There's more to this contract compliance audit lark than just money…

When done in the right way, contract compliance audits of marketing services agencies deliver far more value to both client and agency than simply identifying accounting errors.

That was the message delivered by Philipp Schuster of adidas Group at the ProcureCon Marketing Conference held in London in June.

In 2013 adidas embarked on a trial involving two specialist firms: one in agency compensation benchmarking and one in contract compliance auditing. These disciplines are closely linked, yet at the same time are niche areas of expertise in their own right. As the information made available to both is highly confidential, it’s important that scopes of work for each are clearly defined and the projects are kept separate so that conflicts of interest don’t arise.

By carrying out both exercises at the same time adidas benefitted from a thorough review of what had gone on in the past, as well as understanding what might be possible in the future.

credits available on production budgets (i.e. where money given to the agency has not all been spent)…is undoubtedly the most common finding…

Somewhat unexpectedly, this wasn’t just confined to amounts of money over or under charged. As you would fully expect, the contract compliance audit identified credits available on production budgets (i.e. where money given to the agency has not all been spent). In fact this is undoubtedly the most common finding from an agency contract compliance audit, no matter what type of marketing services agency is being audited.

It also identified differences in fees between actual and estimated amounts (in hours and rates); differences in the charging of third party/bought in costs to what had been agreed; and differences in the recharging of travel and subsistence costs. Without information having been traced back to original documentation and reviewed in detail, none of these would have been apparent.

So far, so good I hear you say. That’s what we would expect to have been uncovered by a professional auditor doing a thorough job. So what was it that was unexpected?

adidas was not expecting…a thorough review of the agency contract and feedback on…day-to-day operational processes…

According to Philipp, adidas was not expecting as part of the compliance audit a thorough review of the agency contract and feedback on how day-to-day operational processes could be enhanced.

The contract review highlighted some areas of the wording that were not crystal clear and open to different interpretation depending on whose pair of glasses you were wearing. It pointed out some omissions in common agency contractual language that could lead to misunderstandings that had the potential to damage the working relationship if not addressed.

The process review highlighted opportunities to bring greater clarity and rigour to briefs issued, approval processes and overall budget management on the client side that, once addressed, could unlock tangible benefits for both client and agency, truly a win/win situation.

Finally the audit provided a risk assessment of the agency by looking at its overall financial performance and its degree of reliance on adidas for revenue.

When combined, all of the audit findings created a platform that facilitated improvements collaboratively with a focus on increasing efficiency to the benefit of both parties.

…the brand team benefitted from having an independent assessment of its ways of working just as much as the agency did.

Happily for the procurement team at adidas it was not mandatory to take the accrued financial benefits to the bottom line (which undoubtedly helped with the buy-in of the marketing team to the overall process) and the opportunities identified in non-financial areas opened up an area of discussion with the agency that would never have otherwise happened. It is fair to say that the brand team benefitted from having an independent assessment of its ways of working just as much as the agency did.

Following the success of the trial, contract compliance audits are now part of adidas Group’s toolkit for managing its agency relationships. It carries out audits each year across a variety of different agencies in terms of both size and marketing discipline.

Philipp described how adidas sees the audit process as facilitating a continuous circle of improvement starting with the client/agency relationship and progressing (in order) to the contract, briefs and statements of work, the audit itself, identification of financial benefits, identification of process benefits, alignment with all stakeholders, and, finally, the incorporation of everything learnt into a revised contract and ways of working.

a thorough contract compliance audit can be of particular value to younger and/or smaller agencies.

It has found that a thorough contract compliance audit can be of particular value to younger and/or smaller agencies. Agencies that are owner managed or growing quickly may not have the resources available to analyse their systems and processes themselves – everyone is so focused on exceeding their clients’ expectations on a daily basis. By engaging with a specialist auditor in a collaborative manner, such agencies can gain valuable insight into how to better equip their business for sustained growth, all paid for entirely by their client.

audits are actually a development exercise with the potential for tangible business improvement for both parties,

In the beginning, adidas’ overarching goal for the audits was to verify and increase contract compliance. Using a variety of tools over a cross section of agencies (discipline, size and location), it has learnt that the audits are actually a development exercise with the potential for tangible business improvement for both parties, able to turn a client/agency relationship into a sustainable and mutual success story.