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The relationship between agency and advertiser is fundamental for the advertising activity, brand strategies and tactics to flow. Over the years, we have conducted countless contract audits of advertisers in various categories with different agencies in Mexico and have seen a clear evolution of market dynamics.
On September 1, 2021, the Law for Transparency, Prevention and Combating of Undue Practices in Advertising Contracting (Ley para la Transparencia, Prevención y Combate de Prácticas Indebidas en Materia de Contratación de Publicidad) came into force, which, according to its Article 1, aims to “”promoting transparency in the advertising market, as well as preventing and combating commercial practices that constitute an undue advantage in favor of certain individuals to the detriment of advertisers and, ultimately, of consumers”.
Additionally, the law of outsourcing has begun to take effect the same date marking the last four months of 2021 a turning point in the way relationships are conducted in the Mexican advertising industry. These laws have since brought about several substantial changes in the relationships between advertisers, agencies and media, which, if not transformed, will continue to be affected in the coming years. The main questions advertisers ask themselves are “How do these changes affect me? What can I expect from my media agency going forward? What can I do to validate and improve this relationship in the coming years? How do I make sure I don’t lose competitiveness?
The advertiser agrees to pay a fee in exchange for a service performed by the agency, which makes a team available to the advertiser.
This process reveals many gaps in the performance of the team assigned to the account, the billing process, the SoW, etc. Among the main KPIs to be audited are:
- SoW (Deliverables)
- Invoicing and review of witnesses
- Work team
- Remuneration
- AVBs
- Commitments
- Clauses and others
Since 2018, the number of reports has been decreasing. Currently, the average advertiser has 20 stipulated reports per contract that their media agency must fulfill. These reports include everything from strategic and tactical plans to team training sessions.
Interestingly, we have noticed that as the number of deliverables looking to optimize processes is decreasing, the degree of compliance has reduced as well. This reflects that having fewer deliverables does not necessarily translate into quicker completion of deliverables by the agency but rather the opposite. This is evidence that there should be a better follow-up of the deliverables’ contractual compliance.
BILLING
Agencies’ invoicing processes serve as a bridge between advertiser and media. During the first years that agencies are audited, interesting issues usually appear, for example: balances in favor of the client that the latter was unaware of due to lack of reporting, delays in agency payments to the media (the advertiser has paid its share to the agency) or in rare cases, differences between the invoice charged to the advertiser vs. what was paid to the media.
Over the years, with the recurrence of media agency audits, these matters have been largely smoothed out.
Today due to the change in the transparency law in billing processes, one of our main verifications is vehicle witnesses. Since the billing process is now directly between media and advertiser, from now forward, the agency is the mediator for the media and is in charge of correctly send the invoice to the advertiser. Last year’s witness reviews ensure that what was approved and paid for by the advertiser is what was actually aired in whatever media outlet.
This is a job that the agency must always keep up to date to ensure that all paid advertising is as agreed since there may be discrepancies that affect the presence of the brands.
Teams are the most integral part of the relationship between an advertiser and its media agency. Having a well-structured team ensures that there is consistent, stable and effective management. The seniority of the account plays a key role in making strategic decisions and contributions, as well as in the team’s effectiveness in executing the day-to-day operations. Regardless of the changes brought about by the new transparency and outsourcing law, it is still very important to be able to review and ensure that team management is appropriate, both by comparing performance against past years as well as against average market data. Certain metrics are very relevant such as team turnover rates, time spent by the team on the account and days of unfilled positions.
Account staff turnover directly affects account management. High turnover rates create instability in the continuity of processes. We can see that since 2017, turnover that was between 40% and 50% both compared against previous years performance and people, have been going down year after year. During the first year of the pandemic, they reached their historical low point around 20%. In 2021, with the return to normality, we have seen a slight upturn in turnover , which is now back to between 30% to 40%.
It is inevitable to a certain extent that people rotate from position, but over the years and with the increase of audits, the agencies have put more effort into seeking a minimum rotation amongst their ranks so as not to be penalized and to reduce impact on clients. The metric of average days without covering my team is also very much in line with rotation. This metric tells us how many days of the year a team has been completely empty.
Obviously, no advertiser will have their team completely empty for weeks at a time, but the metric puts into perspective the number of days between a person leaving and their replacement arriving taking into account the number of positions in the account. Thus we arrived at a figure that, just like turnover, has been decreasing since 2017 and due to the effect of the pandemic in 2020, since there was almost no turnover, there were not many gaps in teams either (people did not change jobs voluntarily).
