It pays to audit your Advertising and Media agencies regularly

24 January 2019

How to approach Agency Audits and Reviews

What is a Media Audit?

Definition: media auditing is the process of determining that media purchased by the brand or client via their vendors, partners or agencies, appears in the correct places and at a fair market price.

Typically the advertiser (client) will sign-off on the media plan, represented by a media schedule which the agency is proposing, prior to the campaign commencing. This plan will include all the media (aka mediums/channels) which will be bought as well as detail around the specific time scheduling of those ‘spots’ or ‘slots’.

Note the Difference between Audits vs Reviews

Auditing is more than simply grading an agency’s performance by analyzing financial costs against subjective perceptions of quality. Instead, this is more of what we would call an ‘agency review’. There’s no shortage of competing firms (often with ulterior motives) who will offer free ‘audits’. These are essentially opinionated reviews from an external perspective.

Without getting too technical, some of the activities contained in the ‘price bench-marking’ procedure below are more synonymous with this agency review process.

Also keep in mind that while we’re referring mostly to media agency audits in the examples below, the auditing of advertising agencies, digital marketing agencies, marketing agencies or any other outsourced agency supplier are also common. The only difference is that often Media Agencies are responsible for the largest line-item (media expenditure) which forms the majority of the invoice value for most agency relationships. This might not be clear or bundled into one single large invoice every month – it varies.

There are Three Types of Agency Audits

1 – Benchmark Audits

A benchmark audit involves a process where the cost of the media is compared with various industry benchmarks or averages. Using the laws of mathematical averages, a general picture quickly appears as to whether the client has received a financially adequate service in return for their expenditure.

This is the most simple and quickest of the three audit types. For this reason benchmark audits are popular, mostly for small and medium businesses. There are many ‘auditors’ who operate in this market, perhaps in part due to the fact that formal qualifications are not required. Some operators will use this audit process as a lead generation hook so they can convince the client to move over to their preferred network of suppliers at a later date.

Many of the conclusions with these reports can be very subjective and the benchmark data inaccurate, unavailable or even conjured from thin air. For example, what does an industry benchmark email open rate or broad CPM for a digital ad placement really mean? Many benchmark audits may focus on comparing metrics which are less relevant to the larger aims of the audit in the first place.

While benchmark audits are deemed less professional than contractual audits, it doesn’t mean all of the auditors operating in this space are ineffective. Better quality auditors may conduct live tests and/or mystery shopping research as well as existing industry data in order to lend more integrity to their conclusions.

Generally speaking, the benchmark audit process works best when combined with an audit into the contractual side of the agreement.

2 – Contract Compliance Audits

A contractual compliance audit involves looking into the contractual agreement. This is much closer to what most operators would agree to be a professional agency audit. Compliance audits involve assisting the advertiser to answer whether their agencies are delivering on their obligations. It aims to uncover both instances where they are ‘delivering’ as well as the areas where they are not.

This type of audit is essentially an evidence-based review of the agreement between two parties (in this case a client and their agency) to understand the degree to which the agency has complied with the terms of the contract. For this reason, a lot of the findings will hinge on the original agreement and the service provisions detailed within that document.

The process typically involves the client hiring an auditor who meets with the financial director, senior account managers and perhaps other operational staff within the contracted agency. The auditor will introduce their role and team, but most critically… also explain the scope of the audit process that has been defined by their client (the advertiser). At this point it’s common for the agency representatives to quickly reveal how they are feeling about the situation via verbal and non-verbal cues.

Auditing digital media can be complex, because it is estimated upfront, before these figures need to be reconciled at a later date. The invoice values are lower and so there’s a lot more data. Due to this complexity, there can be more room for error.

Similarly, with traditional media, the commissions on each booking can create layers of audit complexity. Most modern agencies will use electronic booking systems linked into their scheduling software which makes this easier, but it is common to find cases of human error during data entry. Booking data is extracted and analyzed by the auditor, then samples of specific areas are investigated in deeper detail. The auditor will then ask for additional documenting invoices to verify those charges and make sure they are justified.

A lot of the results from this audit type are determinant on the original contract, which is why this is the first thing your auditor should investigate in detail. For this reason, your audit team needs to have people with both a grounding in legal contract law and be a subject matter expert. Clients are always encouraged to talk to the agency first and ask probing questions prior to even considering hiring an auditor in the first place.

