How to Prevent Fraud in Production Bidding

Advice from the DOJ

Back in 2002, the U.S. Department of Justice Antitrust Division secured convictions that led to prison time for six executives in the Grey Worldwide / Color Wheel bid-rigging scheme. Rebecca Meiklejohn, a DOJ litigator, led the case which involved kickbacks and bid-rigging for production work on two of Grey’s largest accounts, Procter & Gamble Co. and Brown & Williamson Tobacco Corp. (Note:  Grey was not the only agency that’s had isolated cases of misconduct by production staff.)

While speaking at the Association of National Advertisers’ Agency Financial Management conference back in 2005, Meiklejohn stated that it tends to be individuals within an agency that perpetrate these production related frauds despite any policies and best practices that agencies have in place. At the time, Meiklejohn recommended advertisers and their agencies require and enforce the following procedures to prevent procurement fraud:

  1. Competitive Bidding – all bids must be secured in writing with date stamp and prior to submitting bids to the client
  2. Conflict of Interest Policies – these need to be well defined and prohibit agencies from accepting any gratuities from suppliers
  3. Paper Trail – thorough production files must be maintained and include all original as well as revised bids and client authorizations, and all with date stamps
  4. Checks and Balances – agencies must have separate authority for awarding contracts from those approving supplier invoices, and clients must beware of telltale signs of improprieties, such as faxes without date stamps
Production Bid Management Challenges in the Digital Age

At Bajkowski + Partners, we’ve performed numerous process audits for clients that have included reviews of production management practices and we still uncover deficiencies within both the clients and their agencies. While we have not uncovered situations that indicate any intentional wrongdoing, we have seen several new production bid management challenges arise since production management went digital.

At the agencies, we typically find the following issues during a process and contract compliance audit:

  • Scattered Production Records – back in the days of date stamped faxes, agencies maintained paper “job jackets” which held all paperwork, including original and revised bids, in a single file (usually a large manila envelope). Fast forward to the digital age, bids are typically emailed between suppliers and agencies, and it is incumbent upon the agency producer to properly file such bids and signed authorizations into a digital folder set up for a given production job. Printed back up is not always consistently retained, and often other components of the production job are not always kept in the same digital file. So when a production audit is performed, it can take the agencies weeks to pull together the job components.
  • Missing Production Records – signed client authorizations are often missing for revisions to the original approved estimate and, particularly for video and radio production, revised costs were conveyed and client approvals were received in an email communication rather than a formal estimate. A bad habit we all have is adding non-related content, such as bids or authorizations, to an existing email thread rather than starting a new email with a well defined subject line, making finding those missing documents that much more difficult. Hence, these often don’t make it into the digital production job file.
  • Bypassing Production Protocols – while the digital age has enabled agencies to apply better controls around production management, it isn’t foolproof. There are numerous ways to get around the digital production management tools deployed by agencies, but the most common gaps we find are 1) single bidding on work that should have multiple bids and 2) no formal estimates provided to and signed by clients for revisions. The most common excuse for single bidding jobs when client contracts require multiple bids are typically about “time crunch” – in other words, the agency believed they could not obtain multiple bids for a job given the rapid turnaround required by the client. This was also the same excuse when formal revised bids were not provided despite an escalation in costs beyond the original estimate contingency. Occasionally we come across agencies providing bid comparison sheets or estimates to clients without attaching copies of the actual third party bids as backup.
  • Incomplete Contract Requirements – we’re still amazed when we review client-agency contracts and find critical production management clauses missing, vague or incomplete, even around bidding requirements. We also manage several agency reviews and contract audits each year, and this is always an area of friction when working to bring clients and their agencies to workable and prudent production management terms. These terms are the requirements that both agencies and client staffs need to have as well as understand so that both parties are in compliance. And as agencies have created sophisticated video production studios or decoupled production services altogether as a separate dba, this former agency department is now a third party entity that can operate outside any contract loopholes.

For clients, the two biggest challenges are ensuring that contractual production requirements are understood and enforced by those who manage and approve such work, and not pressuring the agency staffs to engage in practices that violated production procurement and management best practices.

Production Procurement Requirements for the Digital Age

We work with clients to instill best practices into their agency contracts and processes, and here are a few of our key recommendations to prevent production bidding fraud and mismanagement:

  1.  Production contract clauses are current, comprehensive, and periodically reviewed – you should always have a master services agreement or contract that 1)has clear language around all forms of production management, including bidding and invoice reconciliation processes, authorization requirements, and production job recordkeeping mandates; 2)address how many competitive bids are required for various types of jobs and when single bidding is allowed (if at all); 3)defines a conflict of interest policy including blind-bidding protocols when the agency is competing for production services against outside resources; 4)prohibit gratuities or pay-to-play between suppliers and agency as well as client staffs, and place dollar limits on (or prohibit altogether) gifts, including meals and outings; 5)requires written production process manuals that are shared with client and agency staffs; and 6)has an expiry date (e.g., within three years of execution date) to force review and updating of terms.
  2. Distribute all policies cited in the contract – even when client-agency contracts refer to specific policies rather than being detailed in the contract, including conflicts of interest terms or production management processes, more often than not the disclosing party never distributes those policies to the other party. And even if they do, they don’t always get disseminated to those who have to execute. Yes, these documents are confidential but people can’t adhere to policies they don’t know and not every client contract requirement is the same.
  3. Production management training of both client and agencies staffs – if your teams don’t know or understand the terms of the client-agency contract and any addenda such as specific policies and procedures, then the chances of finding compliance gaps are that much greater. There should also be periodic training updates. With busy schedules, we’ve found that “lunch and learns” are a great inducement to get people to show up to training sessions.
  4. Periodic auditing of production processes and actual production jobs – this is the best means of determining where there are deficiencies and discouraging bad habits. To be both fair and comprehensive, a third party service that performs production process and production job audits should be engaged to audit the client and not just their agencies. More often than not, there are compliance gaps on both sides. The frequency of such audits will depend upon the level of production spend, variety of production work (digital, broadcast, print, etc.), and number of agencies.

While mistakes are going to happen, they should be a rare exception and not the norm. You know that adage about an ounce of prevention.

Lately marketers and procurement staffs have been focused on agency transparency around agency compensation and media buying, but production should also garner regular scrutiny. And agencies need to do a better job of self-policing.

 

Bajkowski + Partners LLC is a leading consultancy providing services to marketing and procurement teams in the areas of agency relationship management, agency search, process audits, contract and SOW development and audits, and a number of other marketing resource and marketing operations related areas. For more information, please visit our website.

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