IMPORTANCE AND EVOLUTION OF AUDITS IN MEXICO

6 Feb 2023

Additionally, the outsourcing law has started to take effect from the same date, marking the last quarter of 2021 as a significant turning point in the way advertising relationships are conducted in Mexico.

These laws have since brought several substantial changes to the relationships between advertisers, agencies, and media, and if they remain unchanged, they will continue to impact these relationships in the coming years.

The main questions advertisers are asking themselves are: “How do these changes affect me? What can I expect from my media agency moving forward? What can I do to validate and improve this relationship in the coming years? How do I ensure I don’t lose competitiveness?”

The relationship between agency and advertiser is crucial for the smooth execution of advertising activities and the effective implementation of brand strategies and tactics. Over the years, we have conducted numerous contract audits for advertisers across various categories with different agencies in Mexico and have observed a clear evolution in market dynamics.

On September 1, 2021, the Law for Transparency, Prevention, and Combat of Improper Practices in Advertising Contracts came into effect. According to Article 1, its purpose is to “promote transparency in the advertising market, as well as to prevent and combat commercial practices that provide undue advantages to certain individuals to the detriment of advertisers and, ultimately, consumers.”

The best way to ensure that our media agency is meeting its contractual commitments is through a contract audit. This process involves evaluating all aspects that can be audited based on the contract between an advertiser and their media agency.

The advertiser agrees to pay a fee in exchange for services provided by the agency, which assigns a team to manage the account.

This process reveals many gaps that may exist in the performance of the team assigned to the account, the billing process, the Statement of Work (SoW), and more. Key performance indicators (KPIs) that are typically audited include:

SoW (Deliverables)

Billing and Review of Evidence
Work Team
Compensation
AVBs (Agency Value Bonuses)
Commitments
Clauses and Others

Over the years, the number of reports has decreased since 2018. Currently, the average advertiser has 20 reports stipulated in their contract that their media agency must fulfill. These reports include a range of deliverables, from strategic and tactical plans to team training sessions.

Interestingly, as the number of deliverables has been reduced in an effort to streamline processes, we have observed a corresponding drop in the percentage of compliance. This indicates that having fewer deliverables does not necessarily mean that the agency will automatically meet all deadlines more consistently; in fact, the opposite may be true. This highlights the need for better monitoring of contractual compliance

Billing processes at agencies have been a critical point in advertiser management, serving as a bridge between the advertiser and media. During the initial years of auditing agencies, interesting issues often arise, such as credits due to the client that they were unaware of due to lack of reporting, delays in payments from the agency to media (despite the advertiser having paid the agency), or, in rare cases, discrepancies between the amount charged to the advertiser and the amount paid to the media.

Over the years, with the recurrence of audits on media agencies, these issues have significantly decreased.

Today, with the change in transparency laws regarding billing processes, one of the primary reviews we conduct is the verification of billing witnesses. As billing is now a direct process between the media and the advertiser, the agency’s role will primarily be to mediate to ensure the media sends the correct invoice to the advertiser. Recent witness reviews ensure that what was actually approved and paid by the advertiser matches what was actually aired by the media. This is a task that the agency must keep updated to ensure that all paid media is as agreed, as discrepancies can affect brand presence.

Work teams are a crucial part of the relationship between an advertiser and their media agency. A well-structured team ensures consistent, stable, and effective management. The seniority of the account team plays a key role in decision-making and strategic contributions, while the effectiveness of the team in executing day-to-day operations is vital.

Despite the changes brought about by the new transparency and outsourcing laws, it remains essential to review and ensure that team management is optimal. This involves comparing current performance against previous years’ data and industry averages. Key metrics include team turnover rates, time dedicated to the account, and days with unfilled positions.

Staff turnover or changes in positions are somewhat inevitable. However, over the years and with the ongoing audits, agencies have increasingly focused on minimizing turnover to avoid penalties and reduce the impact on clients. Closely related to turnover is the metric of average days with unfilledpositions. This metric indicates how many days throughout the year the team has been completely vacant.

Clearly, no advertiser will have their team entirely vacant for weeks at a time, but this metric provides perspective on the number of days between when a person leaves and when their replacement arrives, as well as the number of positions on the account. This leads to data showing that, similar to turnover rates which decreased since 2017, the pandemic in 2020 resulted in minimal turnover and fewer gaps in teams (as people were less likely to change jobs voluntarily).

