SIG Speaks to Patrick Gahagan, Director of Contract Compliance Audit Services at SC&H Group

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As a Director in SC&H Group’s Contract Compliance Audit Services practice, Patrick has a few key professional motivations with all of his clients: increasing third-party transparency, optimizing supplier relationships, and improving governance. He works with Fortune 100 companies to evaluate contract compliance in categories such as marketing and advertising, contingent staffing, facilities management, construction, computer hardware/software, MRO, security, events, and office supplies. Projects under Patrick’s leadership have resulted in client savings of over $150 million in addition to practical control developments, valuable process improvements, enhanced earnings, and proven cost-savings initiatives. He is very passionate about helping to influence the operations and cultures of global enterprises, and one of his greatest professional achievements was being able to hand over a $1 million recovery check to his client. 

Patrick will share his expertise with attendees at the Western Regional SIGnature Event in Bellevue, WA on May 16th. 

 

Your presentation at the Western Regional SIGnature Event has to do with contract compliance and transparency when procuring the services of marketing and advertising agencies—why is this an important topic to address?

 Marketing and advertising have the potential to significantly enhance enterprise value by increasing sales, enhancing brands, and effectively communicating with stakeholders. Given the magnitude of this work, it’s imperative to get ahead of (or address) any potential non-transparent practices—recent reports from the Association of National Advertisers have highlighted a prevalence of transparency challenges. Many procurement departments are worried that earned trust and accountability have been replaced with blind trust and familiarity. They wonder whether their agency relationships have solid foundations and they are not sure how to how figure out if current trust levels are warranted. Since these agency relationships are sensitive and often managed at very senior levels, it’s important that marketing and procurement are on the same page. 
 

What are some of the risk areas in marketing contracts that are often overlooked?

The main areas of risk revolve around creative, production, media and events.   
 
With creative, it boils down to the fee paid to the agency and how that fee is derived. Many companies use retainers, but there is a lot of variance in how those retainers are structured and managed.   
 
Production and media are usually pass-through expenses, so a lot of the risk is around reconciliation to actual and whether that happens in a timely manner. Everyone knows that media credits arise, but not many people actually understand the mechanics of those transactions and how to trace funds from media orders to post-buys. Rebates are another issue that can be murky for advertisers. With many agencies owned by agency holding companies, there are also risks around inter-company pricing and subcontracting. The corporate structure of some of these enterprises lends itself to non-transparent practices. 
 
Events are a unique situation, but it is similar to production in the sense that there is a large amount of pass-through expense happening through the agency, often without a lot of transparency. 
 

What are some of the processes and controls that can be implemented to mitigate these risks?

 
The keys are awareness and defense in depth. There is no one process or control that will prevent every error. However, building a compliance framework that recognizes the risks and addresses them proactively at each stage of the process will greatly reduce the probability of significant issues.   
 
Awareness starts by simply having open discussions with agencies during the RFP process and contract negotiations. Understanding which contract clauses raise the risk of non-transparent practices will help organizations make more informed decisions during negotiations. It’s not to say that every company will be able to negotiate the optimal contract – everyone’s leverage is a little bit different and some companies will have to accept a higher level of risk and manage it accordingly. 
 
After the contract is executed, it’s important for the organization to be aligned on where responsibilities for compliance will be assigned. One of the common things we see is that each stakeholder makes assumptions that are not always accurate. Marketing thinks Procurement is checking the invoices against the contract prior to payment. Procurement assumes Marketing is collecting rebates and media credits. Everyone assumes that Accounts Payable and internal audits are double-checking everyone’s work. The truth is that a lot of invoices are getting paid without any compliance check as long as campaigns happen and work stays under budget. 
 
Periodic audits can be an excellent stop gap or last line of defense, but they should not be the primary compliance tool. Those controls should really exist at the operating levels in Marketing. 
 

What advice do you have for people who are negotiating complex contracts with agencies and keen on getting ahead of any potential conflicts?

Make sure that Procurement and Marketing work together. Effective marketing and cost-effective, transparent transactions are not mutually exclusive. Organizations should insist on transparency from agency partners. There are also some fantastic resources put out by the Association of National Advertisers including suggested contracts, audit clause language, and many other resources.   
 

You specialize in third-party transparency, supplier relationships and improving governance. How did you get involved in this area?

About 15 years ago, we heard our clients talk more consistently about their challenges engaging effectively with internal marketing stakeholders. They saw value potential and were frustrated by the difficulty of applying traditional procurement practices to the engagement of marketing agencies. They had worries that suppliers were not diligent about complying with agreed pricing, and that invoice approvers in Marketing were stretched thin and not necessarily reviewing invoices carefully. 
 
Since marketing was not an area of expertise for us at the time, we hired a marketing consultant to teach us how the business operated. We learned technical skills such as how to properly complete a post-buy analysis, and over time we learned the language of marketing and media. We also got to know most of the big agencies and built a reputation for conducting objective, factual audits that enhanced agency relationships. Once we had credibility in the marketing space, it became much easier to facilitate conversations between our procurement clients and their marketing stakeholders.   
 
At the Western Regional SIGnature Event in May, Patrick will present on how to avoid the “Madison Avenue shakedown” for buyers looking to procure marketing and advertising services. Regional SIGnature Events are powerful one-day meetings in which buy-side practitioners benchmark with other organizations and network with colleagues facing similar issues. To learn more about attending and see who else is presenting, visit our website
 
 
Heather Schleicher, Senior Marketing Director

Heather Schleicher, Senior Marketing Director at SIG, has more than 15 years of experience in business and marketing with organizations ranging from independently owned franchises and small businesses to $12B international enterprises. Prior to joining SIG's leadership team, Heather served as Senior Marketing Manager where she was responsible for creating, executing, and supporting SIG’s marketing strategies across all regions and lines of business. Before joining SIG, Heather led digital marketing initiatives for outsourcing, recruiting and workforce management provider Allegis Global Solutions. Previously, Heather managed the marketing department at a contracting consultancy in Washington, D.C.

Heather is actively involved with local and national non-profit organizations. She was the spokesperson of a two-year nationwide campaign to bring home missing persons and teach safety education and prevention. Heather has a BS in Corporate Communication from the University of Baltimore.