Bottom-line Savings through Contract Compliance and Cost Recovery Presenters: George Albarelli, John Fiore, Chris Fejko and Tarek Ibrahim November 13, 2012 General Information Share the webinar Ask a question Votes (polling questions) Rate (before you leave) Attachments (you can download today s materials) Experis Finance Tuesday, November 6, 2012 2 1
Earning CPE Credit To receive 1.0 CPE credit for this Webinar, participants must: Attend the Webinar for at least 50 minutes on individual computers (one person per computer) Answer polling questions asked throughout the Webinar Experis Finance Tuesday, November 6, 2012 3 Meet our Presenters George Albarelli Director, Risk Advisory Services John Fiore Director, Risk Advisory Services Chris Fejko Director, Risk Advisory Services Tarek Ibrahim Engagement Manager, Risk Advisory Services Experis Finance Tuesday, November 6, 2012 4 2
Agenda Foundation Relevance, Benefits, Reasons, Process, Case Study Advertising Risk, Best Practices, Case Study Leases Risk, Types, Best Practices, Case Study Royalties Opportunity, Best Practices, Case Study Wrap-up Questions Experis Finance Tuesday, November 6, 2012 5 Determining whether your organization is adhering to the terms and conditions of negotiated t contracts t with vendors An answer to budgetary constraints and demands placed on organizations for cost reduction and revenue recognition An identification of weaknesses in the procurement process while enabling cost recovery / cost reduction A proven methodology that t can be applied to any or all of an organization s purchases Experis Finance Tuesday, November 6, 2012 6 3
When is it relevant? Purchasing is decentralized within the organization Complexity in Contract Construction; not to exceed, pass through, cost plus Approval process at different levels / locations Different systems for various spends, multiple legacy systems Global procurement Special vendor arrangements High Risk Contract Errors Overpayments Experis Finance Tuesday, November 6, 2012 7 What are the benefits? Achieves cost reduction and cost recovery Improves accuracy of vendor transactions and relationships Improves contract structuring for sustained cost reduction Improves procurement and payment processes Improves financial and operational processes Improves overall business performance Experis Finance Tuesday, November 6, 2012 8 4
Audit Approach High-level Risk Detailed Area Execute Area Long-term Assessment Scoping Reviews Solutions Identify current procurement activities Determine annual spend, # of buyers and suppliers, type and extent of source documentation/ contracts, application systems, etc. Identify highest probability for significant contract errors and recoverable dollars Determine population of items and a sampling plan Analyze data within area and identify items with greatest value Document specific review process for each specific area Develop project plan with resources and go/no-go decision points Review contracts in detail Submit potential recoveries to management for discussion and approval Track error types to contribute to long-term solutions Assemble supporting documentation Accumulate stats of recoveries by error type Develop recommendations to address each significant error type Implement shortterm fix immediately Establish monitoring plan until long-term improvements can be deployed Experis Finance Tuesday, November 6, 2012 9 Assessment focus High-level Risk Assessment Identify current procurement activities Determine annual spend, # of buyers and suppliers, type and extent of source documentation/ contracts, application systems, etc. Identify highest probability for significant contract errors and recoverable dollars Tone at the top level of compliance and monitoring Lack of controls or identification of control weaknesses, including system constraints Complexity of the contracts (lack of standardized terms and conditions) Type of contracts Frequency of contract changes Spending pattern (changes and distribution) Buyer experience and skills Employee turnover or employees unaware of the policies and procedures that govern procure-to-pay transactions Disruptions to the business Experis Finance Tuesday, November 6, 2012 10 5
Testing Considerations Detailed Area Scoping Determine population of items and a sampling plan Analyze data within area and identify items with greatest value Document specific review process for each specific area Develop project plan with resources and go/no-go decision points Stratify your sample according to your risk assessment Consider the population distribution (high-volume, low monetary amounts versus low-volume, high monetary amounts) Lack of an established process, segregation of duties and clear authorization limits Inadequate books and records Manual workarounds to compensate for system limitations Unnatural resistance and lack of cooperation Experis Finance Tuesday, November 6, 2012 11 Audit Approach Execute Area Reviews Review contracts in detail Submit potential recoveries to management for discussion and approval Track error types to contribute to long-term solutions Assemble supporting documentation Compile Metrics for Solutions Report Findings Price History / Walk Issue Resolution Detect Issues Experis Finance Tuesday, November 6, 2012 12 6
