How transparent should a trading relationship be for it to become mutually beneficial?

This is a question we at Financial Progression often find ourselves pondering with our clients. How much financial transparency is it reasonable to expect of a supplier? How candid will they be in their response? How much does it matter? Can mutual trust exist without complete transparency?

Establishing the importance of financial transparency of suppliers to a client often boils down to a few pertinent questions:

• the strategic importance of the product or service (how much pain does my business suffer without it?)
• the degree to which the product, service or contractual terms provide my business with a competitive advantage
• how much the organisation is spending on the product or service (in absolute and percentage terms)
• whether another supplier can be found quickly and without having to invest lots of time (and by inference money) in making the change
• how well the supplier manages the key stakeholders in our business through its service delivery
• the impact of the product or service on the bottom line
• how well the organisation understands the financial drivers of the supplier’s business and hence where it makes money
• the culture of both customer and supplier

Considering the above honestly and frankly will leave most with a feeling in their gut as to whether they understand the nature of and benefits derived from the relationship and whether they currently find themselves in a Win or Lose situation.

Considering the above honestly and frankly will leave most with a feeling in their gut as to whether they understand the nature of and benefits derived from the relationship and whether they currently find themselves in a Win or Lose situation.

Now put yourself in the shoes of your supplier and ask the same questions in reverse. Notice any differences in the response? Is it likely to be a Win or Lose situation from their perspective? Where are the potential areas of common ground? Are both parties interests disparate in one or more areas? What are the gaps in knowledge or understanding? How can they be filled? If they can be filled, will it make the buying experience better?

This thought process can be applied to any supplier, in any scenario. At Financial Progression, we find that clients seek us out to answer questions about the financial drivers of the supplier’s business (specifically to uncover the data and fact of the supplier’s financial position from publicly available information and, more often, the profitability of its business directly from inside the supplier’s accounting systems) and to get an independent perspective on how well the relationship works on a day to day basis. In most instances those suppliers are marketing agencies from across the different marketing disciplines.

With the strategic importance of marketing paramount in the current economic environment, it is to the mutual benefit of both brands and their agencies to work closely to deliver high quality output at a fair price. That said, in our opinion, in many brand/agency relationships neither financial transparency nor the trust which grows from it are sufficiently developed for this to be commonplace.

Marketing compliance audits are becoming increasingly the norm for brands to commission to increase the transparency of the relationship with their agencies and are recommended as best practice by the Incorporated Society of British Advertisers (ISBA) to all its members.

The purpose of a marketing compliance audit is to consider whether the key financial and commercial clauses in the agreement between brand and agency (whether written or verbal) have been implemented as agreed. In what are often complex arrangements, this is often best determined by an independent, qualified accountant reviewing the financial records at the agency to establish the data and fact of the account. The client’s systems and controls are also reviewed to assess their suitability. Alongside sits a review of the health of the day to day relationship with input obtained from both parties as to what is working well and what could be done differently. The review provides insights for both parties to step forward on a surer and more enlightened footing.

The results are always illuminating for both parties, though arguably more so for the brand than the agency as the impetus to understand and challenge tends to emanate from that source. That is not to say that the agency does not benefit too – honest feedback from the client combined with a professional opinion on the status of the agency’s business processes and practices can be extremely beneficial, acting as a catalyst for change in order to manage its cost base and serve its clients even better.

So how does one find the equilibrium, that point at which the client has enough knowledge to know whether it is being offered an attractive service at a competitive price and the agency has proffered enough information to make the client feel comfortable without leaving itself exposed? If it can be achieved, surely that is the point at which a mutually beneficial arrangement can be borne.

That old adage “Begin with the end in mind” frequently escapes our lips when asked for an opinion on this subject. If you genuinely want the relationship to be mutually beneficial, then agree what the characteristics and results of such a relationship look like and have an objective way of measuring them. Whatever you agree between you will be fine until it stops working. At that point the dissatisfied party has a responsibility to flag it up and work with the other to resolve it. Consider bringing in an independent party to counsel both if the relationship is that important – a marriage guidance counsellor if you will – and you may be amazed at how quickly things change for the better.

We are keen to find out how many people out there have experience of commissioning contract compliance audits of marketing agencies and suppliers, particularly what the objectives were at the beginning and the benefits that accrued to the brand and agency after the process was complete. Feel free to comment on the blog or call me (Adrian) for a chat on 01628 353009 or 07841 725666.