In the end, in 2021 we see an increase to an average of 17 days with unfilled positions. This means that, on average, the advertiser experiences a 17-day period where no position on their team is filled.

In the end, in 2021 we see an increase to an average of 17 days with unfilled positions. This means that, on average, the advertiser experiences a 17-day period during which no position on their team is filled.

The financial aspect always generates considerable discussion, and achieving favorable financial differentials for clients has been a recurring point in all the audits we conduct year after year. By analyzing the salary entries for each employee, taking into account actual time dedicated, and subtracting the days with unfilled positions, we calculate the real amount the agency has paid its employees for the time spent on each client’s account. This review consistently yields returns for advertisers, which they can use to negotiate future team fees with media agencies or secure direct refunds.

Among audits that have generated a positive differential for the advertiser (where the audited salary amount is lower than the contractually agreed amount), we see an average annual differential of between 7% and 8% in favor of the advertiser. This trend was disrupted during the pandemic year, where reduced turnover and fewer unfilled positions also decreased this differential. By 2021, the differential began to rise again, reaching between 4% and 5%.

This demonstrates that there are always discrepancies worth auditing each year to ensure that the agency is paying the correct amount for the active team.

It is also important to understand what percentage of our investment the fee paid to the agency represents. The vast majority of advertisers in Mexico use a fee model based on a team of work. Historically, the cost of the fee has represented between 3% and 5% of the total investment over the past five years.

The issue of AVBs (Advertising Value Bonuses) has historically been a significant point within contract audits. Media outlets return a percentage of the investment to agencies at the end of the year. Since this investment comes from their clients, many clients have this return stipulated in their contracts. In many cases, there is even a historically established minimum guaranteed amount that the agency will return to the client, ensuring a certain sum for the advertiser by the end of the year. Even during 2021, when the new law came into effect, the average AVB received by the Mexican market remained unchanged.

Change in the Dynamics of AVBs

Injunction Against the Transparency Law

Unlike previous years, towards the end of 2021 and starting in 2022, the dynamics of AVBs (Advertising Value Bonuses) have changed in the market due to the introduction of the new transparency law. The law prohibits the direct return of AVBs, impacting the return on investment for many agencies and, consequently, their advertisers. The market has shifted to a scenario where most agencies are finding alternative ways to return these investment percentages to their clients.

In some cases, direct returns between the media and the advertiser have been arranged, avoiding a breach of the transparency law. However, this often depends on the media outlet itself, which has the final say on whether or not to offer rebates.

Some agencies have adhered to previous agreements, finding ways to return the funds without violating the law, while others have completely moved away from the AVB scheme. Despite the new law coming into effect at the end of 2021, the average percentage returned has not changed compared to 2020. In contracts between agencies and advertisers, it is important to be cautious with this clause and avoid explicitly mentioning “AVB returns.” Instead, it is becoming common to include clauses referring to the return of all “bonuses” or “benefits” in favor of the client. It is unlikely that this practice will disappear entirely, given its significant impact on advertisers. In fact, in many cases, the advertisers themselves have taken charge of the situation, negotiating directly with the most relevant media outlets in their portfolios.

On January 11 of this year, it was announced that the Supreme Court of Justice of the Nation reaffirmed an injunction against the well-known transparency law in Mexico. The initial argument was that the law conflicted with constitutional rights related to labor and free commerce by restricting, among other things, media agencies’ ability to purchase advertising space from providers and then resell it.

If the law is fully invalidated, it would mean that practices prior to the law’s implementation would regain relevance. These include allowing agencies to act as intermediaries in the buying and selling of advertising space, enabling them to purchase space on behalf of advertisers without direct invoicing to the media, and reinstating AVBs as a standard practice, among other things. While we do not know all the details, this ruling could clearly signal the beginning of the decline of the transparency law, potentially leading to its repeal.

Having concluded 2022, we are preparing the audits for the past year to gain greater insight into the impact of the new law during its first year fully affected by it. Regardless of whether the transparency law is invalidated this year or not, it is clear that conducting periodic audits of media agencies is a standard and recurring practice to ensure that advertisers are receiving what they are paying for. This practice encompasses not only monetary factors but also the qualitative aspects of services, reports, and team presence, which are crucial for reinforcing and maintaining a healthy relationship with our media team.

Many advertisers, especially at the regional or global level, already have annual reviews of these contractual relationships in place. This allows them to identify areas for improvement year after year and continuously enhance their position in the market.