Addressing the Root Causes Categorize observations Root Causes Long-term Lack of business process training 45% Solutions Purchasing systems applications 15% Inadequate document management 20% Accumulate stats of recoveries by Ineffective purchasing process 15% error type All other 5% Develop recommendations to address each Recommendation Examples significant error type Benchmarking Implement short- Training Initiatives term fix immediately Document Management Establish monitoring plan System Enhancements until long-term Vendor Management improvements can be deployed Governance Experis Finance Tuesday, November 6, 2012 13 Case Study: Company with $15B spend, over 200 locations Phase 1 Assessment: Used Analytics for spend analysis and duplicate payments review Interviewed key personnel to identify contract risk High Spend / Risk contracts were identified Phase 2 Sample: Analytics indicated that system was robust in controlling duplicate payments Issues with complex contracts that include thresholds and cost plus Phase 3 Audit: Detailed review of complex contracts Price downs on volume thresholds were not recognized Vendor invoices were not consistent with cost plus contracts Recoveries were identified with vendor concurrence Phase 4 Improvements: Process change for contracts with thresholds, price downs Experis Finance Tuesday, November 6, 2012 14 7
Polling Question #1: What should be considered when implementing a contract compliance initiative? Services that: A. Solution design fits your organizational needs and culture B. Address root cause, not symptom C. Executive oversight and ongoing monitory D. Consider impact on customer and supplier relations E. All of the above Experis Finance Tuesday, November 6, 2012 15 When are Marketing and Advertising Audits relevant? They are relevant when an organization: Works with any marketing agency to perform creative production, media buying, direct marketing and/or public relations services Performs their own internal media buying or creative production services Has limited or inconsistent return on investment (ROI) related to their marketing budget allocation Has concerns about the creative output of their marketing agencies Has concerns about the fee structure with their marketing agencies Has a complex business structure with different product lines, market niches and demographic targets Has a decentralized marketing procurement function Has recently begun or is ending a relationship with an agency Suspects fraudulent activity Experis Finance Tuesday, November 6, 2012 16 8
What are the benefits of Marketing and Advertising Audits? Benefits can include: Improved marketing procurement Improved financial and operational processes within an organization s internal marketing groups Improved accuracy and transparency with marketing agencies Achieved cost reduction and improved scales of efficiency Improved financial and operational processes with marketing agencies Improved contract development that include best practices Improved overall business performance and ROI of marketing spend Experis Finance Tuesday, November 6, 2012 17 Common Marketing & Advertising Audit Findings - Risk Area: Advertiser / Agency Fees Agency Compensation Methodology Not advantageous to the advertiser given their levels of spend, marketing mix and business model (arrangements can be a fixed fee, reconciled fee, commissions i or incentives based). Direct Labor Costs Control weaknesses related to agency time-keeping systems Timeliness of agency timesheet submissions by agency personnel Agency s review and approval of hours billed to advertiser Lack of agency staffing reconciliations (FTEs/hours spent by agency personnel servicing the advertiser) Incorrect agency fee calculations charged to the advertiser Incorrect agency rates and/or calculations of media commission charged to the advertiser Overhead Rate/Derivation and Profit Margin Incorrect derivation of overhead and profit components of the advertiser fee Experis Finance Tuesday, November 6, 2012 18 9
Common Marketing & Advertising Audit Findings - Risk Area: Media Buying Media Bill-Pay Testing Lack of agency media buying segregation of duties Lack of agency media contracts, purchase orders, insertion/ buy orders Missing advertiser approval of media plan; media estimate Retention of media supplier credits and unused advertiser funds by agency Missing agency support for advertiser billing Missing advertisement proofs of performance Timeliness of agency s clearing of media discrepancies Lack of agency review of print positioning reports; Incorrect print positioning Lack of agency adherence to advertiser s media buying guidelines Media Cash-flow Testing Timeliness of advertiser payments to agency; and agency payment to media vendors Agency retention of advertiser funds in advance of media vendor payments Calculation of potential float on advertiser s funds Experis Finance Tuesday, November 6, 2012 19 Common Marketing & Advertising Audit Findings - Risk Area: Creative Production Creative Production Testing Missing advertiser approval of agency production estimates Missing third party production/editorial contracts Missing advertiser/agency purchase orders Timeliness of advertiser billings by agency Missing approval of out of pocket expenditures incurred by agency (T&E, R&D) Lack of adherence by agency to advertiser T&E policies Limited agency monitoring of creative materials usage rights (licensing, talent) Incorrectly applied agency production expenditures Lack of agency competitive bidding process (i.e., production/editorial houses) Missing agency background checks of new suppliers Incorrect agency in-house studio billings (i.e., rates, mark-ups) Duplication of efforts Experis Finance Tuesday, November 6, 2012 20 10