3 – Financial or statutory audits

This is the type of auditor that you would associate with financial accountants, conducted typically at financial year end. This type of audit investigates the financial statements of a company which will be submitted to shareholders in the effort to ensure people have a true fair view of what’s going on within the company. This is generally outside of the scope of the typical agency or vendor audit which we are referring to here on this page.

The Typical Impetus for Agency Audits

Regular auditing is only one element of best practice media governance.

A media agency audit will typically reveal whether the creative content which has been produced appears at the predetermined times and in the specific areas which were outlined in the media plan. Often third-party verification tools can be used (aka media monitoring) to help provide some data in this regard, but the information from these tools can be limited and not include financial cost data. This software is popular within the Public Relations agency space in order to track brand mentions and then estimate the value of those brand mentions using equivalent advertising cost data estimations. The cost and purchase order/invoice approval data must come from other sources.

What many outside the agency industry don’t realize, is there’s a complex web of commission and fees between suppliers within the media supply network that can hide the true value of the supplied media. This can distort the price of the media, above and beyond what would be considered to be a fair ‘market rate’. Contrary to popular perception, media agencies can end up offering more expensive rates than a direct purchase from the publisher/broadcaster itself.

Furthermore, many media agencies will pre-purchase large chunks of advertising space from their preferred suppliers at the start of the financial year. Deals will occur where substantial discounts are made for these bulk purchases. The media agency’s profit is realized sometimes, not via rebates or commissions but by simply on-selling this space to their clients at an inflated rate. These purchases which have occurred ahead of time, will be pushed upon the client regardless of how appropriate the advertising media may be to the goals and objectives of that brand.

Ultimately, a media audit will help reveal answers to these questions so the advertiser can ensure their marketing expenditure is being spent in an optimal way. CFO’s in particular often require this insight for their due diligence. Independent media auditors are preferred for best practice corporate governance.

How Audits Differ for Different Sized Companies

Depending on the size and industry nature of the company, expenditure on media is typically the largest line-item in any marketing budget.

For small businesses, strict media expenditure could be relatively low, but general agency marketing expenditure can form the highest cost to the business. We find most small businesses benefit most from an agency review and general strategic audit of their business/marketing instead.

For traditional advertising agency arrangements, creative production costs and other labour costs can be high, but generally far less than the media component (around 1/5 of the cost of the media). For organizations operating within highly competitive industries such as FMCG, generic consumer services (retail banking) etc. media can be the single largest purchase each year – far outstripping other raw material or operational production costs.

Corporate governance stipulations for larger firms warrant frequent investigations into any large expenditure line-items. This is done to ensure company funds are being put to the best use.

Most large advertisers will routinely use media auditors on a regular basis. Often the CMO will be responsible for answering the typical question from the CFO/CEO, “What was the return on our marketing spend”. In some cases, answering this question can be complex, especially when there are many providers involved in the campaign execution process.

A conflict of interest arises when an auditor is assigned from the same holding company group. A company is assigned, who may appear separate in terms of name, but operates within the same group of media companies. For this reason, it’s always important that audits are conducted by independent firms. This is good business practice and will help reduce financial risk.

Investors will often require investigation into any large proposed expenditure items before committing approval for the allocation of funds. This discretion is pronounced during times of financial hardship and perceived risk is high.

When purchasing direct from the media supplier such as Facebook for example, you are also reliant on data that the platform supplies. Independent verification may be required by an industry expert.

We have personally heard of instances where very large advertisers have very large conflicts of interests in their marketing services supply chain with little to no oversight in the expenditure process once the account has been ‘won’.

Getting the most out of a Media Audit and their benefits

An audit can go one of two ways. The findings are either used to provide additional insight into performance of the agency and the relationship improves, or it’s used for ‘agency bashing’ where the agency becomes a scapegoat for performance issues.

There is still much debate in the media industry around which metrics are the best to measure and how to verify figures. With some media channels, there will be less ability to provide accurate figures and conclusions when compared to others. However, there have been many recent studies with the advent of technological solutions which can provide accurate sample data which can be used for projections.

At the start of the audit process we recommend the client to work closely with one of our staff in order to set the scope of the investigation. From that point on, this scope will restrict the level of detail and areas which the auditor will investigate.

There needs to be some discussion around how the auditor’s methodologies work, and what improvements his/her analyses can enable. Defining the scope of the audit up front and being very clear about what the audit hopes to achieve will ensure the resulting findings are helpful.

