing our industry today than that of payment terms A little history sets the stage In 2004 the merger between Belgiumbased company Interbrew and Brazilian brewer AmBev created the brewing company InBev Within two yearsamp8217 time InBev embarked on an ambitious global costreduction initiative which centered around a movement to unilateral 120day payment terms across its entire supply baseInBevamp8217s acquisition of AnheuserBusch in 2008 brought this issue to the US and started a domino effect across the largest global packaged goods companies and the industry as a whole Although several industry groups are working to address the issue directly there has been no concerted effort to denounce this practice as patently unfair and damaging to the service provider community and ultimately the overall marketer ecosystem How can it be that companies whose current cash position may exceed the market capitalization of the biggest marketing services holding companies expect to extend cash payments particularly in the current low interest rate environment on cash deposits And even more ironic is the concept of cash neutrality in master service agreements where large advertisers expressly define it as what it truly is and then choose to apply it only to the cash management of media expenses between themselves agencies and media owners but not to fees production or thirdparty expendituresVALUEThe notion of value has become central to the dialogue as the industry makes attempts to get away from payment based on peopleamp8217s time to that of results generated by agenciesamp8217 deliverables But who ultimately defines value and more importantly who determines itTwo bellwether companies representing the largest marketer and most valuable brand in the world respectively have taken it upon themselves to lead the industry with amp8220valuebasedamp8221 compensation models Sadly both of them miss the mark on an interpretation and application of value that would engender and foster trust with their agency supplier partnersIn both cases payment is initially determined by historical laborbased models and adjusted based on each companyamp8217s definition of value Then the ultimate determination of value is once again solely the purview of the client with a significant component being a subjective qualitative evaluation of agency performanceThe real benefit in these two models is purely on the buyeramp8217s side On one hand creating a general contractor model removes internalexternal cost which then eliminates multiple touch points transactions and negotiations But efficiencies are gained by managing agencies via menu pricing and standardized spreadsheetsTo their credit both companies have continued to enhance their respective models since their joint introduction in 2009 but neither appears to have budged in the direction of increased collaboration on the definition and determination of valueValue like transparency and equity has to be a twoway street Nothing could be more productive in clientagency relationships than the dialogue that is created between the parties to mutually define success and value for their unique amp8220marriageamp8221 And even more interesting is when actual monetary value can be tied to the accomplishment of collaboratively devised objectives When a client and agency can agree to a scope of services that relate to realistically achievable objectives and the agency is able to exceed them then you have true incremental value that should be rewarded accordingly Itamp8217s not rocket science or brain surgery but it does require a commitment by both parties to put in the necessary effort energy and time to ensure a fair and honest playing field Doing so can only serve to encourage and restore trustAN INDUSTRY CALL TO ACTIONRestoring a momentum of trust in the marketing services industry calls for explicit concerted action by the major industry associationsWe desperately need collaboratively developed standards and guidelines governing the critical issues of transparency and equity in clientagency relationships Conversely value should remain a nut for individual involved parties to crack Given the uniqueness of each and every engagement between marketers and their supplierpartners every significant statement of services or statement of work SOW between the parties must contain a specific section addressing the mutual expectations of transparency equity and valueOriginally published by Connote MagazineThe opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillagecom management or associated bloggers Image at top courtesy of freedigitalphotosnet

CLICK TO DOWNLOAD THE MYERS REPORT RESEARCH & WHITEPAPERS

Erosion of Client-Agency Trust in the Procurement Era -- J. Francisco Escobar

Author

Publish date

Channel

Archived in

J. Francisco Escobar

Empowering Women in Media: Insights from Industry Leaders (Video) - By E.B. Moss

More Videos:

CLICK TO DOWNLOAD THE MYERS REPORT RESEARCH & WHITEPAPERS

Erosion of Client-Agency Trust in the Procurement Era -- J. Francisco Escobar

Enjoying This Commentary? There's More to Love

J. Francisco Escobar

Empowering Women in Media: Insights from Industry Leaders (Video) - By E.B. Moss

The payment was successful

Cookies