Key ingredients of well-crafted advertiser-media agency agreements

To enhance advertiser-agency agreements, Tejas Apte, Unilever's General Manager - Media, South Asia and Rajiv Dubey, Dabur's Head of Media, emphasised that setting a ‘water-tight’ contract, one that is regularly reviewed and updated, even by a third party auditor, is utmost important for the client-agency relationships to thrive.

The Indian Society of Advertisers (ISA), the apex national body representing advertisers across the country, announced the official launch of the ISA Media Charter. This comprehensive initiative aims to safeguard the interests of brands by promoting fair and transparent practices in the advertising industry.

Tejas Apte

Speaking about unbilled media, media credits and holds, Apte, who is also ISA Media Forum Head, said that there are two types of differences when it comes to unbilled media. First is the permanent difference and second is the timing difference.

"The root cause of the permanent difference is the variance between the buying rate assumed and the actual building rate, which is typically lower. Which means you have passed on more money to the agency than what you would have wanted and which means they are also holding that money back keeping the money with them," Apte said.

"The second difference in the timing means that sometimes the agency is waiting for the vendor to send the invoice and it happens in newer places. So, when it is in newer places and there are new types of publishers etc, we have to get more organics," he commented.

Furthermore, Apte said that to avoid such complications, it is advisable to incorporate a provision in your contract detailing the agreed-upon agent. Specify a timeline, such as 10 or 12 months, within which the agency should ideally refund any money that they hold on account of unbilled media. This is the first step that is recommended for all advertisers to build into their contracts.

"Second part pertains to a consistent reporting schedule. This could range from quarterly to every six months, depending on your preferences. It's crucial to establish a reporting frequency within the contract. This is where the agency will disclose any withheld unbilled media funds. These funds are reserved for unbilled media," Apte said.

Furthermore, Apte spoke about media benefits including Agency Volume Benefits (AVBs). He said that it is necessary to make sure the contract is clear about what is defined as a rebate as it relates to income or benefits received by the agency group because of client billings.

Firstly, ensure that the definition captures all types of rebates: Fair share, fixed or minimum, cash, offsets and free space. Secondly, if it is your spending that results in rebates being received within the agency group, ensure they are all passed to you, no matter which agency entity or country receives them.

"Another thing is that a lot of the digital media is borderless and rebates are also borderless. So, try and ensure that in your contract, you have a very clear understanding. You can try and specify that anything that approves to you, is actually passed back to you from any part of the globe," Apte said.

Make sure that your contract requires the agency to make all reasonable efforts to pay media invoices on time so that rebates are not lost. In some cases, media vendors only award rebates if the agency has paid the vendor invoice within the prescribed payment terms, he added.

"Fifth is, you should not be financially penalised. The sixth one is that you should try and have a sense of what a decent level of rebate is and you should try to ask the agency for a declaration, saying you have an x-rebate which is due," Apte said.

While it should be covered by the Right to Audit clause, rebates should be audible. This includes vendor contracts and the ability to audit the whole agency turnover if the rebates are based on a fair share. Consider requiring all relationships with vendors to be subject to a contract. In some cases, agencies do not enter into contracts with all vendors. This can make it difficult to determine if there is a contractual agreement to offer rebates, he stated.

Furthermore, he said that the ninth point is regarding the timing of visits. Some agencies wait until they have received every rebate before remitting to the client but it is recommended that the rebates are provided to advertisers by the agency every quarter, commencing in June of the following year, with each remittance being accompanied by a report that estimates the amount of rebates yet to be received.

Lastly, some agencies have negotiated Service Level Agreements (SLAs) with selected media vendors. A best-in-class contract should seek evidence of these SLAs to be shown to the auditors. This ensures that the financial basis of them is for a legitimate commercial purpose and that there is no link to client spend.

Further, he spoke about the right to audit. First is no limits on audit partners.

"You should have the right to decide as an advertiser who the auditor should be and you should just have the freedom. The second point is that the business remains borderless and the third is your direct contact matters, then get to the bottom of benefits, don't be limited to one entity, auditors should preferably work on a fixed-fee basis, lastly, the non-compliance should come with consequences and lastly timely repayment matters," he stated.

Rajiv Dubey

Furthering the discussion was Dubey, who spoke about the various breaches that lead to clauses and how to fix them through the right kind of framework so as to avoid incurring losses.

He recalled that earlier on very few marketers extracted the AVBs from the agencies but gradually it was the agencies which started coming up to include clients in auditing them and the realisation that came in the aftermath of this was that agencies keep this money with them for a long period, be it more than 1-3 months or even a year, sometimes, because the faster the money comes in, the better the KPIs are built.

He emphasised that when developing a best-in-class media agency contract, one should consider how the campaign data should be stored.

“Ideally, it should be stored at your end because you are the ultimate data owner, but if the data is stored at a third party or the agency, there could be a possibility of breaches, which is why one should keep the data at one side-  be it at the programmatic seat or the agency seat. Advertisers should make sure that they have direct access to campaign-related data, either through their own logins or via agreed reporting,” he added.

Dubey also suggested that in terms of the cash neutrality clause, one should do a reconciliation of both- the money paid in advance or at a later date to the agency with regards to the due date so that there is no scope for incurring losses therein.

Additionally, he also pointed out the three other aspects of payment terms that one should ensure feature in contracts- Sunset clauses of late payment, credit notes and early payment discounts.

“What we do at our end is that we close all the service orders that have been opened within the defined period,” he said.

Speaking about the remuneration practice, Dubey emphasised that traditionally, agencies used to work on a percentage basis and 15% used to be the norm which has now come down to x percentage norm, depending on the capability to buy.

“The percentage model works with the clients or advertisers where the spend is below a threshold level because if the spends are only going up by 20%-30%  it does not really make a difference for an agency to work on the same level of fee. Therefore, in such cases, a fixed fee-based model works very well because then the agency can keep the fee for a longer period or build an incentive system based on FTE which is built on a defined scope of work in terms of how many FTEs are being placed for a business,” he elaborated.

He further added that timesheets should be maintained and be auditable, at least insofar as they relate to a client's business and agencies also need to ensure there is a robust system in place with appropriate authorisation controls for time being allocated to the business’ account.

“Since timesheet management is a tricky part, a third party auditor can always help in reconciling the number of people who are working on an account actively or passively, and accordingly the remuneration structure for that person or the agency,” he commented.

Commenting on how reconciliation should be managed, he stated that it should be prepared and submitted quarterly so that one can pay on time and recover the FTE, deliveries, etc. as and when required.

“If there is a material change to the SOW, consider coming back to the table to renegotiate the fee based on the revised SOW. Remuneration needs to be fair in both directions: clients should pay for the services they receive; agencies should charge for the services they deliver,” he concluded.

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