This post is by Lyndon Brill, Agency Remuneration Expert at TrinityP3. Lyndon has worked at the highest level in the advertising industry for over 10 years and is ideally suited and experienced to assist our clients in achieving their maximum growth potential.
In light of the recent ANA Production Transparency Report in the US, and the growing trend for the ‘Big 6’ Networks to establish separate brands for production services, here is a list of key considerations for your current agency contracts. TrinityP3 believes terms and conditions should be transparent, and not support hidden agendas, especially where an agency may engage a related production supplier. So here are our seventeen areas or principles when reviewing your agency and production contracts:
1. Review your agency contracts regularly
The contract should contain transparent terms, which are clearly understood by both parties, and reviewed at least every third-year due to technological advancements and process efficiency within industry practices. Do you know exactly what the terms and conditions are of your agreement? If not, you should, transparency is paramount.
2. Be clear on the type of relationship your contract defines
Contracts are generally one of two formats. This is either one of Principal and Agent, or alternatively Principal and Contractor. Where the Agency is acting as an Agent, the Agency has a fiduciary responsibility to act in the best interests of the client, and procure production at the best possible price. However, where the contract engages the agency as a Principal and Independent Contractor, often terms allow for the agency to mark-up or provide less disclosure and transparency over the sourcing of external production services.
There has been a recent shift towards these agreements where the Agency acts as the Principal with production suppliers, to limit the ‘risk’ of audit and potential compensation in the case of a breach of terms of the agreement. The Agency engages suppliers, which are often deemed external 3rd parties (although often related), which are not subject to the terms and conditions of any Master Services Agreement.
3. Investigate contracting third party production companies directly
A direct Production Services Agreement with the related 3rd party production house is always recommended, which should include the same transparent terms as the Agency agreement, and especially include the right to audit. This supports the move away from ‘fixed price’ and ‘non-auditable’ external production agreements, which are common within the industry.
4. Engage an independent production consultant
For large spend campaigns where value is unknown, it is recommended an external production consultant is engaged, to ensure value is maintained prior to the approval of the production supplier. This process often takes less than 48 hours to turnaround, and confirms value or eliminates unwanted inefficiency or wastage. Clear rate cards relating to each party should be clearly identified within each contractual agreement directly with the marketer.
5. Contracts should clearly define warranties and indemnities
Terms should be included within both agreements that cover the Warranties and Indemnities where the Agency engages the Related 3rd Party, and undesired actions or service levels have a direct impact on value delivered by both the creative deliverables or deliver an under-achieving campaign performance. These should be clearly established and understood by all parties.
6. Insurance requirements for all parties should be defined
Terms should also clearly establish Insurance requirements to mitigate risk to all parties. The contract should clearly identify which party is insured for which services, and especially where both external or related party production parties are engaged, which covers any unforeseen safety or circumstances, which could place the marketer in a position of undesired risk.
7. Third party cost should be passed on at net
Terms should be included within the agreement that require the agency to pass on external 3rd party production at net cost. The agency generally charges head hours in a production estimate to cover the resource time require to produce the agreed ‘concept’ assets, which is agreed through the production estimate process. Paying an external production mark-up is often a pure profit centre for the Agency, which delivers limited value to the marketer.
TrinityP3 generally does not support production mark-ups or commissions, as it does not encourage the agency to buy at the most efficient possible price, due to the impact it can have on the service fee or commission in such cases. However, in some markets, especially Asia, production mark-ups are more common. However, these should only be accepted if the commission covers the production resourcing for production supervision, and it is therefore not recovered in the production estimate, which would essentially be double ‘dipping’. Furthermore, there is often no direct correlation between the size of the production budget, and the resource hours required to procure and deliver the services covered within the agreed campaign.
8. Beware of fixed price methodology
It is common for Agency agreements to include terms which require the agency to estimate and provide production estimates based on net cost. However, terms are also included which highlight that the terms use ‘fixed’ cost methodology. What ‘fixed cost’ methodology does is provide a floor price for the production estimate, which allows the agency to retain any production credit, where the external 3rd party production costs come in below the estimated price. While this does provide a guaranteed price for the marketer, it doesn’t allow them to take advantage of any under-spend by the agency, which can have an impact on value. This process can be complex, and is therefore not viewed as major consideration for the marketer.
9. Production contingencies should be avoided
The use of production job close accounts can allow all production debits and credits to be closed to a single job or balance sheet account, with full disclosure provided on a quarterly basis. The agency can either agree to credit the marketer if substantial credits exist, or use this to offset against future campaign or production requirements.