In 2021, we see that increase again to an average of 17 days without coverage. This means that on average, the advertiser has a gap of 17 days where none of their team positions were filled.
REMUNERATION
Money always gives a lot to talk about and obtaining differential amounts in favor of the client has been a recurring phenomenon in all the audits we perform year after year. By analyzing each employee’s salary and taking into account working hours, we calculate the amount paid by the agency to its employees for the time spent on each client’s account. This review always results in returns for the advertisers who, at the end of the audit, use it to negotiate with the media agencies for the following years’ team fees or direct refunds.
Among those audits that have generated a positive differential for the advertiser (the amount of audited salaries is lower than the amount fixed by contract) we see that on average each year the advertiser obtains a differential of between 7% and 8%. This trend was not followed during the pandemic year, when the turnover and the number of uncovered days also decreased. In 2021, we see how it starts to rise again to between 4% and 5%.
This shows that year after year there are always differences that are worth auditing and corroborating such as if the agency is paying the right amount for the active team members. It is also important to be clear about what percentage of our investment represents the fee paid to the agency.
The vast majority of advertisers in Mexico use a team-based fee modality. Historically, the cost of the fee has represented between 3% and 5% over the last 5 years.
AVBs
The issue of AVBs has historically been a very relevant point within contract audits. The media gives back to the agencies a percentage of the investment they achieve at the end of the year as an agency. Since this investment comes from their clients, many of them have stipulated this full return to their advertisers. In many cases, there is even a minimum guaranteed amount that the agency will return to the client, which ensures the advertiser will receive an amount at the end of the year. Even during the year 2021 when the change in the law came into effect, the average AVBs received on average by the Mexican market remained.
CHANGE IN THE AVBS DYNAMIC
PROTECTION AGAINST THE TRANSPARENCY LAW
Unlike previous years, during the end of 2021 and from 2022 , AVBs’ dynamic has changed in the market due to the entry of the new transparency law. The law prohibits the return of AVBs as such and has affected the return on investment of many agencies and consequently of their advertisers.
We have moved on to a dynamic where most agencies find a way to return those investment percentages to their clients in one way or another.
In some cases it has been possible for the return to be made directly between the medium and the advertiser, thus not violating the transparency law. However, this usually depends a lot on the medium itself, who in the end has the most power to decide whether or not to return rebates. Many have respected previous agreements
looking for a way to return it without breaking the law and others have completely disassociated themselves from the AVBs scheme. Despite the entry into force of the new law at the end of 2021, the average percentage returned has not changed in comparison with 2020. This clause in contracts between agencies and advertisers must be reviewed with care and not explicitly mention “return of AVBs” but instead include return clauses of all “bonuses” or “benefits” in favor of the client.
It is difficult for this practice to disappear completely as it has great re-entry importance for advertisers. In fact, in many cases it is the advertiser itself who has taken the reins of the matter and seeks to negotiate this issue directly with the most relevant media outlet from its portfolio.
RESOLUTION IN FAVOR OF PROTECTION AGAINST THE TRANSPARENCY LAW
On January 11 of this year, the Supreme Court of Justice of the Nation reaffirmed that a protection had been filed against the famous transparency law in Mexico. The initial argument was that the law ran counter to constitutional labor and free trade rights by limiting (among other things) media agencies from being able to buy advertising space from providers and then resell it.
If the law in its entirety is invalidated, it would mean that practices prior to the date of the law would once again become relevant. Among them, the fact that agencies can once again be intermediaries for the purchase and sale of advertising space stands out, that they can buy space for advertisers without having to bill the media outlet directly, AVBs practices would once again be established as a natural practice. We do not know all the details, but clearly this resolution could mean the beginning of the fall of this transparency law and it could end in its repeal.
CONCLUSION
Having closed 2022, we are ready to prepare the audits corresponding to last year. They will give us greater visibility, especially on the impact of the new law on the first year it came fully into effect. Regardless of whether the transparency law is invalidated this year or not, it is well demonstrated that carrying out periodic audits of media agencies is a common and recurring practice to ensure that advertisers are getting what they pay for. Not only there is a monetary factor involved, but the qualitative part of services and reports as well as the presence of the work team are extremely important variables in order to strengthen and maintain a healthy relationship with our media team. Many advertisers (especially at a regional or global level) have already stipulated the annual review of this contractual relationship, which has allowed them year after year to find points of development to continue improving their position in the industry.