We find good outcomes when our reports are provided via feedback to existing agency vendors so they can have a chance to improve before ending the relationship if necessary. Providing further incentives for performance can be an effective tactic.

The benefits from audits can be significant. We find that the Pareto Principle applies to most marketing campaigns where the vast majority of expenditure produces negligible returns. Similarly, larger, more complex campaigns will provide more opportunity for fees to be hidden and inefficiencies to be present. The typical return on the price of the audit can be five-fold.

The Cost of a Media Audit

The cost of the media audit will depend directly on the scope set at the first meeting and thus costs will vary significantly. Expect large audits to run into the hundreds of thousands of dollars and smaller audits to be in the tens of thousands of dollars. The cost will depend upon the number of media channels under investigation, the number of participants in the supply chain, the availability of information, contractual agreements and frequency.

Large audits will require more expensive tools and purchasing of data together with more analysis labour overheads.

For small business audits who may have 1 to 5 agency suppliers expect to pay at least $1000+ per investigation.

For medium businesses who may want to look at certain channels/agencies in detail expect to pay more in the vicinity of $10 000 per investigation

For large businesses who require highly professional, in-depth audits, expect to pay somewhere between $50 000 to $200 000 per investigation.

Our Recommendations

We understand there is a lot of concern around over media transparency and many advertisers are looking for compliance audits to check whether the agency is fulfilling its service obligations. We believe this should be a regular occurrence and best approached using a mix of the price bench-marking audit and contractual compliance audit.

Depending on your country of origin, our audit team can be difficult to reserve. Contact us to see whether one of our audits can solve any current problems and help fill in any gaps in the reporting process.

Do this before hiring an auditor

Before assigning an auditor, start with the following tasks.

1 – Read the media agency contract

The contract should outline many rights you have when conducting an audit. Look for the following:

Which specific party are you contracted with? Is it the trading entity who you interact with or a holding company?
Is there a dispute resolution clause or mentions of rights and process related to compliance auditing?
Is there a specific restriction as to which auditor you can use? We’ve noticed some contracts will attempt to limit the auditors to specific entities rather than which ever auditor may be most suitable.
Is there a notice period that must be given in advance of your audit commencing?

2 – Speak with your media agency

Most larger agencies will be familiar with audits and their other clients will submit other similar compliance requests
Your agency may give some information as to how they perceive different auditing firms
It is best to break the ice early on in order to set expectations of further investigation. This may help to limit any future animosity
Keep in mind, auditing aims to improve the working relationship and in our experience, often leads to more productive outcomes. Align key stakeholders early in the process to avoid the potential for hostile or aggressive behaviour.

Step 3: Chose an appropriate auditor

The scope of work will help determine if it’s appropriate to contract a large auditor or mid-small tier firms. We would recommend partnering with an independent firm for the best results. KMPG, EY, PWC, Deloitte, Accenture, Bain, McKinsey are the larger players. Given most of these firms have now invested in media and ad tech business divisions, their previous ‘independent’ nature could now more questionable.
Some advertisers would prefer expert advisory from an industry specialist. Often the complexity of the media area requires technical expertise and a level of depth of understanding that may not be present with the larger consulting/audit firms.
It might be that a collaborative mixture of individuals or firms may be needed for the best results to work together as a special project group in collaboration. For example, the financial audit acumen of an established accounting auditor, mixed with the technical expertise from a boutique industry specialist and a legal contract expert. This is the cross-functional team approach that we take personally when doing these audits.

Is an Audit what’s needed?

We believe it’s important to look at the audit process from a holistic perspective. Is the audit necessary for internal compliance reasons or is it precipitating an existing undesirable situation with the current vendor? Typically the clients that reach out to us are the latter, where there is suspicion that the current media suppliers are not performing as expected.

The bigger question is whether this situation exists because of the lack of specific direction that has been provided to the agency, the inadequacy of contract that has been signed, or because of malpractice.

Poor agency performance can be a result of optimizing the wrong performance metrics which do not contribute toward organizational goals. Ultimately, we realize you want to make sure your external agencies are working optimally to deliver your marketing and business objectives while operating in a transparent manner.

Brands that don’t have a regular audit system in place should seriously consider their rights to do so. Many are not even aware this may be detailed in their contract. Either way, first define what everyone means by ‘media auditing’ and look for expert advice to ensure you’re making the correct decisions for your company’s requirements.