Advertising Audit Case Study Large Rental Car Company Audit Focus: Contract Compliance and Media Buying Audit Situation: The advertiser has a relationship with a large media buying agency which serves as its agency of record. Historically, an audit was never conducted. The validation of National Cable spots actualized was not being performed. Furthermore, the contract in place with the agency was outdated and did not include the proper terms and conditions o necessary in a strong advertiser-agency age agreement. e Audit Details: Begin with a high-level assessment to identify areas for potential savings opportunities. Detail a project plan to identify project ownership, set decision points, establish project timelines and outline the overall approach. Identify the total media spend by media type for the scope period. Perform testing at the agency to validate that the proper commission rates are adhered to. Ensure invoices to the advertiser are supported by advertiser invoice from media vendors. Confirm all discounts earned by the media agency are passed back to the advertiser. Perform a cash hflow analysis that tcorrelates payments from the advertiser to the media agency; with payments from media agency to its media vendors. Perform a detailed contract review to ascertain missing or poorly worded contract terms and stipulations. Results: The contract compliance testing can identify overcharges related to pass thru media costs and agency fee miscalculations. Auditors function as liaisons between the advertiser and agency to explain and support all findings to ensure they are properly understood. The results provide insight into the advertiser s current cash flow position with the agency, which at the onset of audits, are sometimes thought to be cash positive or neutral, when in fact cash flow could be negative. Experis Finance Tuesday, November 6, 2012 21 Advertising Audit Case Study Large Diet Product Marketer Audit Focus: Media Buying, Creative Production and Agency Fee Structure Audit Situation: The advertiser is working with two different agencies in two markets (US & Canada), four contracts in total. The advertiser notified the agencies of their intent to audit. Of concern, was the compensation methodology the advertiser has with its agencies, specifically the advertiser wants to gauge whether the fees paid to their agencies are in line with industry best practices. Furthermore, the advertiser wants to obtain reasonable assurances that the terms and condition of their contracts with the agencies are being met and that no overcharges are occurring. Audit Details: Begin by drafting Agreed Upon Procedures based on the contract stipulations to test agency contract compliance, as well as identify potential overcharges. Document the scope of services with each contract; and the market locations and compensation terms contained within. Review each contract and benchmark the agency s services and fees. Review the reasonableness of fees charged to the advertiser by the agencies. Based on the advertiser s business model and media spend; recommendations are made for the advertiser to adopt a different compensation methodology with their agencies. Test and review the support related to the advertiser s largest areas of media and production spend. Results: Through contract compliance testing the audit can identify overcharges related to pass thru media, production and travel costs. The advertiser is made to see the benefits of moving from a purely commission based fee arrangement with both of their agencies to a labor based fee arrangement with a reconciliation of planned to actual costs at year end. The audit also provides transparency, so that the advertiser can better gauge and track agency services. Experis Finance Tuesday, November 6, 2012 22 11
Polling Question #2: What is a typical Marketing & Advertising risk? A. Risk that an agency may not be realizing their financial needs due to the control weaknesses within an advertiser s s internal marketing group. B. Risk that creative production and media buying services are purchased directly by the advertiser. C. Risk that an advertiser s business is not properly managed by the marketing agency leading to control weaknesses. D. None of the above Experis Finance Tuesday, November 6, 2012 23 What are the Benefits of a Lease Compliance Audit? Benefits can include: Ensures compliance with the terms of the lease The activity reflects the terms of the contract Increase in effective Cash Management Limits initial Overpayments Recovery of Overcharges Allows for better decision-making through the use of more accurate reporting and analysis of property profitability Opens the door for development of location level metrics that alert company of future overpayments and assist in future lease negotiations Achieved cost reduction and scales of efficiency Alerts property managers that the company is taking an active role in reviewing charges: Keeps them honest Experis Finance Tuesday, November 6, 2012 24 12
Typical Lease Audit Findings Overcharge for management or administrative fees Incomplete property cost reconciliations Incorrect pro rata share allocation of charges Real estate tax overcharge Incorrect interpretation of lease terms Alerts or metrics that assist Accounts Payable with early identification of incorrect charges Stronger contract development process Experis Finance Tuesday, November 6, 2012 25 Lease Audit Case Study Contract Compliance, Large Retail Chain, Lease Audit, Concentration: Common Area Maintenance Charges Critical Need: Organization has identified an increase in lease-related costs associated with their chain of 800 retail locations. Basic lease-related costs include rent, common area maintenance costs (CAM) and real estate taxes. Rent increases were forecasted based on the terms of the lease agreements. However, significant fluctuations in CAM charges have impacted gross margin and the cash contribution of each location. The organization desired to identify cost recovery opportunities and contracted risk areas. In addition, the organization also wanted to develop procedures over the review, reconciliation and payments to property managers and identify opportunities to strengthen the terms and condition of lease contracts to prevent such significant fluctuations. Audit Provided: Audit initially reviewed the full lease population to determine a target sample of leases that t provide the greatest t opportunity for recovery and consistency with the structure t of their lease contracts. Upon selection of 25 high-risk properties, audit will performed a detailed review of contract terms and an analysis of the related invoices and year end CAM reconciliations. As the CAM audits are completed for the target locations a detailed audit report identifying all inaccurate CAM expenses, process improvement opportunities and best practice techniques. Experis Finance Tuesday, November 6, 2012 26 13
