Sweeping up the over-trading mess

The messy business of agencies over-trading with TV contractors has often been swept under the carpet, and small companies tend to be the ones to lose out. But the practice can’t go on for much longer, argues Paul Prince. Paul Prince is joint

For the second year running, an unnamed agency has found itself over-traded with TV contractors (MW August 2).

It is a situation that is always swept under the carpet by both agencies and TV sales houses. The Incorporated Practitioners in Advertising’s official view is that it should be left to the parties concerned to sort out any problems in private. But as one agency sorts out its trading, another falls foul; the problem is fairly widespread and shows no sign of solving itself.

For advertisers, it is crucial to understand what the problem is and how it comes about.

Put simply, it is the sting in the tail of the “buying clout” argument that so many large agencies claim as a major benefit to their clients. It all started many years ago when major TV buying centralisations took place. Agencies sold themselves on the basis of their buying muscle, that is agency deals, where a media owner agrees to the same discount for all the clients of a particular agency after being guaranteed a certain level or share of its TV spend.

The buying clout argument has been used successfully as a marketing ploy by many large buying points and has attracted both large and small accounts as a consequence.

But this means of winning business has some fundamental flaws. No agency can negotiate terms for business until it has won it and existing agency deals are for existing clients only. Media owners would be mad to allow it to be otherwise.

Discount prices promised by agencies in pitches are effectively nothing more than a “punt” or – and this is where it gets interesting – based on bamboozling TV contractors with their estimates of how much their clients are likely to spend on existing accounts for the following year. This leads to the agency becoming over-traded by gaining higher levels of discount than its actual expenditure qualifies it for.

The agreed level of discount then becomes a false benchmark price that is used to attract new advertisers.

In the past, over-trading by agencies was not a problem, because TV contractors often got themselves equally over-traded by selling more audience and airtime than they had available. This allowed deals to cancel each other out and agencies got away with it.

But in 1993, things changed. Yorkshire Tyne Tees found itself massively over-traded and owing agencies 15m after trying to move money forward from the coming financial year and underestimating the length of the recession. The overdealing crisis cost Yorkshire’s chairman and chief executive Clive Leach his job and contributed to the demise of the ITV sales house MAS. With that experience behind it, ITV has worked hard to put its house in order.

ITV should now want payback. It hasn’t over-traded to any great extent lately, so no compromise should be available. Channel 5 is just around the corner and, as the major player, ITV will be keen to demonstrate its muscle.

So who is going to pay the debts back? Not the agencies – the debts are in the millions.

Perhaps the large advertisers, attracted by the original discount, will pay back? This is highly unlikely. The media controllers employed by larger clients make a career out of scrutinising their advertising costs to the last penny. Media controllers would have procurement breathing down their necks if a buying system they endorsed was found to be flawed.

The losers have to be the smaller clients who have also been attracted to this so-called buying clout. Smaller clients tend to be less sophisticated because they have proportionally less of their time to spend on media matters and are therefore vulnerable to the sort of agencies whose sharp practice has caused this mess in the first place.

Perhaps the role of media auditors should be considered within this issue. Many centralisations and pitches involve media auditors who presumably provide clients with agency benchmark prices as part of their evaluation procedures.

If prices are found to be inaccurate, because of agency over-trading, then surely media auditors will want to investigate the situation. After all, auditors want to ensure that information supplied to clients is as informed as possible in order to maintain long-term client relationships. It is in their interests to highlight this issue and the effects it has had or will have for their client’s campaigns.

If the auditor is of sufficient size it could also provide clients with useful indications of when agencies are in danger of over-trading, as they have enough information to spot when something isn’t quite right with an agency deal. Auditors can also help smaller clients to track their performance year-on-year and spot any inconsistencies that may arise.

It is unlikely that this issue will be swept under the carpet this year. This is a cancer that television companies cannot allow to continue, particularly as it is some of the larger agencies that are culpable of a practice that is ultimately dishonest.

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