The Four Golden Rules of Financial Compliance in Media
- Opinion
- August 29, 2022
As another financial year ends, there’s the usual rush among advertisers looking to finalise media strategies. The pressure to close annual deals and plans can potentially compromise transparency and accountability. That said, advertisers with a clear and robust contract already in place have a sound basis to ensure that their media agency and adtech partners deliver impactful plans in a transparent and accountable fashion. And on time.
There are four golden rules of financial compliance in media. Using these as their guiding principles, advertisers are more likely to make the right compliance decisions for their brands.
There are four golden rules of financial compliance in media. Using these as their guiding principles, advertisers are more likely to make the right compliance decisions for their brands.
1. Approach marketing and media spend as CAPEX not OPEX
Most advertisers adopt very rigorous procedures to derive maximum value out of every cent they invest in capital expenditure (CAPEX). Multiple analyses and checks are involved to ensure that their investments are viable for the long term.
By contrast, most advertisers treat media and marketing spend as operational expenditure (OPEX) in their financial statements and reporting. We believe that it is vital that advertisers are just as rigorous with their media and marketing spend as they are with CAPEX, considering the growing investment many brands are required to make in these areas. This rigor is often evident when advertisers search for and select a new agency and award AOR status to a new, preferred partner. However, once this process is done and the agency has been on-boarded, there is a tendency for less attention and rigor to be focused here. Advertisers adopt a more laissez-faire approach at this point at their peril.
Most advertisers adopt very rigorous procedures to derive maximum value out of every cent they invest in capital expenditure (CAPEX). Multiple analyses and checks are involved to ensure that their investments are viable for the long term.
By contrast, most advertisers treat media and marketing spend as operational expenditure (OPEX) in their financial statements and reporting. We believe that it is vital that advertisers are just as rigorous with their media and marketing spend as they are with CAPEX, considering the growing investment many brands are required to make in these areas. This rigor is often evident when advertisers search for and select a new agency and award AOR status to a new, preferred partner. However, once this process is done and the agency has been on-boarded, there is a tendency for less attention and rigor to be focused here. Advertisers adopt a more laissez-faire approach at this point at their peril.
3. Demand simplicity over complexity in media transactions
The media and marketing ecosystem has become excessively complicated in recent years, and the models of media procurement in particular have become increasingly opaque, especially in the area of online media inventory. Complexity is the enemy of transparency and provides significant scope for agencies to generate revenue because of advertiser confusion.
Complexity is not limited to the buying structure and the many links in the transactional chain. It also extends to how Agency Volume Benefits (AVBs) are calculated. Agencies and media owners frequently change charging structures, making it difficult for advertisers to understand what they being charged for what and why. This can result in non-cash benefits failing to be passed back from agencies to advertisers, and these can include: cash, free space, service agreements, payments for research, and hidden mark-ups in digital.
The media and marketing ecosystem has become excessively complicated in recent years, and the models of media procurement in particular have become increasingly opaque, especially in the area of online media inventory. Complexity is the enemy of transparency and provides significant scope for agencies to generate revenue because of advertiser confusion.
Complexity is not limited to the buying structure and the many links in the transactional chain. It also extends to how Agency Volume Benefits (AVBs) are calculated. Agencies and media owners frequently change charging structures, making it difficult for advertisers to understand what they being charged for what and why. This can result in non-cash benefits failing to be passed back from agencies to advertisers, and these can include: cash, free space, service agreements, payments for research, and hidden mark-ups in digital.
2. Keep transparency on top of the agenda to avoid playing “hide and seek” in media
When advertisers award AOR status to their preferred media agency partner, most are keen to negotiate commission and retainer fees down to the lowest levels possible. When this happens, there can be insufficient revenue for agencies to cover operational costs.
It is often at this point that agency practices become less transparent, as they look to sustain their businesses and drive growth and profit. A lack of transparency can cover many different aspects of trading and cut corners in financial compliance, be this through buying group rebates, confusion surrounding digital media trading, or revenue generated at a group rather than at an operating company level. In many cases, a lack of transparency can protect agency profits because the savings passed back to advertisers do not reflect the actual levels of savings negotiated on their behalf. By ensuring full transparency of media and transactional data, advertisers can better hold their agency partners to account.
When advertisers award AOR status to their preferred media agency partner, most are keen to negotiate commission and retainer fees down to the lowest levels possible. When this happens, there can be insufficient revenue for agencies to cover operational costs.
It is often at this point that agency practices become less transparent, as they look to sustain their businesses and drive growth and profit. A lack of transparency can cover many different aspects of trading and cut corners in financial compliance, be this through buying group rebates, confusion surrounding digital media trading, or revenue generated at a group rather than at an operating company level. In many cases, a lack of transparency can protect agency profits because the savings passed back to advertisers do not reflect the actual levels of savings negotiated on their behalf. By ensuring full transparency of media and transactional data, advertisers can better hold their agency partners to account.
4. Enshrine the right to audit in media and marketing contracts
We often see contracts between advertisers and their media agencies of record in which advertisers sign away their right to audit the agency’s work, or there are restrictive clauses detailing where audit is and is not permitted. Advertisers should make sure – when reviewing existing contracts or drafting new ones – that they include a comprehensive “right to audit” clause or section in the contract. They should also create contracts that prevent the following:
Financial books being excluded from audit
Restrictions on third-party auditors
A limited list of specific firms designated as the only ones permitted to audit. The right to audit should also include advertisers’ right to determine which audit partner they choose. This decision should never be influenced or guided by the media AOR
Ring-fencing AVBs or vendor contracts excluded from the audit
A sound, comprehensive, and thought-through compliance process not only enables strengthened relationships between advertisers and their agency partners. It also ensures maximum efficiencies in media and marketing investments. By following the four golden rules outlined here, advertisers stand the best possible opportunity of securing optimal ROI in the increasingly complex media and marketing ecosystem. And they’ll achieve that in the most accountable and transparent way possible.
We often see contracts between advertisers and their media agencies of record in which advertisers sign away their right to audit the agency’s work, or there are restrictive clauses detailing where audit is and is not permitted. Advertisers should make sure – when reviewing existing contracts or drafting new ones – that they include a comprehensive “right to audit” clause or section in the contract. They should also create contracts that prevent the following:
Financial books being excluded from audit
Restrictions on third-party auditors
A limited list of specific firms designated as the only ones permitted to audit. The right to audit should also include advertisers’ right to determine which audit partner they choose. This decision should never be influenced or guided by the media AOR
Ring-fencing AVBs or vendor contracts excluded from the audit
A sound, comprehensive, and thought-through compliance process not only enables strengthened relationships between advertisers and their agency partners. It also ensures maximum efficiencies in media and marketing investments. By following the four golden rules outlined here, advertisers stand the best possible opportunity of securing optimal ROI in the increasingly complex media and marketing ecosystem. And they’ll achieve that in the most accountable and transparent way possible.