Is it clear where an agency is making money on your account?

When an agency submits a statement of work for a production job or a media plan to a brand team, you would expect that the amount on the piece of paper you approve represents the whole story. Well, not necessarily. What we have found is that the fees from the brand may only be one of the revenue streams present and they are likely to vary by agency type.

For a media agency, unbilled media (or media credits) can provide additional income. Unbilled media occurs when the media owner or sales house does not invoice the agency in full for the media estimated and/or delivered. There can be a number of genuine reasons why a difference between what you have paid the agency and what the agency pays the media owner arises. The main priority for most brands is to have sight of how much money is involved, so this can be taken into account when considering the overall value of their business to the agency.

from a brand’s perspective, financial transparency is of paramount importance, particularly when operating with a finite marketing budget

Similarly, for a creative agency, reconciled credit balances on production jobs that arise when actual costs come in below estimate (a common occurrence, again for genuine reasons) can provide additional income too. Again, from a brand’s perspective, financial transparency of these amounts is of paramount importance, particularly when operating with a finite marketing budget.

While these two examples are commonplace, they’re not the only ones we’ve ever come across. As always the devil is in the detail.

Are multiple revenue streams a problem?

Put simply, No, if (and it’s a big IF) both parties are aware of ALL of them.

We have found that where this isn’t the case, there is often a mismatch of expectations, which inevitably disrupts the client/agency relationship, leading to a decline in levels of trust on the brand side.

The mismatch can manifest itself in a number of ways, including:

• When a brand has not issued a clearly defined and up to date contract as part of a RFP process and then has awarded its business to a new media agency before discussing the contractual terms. During the ensuing negotiations, the brand team makes it clear that it wants to retain 100% of AVBs and unbilled media. Unbeknownst to them, the agency has low-balled its fees knowing it will make up the shortfall by retaining AVBs and unbilled media! Suddenly the agency is much less enthusiastic about working with their new client as it’s going to be making far less money on the business than imagined (and may only be breaking even). Protracted, and often painful, negotiations will then follow by which time the shine will have well and truly worn off for both parties.
• When a creative agency has been asked if it has passed back all discounts and rebates received from third party suppliers as per the terms of the contract, it replies (via the account team) “yes” and then a thorough financial audit uncovers (via the finance team) that the actual answer is “no”.

What is the solution here?

the more aligned the parties are…the more likely the relationship is to endure.

No one is saying that agencies need to conform to a proscribed business model or contractual arrangement. It is our belief, however, that the more aligned the parties are in their understanding of the commercial reality of the relationship from the beginning, the more likely the relationship is to endure.

As a result, it makes sense for brands to consider the following:

1. What degree of financial transparency is it reasonable for your agencies to provide?
2. Will it be easier to get the level of transparency you want if in dealing with third parties an agency acts as principal or agent?
3. How much better will your agency relationships be in the long run if you send out your ideal contract with all the other RFP documentation so that the participating agencies can quote fees commensurate with a pre-determined degree of financial transparency?
4. What tools could be at your disposal during the life of the contract to give you assurance that the contractual terms have been implemented as intended?

At the end of the day, it all boils down to the sharing of information and degrees of financial transparency, with brands wanting as much as possible and agencies wanting as little as possible. As in a marriage, time spent up front getting to know each other and setting clear expectations will help both parties to navigate coherently the problems that will inevitably arise and to avoid a crushing disappointment that ultimately leads to a messy and energy sapping divorce.