TrinityP3 does not generally support contingency cost centres being billed, as historically this just provides an additional revenue stream to the agency, although relatively minor unless based on substantial volumes. Production job close terms generally discourage the agency from over estimating, as it takes away the conflict of interest from supporting the additional revenue stream of the agency ‘taking up or recognising’ additional production credit income.
10. All production contracts should include a right to audit
The contract should contain the right to audit clause, which will allow either an external 3rd party or internal audit party from the marketer to audit all estimates, agency invoices, and external 3rd party pass-through production charges, which should be kept on file and passed on in line with the terms of the agreement.
11. Three competitive bids should be sourced by the agency
The contract should require the Agency to provide ‘3 competitive’ bids for production cost centres which exceed a pre-agreed value of between $25,000 to $50,000 depending on channel. These estimates should be required to be filed and kept on-site for the period which is potentially subject to audit. Furthermore, the responsible marketer should be the person that reviews the three estimates, and selects the best supplier to procure the service and production requirements. This can be a co-operative process with the Agency Producer.
12. Agency should declare conflicts of interest in writing for each production
Agency Networks are establishing separate related party ‘Production House’ brands for two reasons; firstly, to maximise total extraction from the marketer so that independent external production houses are not required. Secondly, so that agencies can deliver low cost economical ‘tier 2’ production services such as content, that don’t always require ‘tier 1’ creative thinking or investment. It is not uncommon now for agencies to find themselves in competition with their own vendors for ‘tier 2 and 3’ services.
Contractual terms should be included within the contract to disclose potential conflicts of interest, which require the agency to disclose each project in writing, that their related party production house is going to be put forward to tender for the services being procured. The related party supplier should only be put forward, if they are genuinely one of the three best suppliers known by the Agency Producer, and can deliver value aligned to the competitive market.
13. Avoiding paying twice for agency producer
In the case of the Agency engaging a related party production supplier, it is vital that the Producer function not be covered twice, especially where the majority of the services are out-sourced to the third party under a supplier agreement. For Agency relationships that do regularly engage a related party, the Producer role should clearly be established, and who is responsible for which services under the engagement.
TrinityP3 often conducts reviews, where producers are hybrid retainer, and also included on production estimates, which can often lead to over recovery impacting value. This has recently become additionally complex, where this function is the out-sourced to either a related or non-related party, which is often inefficient and leads to the marketer ‘double-paying’ for services.
14. A rigorous tendering process should be defined in the contract
Contractual rigour needs to be placed around the tendering process, to minimise any chance of production ‘bid rigging’, which whilst illegal, is known to exist within some markets. A highly transparent process is recommended, especially for production projects with spends exceeding the ‘three competitive bid’ spend threshold amounts.
15. Terms on third party negotiation expectations should be clearly defined
Clear terms should be established to cover the negotiation of talent and music rights and licensing, including any roll-over requirements. This has become extremely complex where assets from either ‘broadcast or print only’ campaigns initially, end up being used as part of the content creation process. Responsibility needs to sit with both parties to limit risk to both Agency and Supplier where possible.
16. Ensure rate cards define responsibilities as well as costs of services
Terms should be included to clearly establish responsibilities for the traffic, distribution and dispatch process of assets, which should support services being passed through at net cost. It is recommended a rate card be agreed and included in the contract, which is reviewed on an annual basis in line with technological and industry practice advancements.
17. Finally, undertake production audits on an annual basis
If you are a marketer with a substantial spend, do not be afraid to conduct an audit after the first year of a new Agency engagement. It will set the scene from a governance perspective, and ensure the agency is highly organised and maintains high levels of integrity into the foreseeable future. The audit will generally deliver a great return from an ROI perspective, and also support trust within the relationship.
In conclusion, contracts are complex, and vital to maintaining trust in a transparent relationship. It is absolutely vital that all parties engaged in the relationship understand the Terms and Conditions of their contractual agreements. It is essential that all marketers, suppliers, and their representative legal counsels understand the conditions of the engagements, and enforce the terms and conditions included in the agreement.
TrinityP3 recommends if you don’t have an in-house counsel that understand the complexity of Marketing Services agreements, then engage an industry expert like TrinityP3 or an external legal expert to assist you with negotiating terms and conditions to maximise value and maintain trust with your supplier arrangements.
Contracts define the terms and conditions of the relationship and expectations to protect both parties. Take a look at how we can help with your contracts here.