A good few years ago now, I was setting up a Finance function to support the Procurement team at a major FMCG. One day the Marketing Procurement Manager came up to me and said ‘Adrian, I think one of our agencies is ripping us off. Would you have a look?’. Having reviewed the high-level facts, I concluded that something was not quite right and suggested that an audit of the agency was carried out. After about six months, having failed to find a suitable provider, the client came back to me and asked if I would do it. Several conversations and a proposal later, Financial Progression stepped into the world of advertising agency compliance audits.
The agency that had given cause for concern was a relatively high profile sales promotion agency. It had been working for the brand for a number of years and, whilst the basis of charging was clear to both parties, there was not a written contract in place. The specific issue was over the charging of third-party costs which, per the agreement, were to be passed through at cost. A couple of events had occurred, however, to make the brand think that this was not happening in practice and it was sufficiently concerned to seek outside help. When it approached the agency to request a financial audit of third-party costs, it refused, stating that there was no contractual right to audit. And it was absolutely correct, there was not.
…the admission of guilt could not have been heard more loudly. After all, why would anyone with nothing to hide object to an audit?
To this day, no one is quite sure why the agency chose to take that path. From the brand’s perspective, the admission of guilt could not have been heard more loudly. After all, why would anyone with nothing to hide object to an audit?
It would be fair to say that the brand was more than a little irritated by the agency’s approach and, between us, we managed to find a supplier to the agency where the brand had a contractual right of audit. The supplier did not object to the audit as it did not feel that it had anything to hide and, relatively quickly, we established exactly why the sales promotion agency had refused to be audited.
We never did get to audit that agency and legal action started soon thereafter. We did, however, audit 13 other agencies for the brand on the basis that, in the brand’s words, ‘if one of our agencies is doing this to us, all of them potentially could be and we want to know which ones are and which ones are not’.
For this particular brand, the revelations came as a great surprise. It had a Marketing Procurement function which had increased its capability and effectiveness dramatically over the previous 4 years (it had driven several million pounds of cost out of the supply chain) and had even been shortlisted for a CIPS award for its cross functional working. And yet, there were still hundreds of thousands of pounds not even on its radar because it had not, at that time, fully appreciated the operational reality of core financial processes at its agencies, nor all the ways in which they make money and, for obvious reasons, choose not to talk about!
The contract compliance audits covered all different types of agencies: creative, sales promotion, full-service advertising, PR, brand, design and even suppliers to those agencies. There were 2 things in common in each instance:
- written contracts were not in place
- every agency/ marketing services supplier had, in some way, shape or form, overcharged the client
Once all the audits had been completed and we had totted up the money due back to the client, it totalled in excess of £500,000…
Once all the audits had been completed and we had totted up the money due back to the client, it totalled in excess of £500,000 – enough for a significant additional marketing campaign or 5 to 10 extra heads in the marketing department over the next 12 months.
That client is still our client to this day. It has now put contracts in place with all of its agencies and marketing services suppliers which, you might think, means that it no longer needs our support. The reality is that it does. It recognises that because of the way agencies across the marketing and media mix choose to work and the way its brand managers interact with them, there are opportunities for matters financial to go awry all the time. It has learned by experience that if you are not checking an agency’s records related to your account, you cannot know what is actually going on. It chooses to do so on a regular basis and continues to benefit financially as a result.