Lease Audit Case Study (Continued) Contract Compliance, Large Retail Chain, Lease Audit, Concentration: Common Area Maintenance Charges Results: Through contract compliance testing, an audit may identify overcharges related to property manager administrative fees, improper allocation of general expenses, un-reconciled charges and charges not allowed based on the terms of the lease. Additionally, a matrix of CAM charges can be developed that would allow accounts payable clerks to quickly identify inappropriate charges. Initially, the audit can provide immediate financial savings. However, as the landlords become aware that tenants are more familiar with the leases and the level of CAM expenses incurred, those errors and overcharges translated into long term financial savings based on avoidance of future overcharges. Experis Finance Tuesday, November 6, 2012 27 Polling Question #3: What is a typical Lease Compliance Audit finding? A. Overcharge for management or administrative fees B. Incomplete property cost reconciliations C. Incorrect pro rata share allocation of charges D. All of the above Experis Finance Tuesday, November 6, 2012 28 14
When is a Royalty Audit relevant? Whenever there is a licensing or royalty agreement in place Perform a risk assessment on the population of Franchisees and Licensees to determine who to audit. Areas of risk include but are not limited to: Contract Complexity Volume Royalty Rates Minimum Payments Changes to a Licensees Business Late Payments Experis Finance Tuesday, November 6, 2012 29 Benefits of a Royalty Audit Assess and evaluate processes and controls for: Revenue cycle Royalty calculation Supply chain cycle Inventory management Royalty obligations accuracy, completeness and payment timeliness Interest penalties on late royalty payments, guarantee payments etc. Advance and guarantee payment compliance Advertising, marketing and promotion expenditure obligations Compliance with exclusivity agreements Insurance requirement obligations License territories Experis Finance Tuesday, November 6, 2012 30 15
Common Findings Unreported sales Royalty bearing items are not included in royalty calculations as a result of system and/or human error Licensees do not apply the greater of the unit cost or net sales percentage when calculating royalties Licensees do not reconcile sales to the general ledger and/or financial statements on a Licensor basis Licensees do not comply pywith advertising, marketing and promotion, and investment requirements Licensees do not comply with insurance requirements Experis Finance Tuesday, November 6, 2012 31 Royalties Case Study Critical Need: Organization identified a need to perform licensing and royalty audits due to a significant increase in the population of licensees over the past two years. The organization s staff was not able to effectively monitor licensing payments and validate compliance with the terms and conditions of licensing contracts. Audit Provided: Audit performs a risk assessment based on the total population of Licensees. Audit reviews both quantitative factors (dollars, volume, etc.) and qualitative factors (complexity of contract, past audit performance, change in business model, etc.). Audit develops contract abstracts and an audit program based on the terms and conditions of the licensing agreements. Audit conducted reviews over the course of a year to ensure compliance with the terms and conditions of the contracts. Results: Audit may identify monetary findings from underpayment or non-compliance with contract terms. Areas of underpayment or non-payment included: royalties, interest, advance compensation, advertising and other areas of non-compliance that include insurance. In addition the organization is provided with a blueprint to assist in future contract development and negotiation. Audit also identifies control weakness at both the Licensor and Licensee that contributed to the issues listed above. Experis Finance Tuesday, November 6, 2012 32 16
Wrap-up Assess risks before embarking on a contract compliance initiative Consider the impact this review will have on customer and supplier relations Design a solution that fits your organizational needs and culture There is no such thing as too much planning or communication Ensure your methodology embraces the life cycle of the product or service that is under review Address the root cause, not the symptoms Executive sponsorship, oversight and ongoing monitoring is critical Experis Finance Tuesday, November 6, 2012 33 Questions George Albarelli Director, Risk Advisory Services george.albarelli@experis.com John Fiore Director, Risk Advisory Services john.fiore@experis.com Chris Fejko Director, Risk Advisory Services christopher.fejko@experis.com Tarek Ibrahim Engagement Manager, Risk Advisory Services tarek.ibrahim@experis.com Experis Finance Tuesday, November 6, 2012 34 17
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