The study, carried out by K2 Intelligence for the Association of National Advertisers (ANA) in the US, found evidence of a “fundamental disconnect” in the marketing industry regarding the basic nature of the advertiser-agency relationship”.
It says that senior executives at agencies are aware and regularly mandate controversial practices that are often not disclosed to clients. These include cash rebates, rebates as inventory credits and ‘service agreements’ for non-media services such as consulting or research.
Out of the 150 sources interviewed for the report, 117 were involved in the media-buying space with 34 reporting that undisclosed rebates existed. Yet despite this, the ANA has refused to name and shame guilty parties, insisting that “following the money trail” was “not part of its mandate”.
Key findings from the ANA report:
- Cash rebates from media companies were provided to agencies with payments based on the amount spent on media. Advertisers interviewed in the K2 Intelligence study indicated they did not receive rebates or were unaware of any rebates being returned.
- Rebates in the form of free media inventory credits.
- Rebates structured as “service agreements” in which media suppliers paid agencies for non-media services such as low-value research or consulting initiatives that were often tied to the volume of agency spend. Sources told K2 Intelligence that these services “were being used to obscure what was essentially a rebate.”
- Markups on media sold through principal transactions ranged from approximately 30% to 90%, and media buyers were sometimes pressured or incentivised by their agency holding companies to direct client spend to this media, regardless of whether such purchases were in the clients’ best interests.
- Dual rate cards in which agencies and holding companies negotiated separate rates with media suppliers when acting as principals and as agents.
- Non-transparent business practices in the U.S. market resulting from agencies holding equity stakes in media suppliers.
What marketers should do
The issue of rebates is a controversial subject among marketers. In the UK, ISBA has claimed that global media holding companies such as WPP, Publicis and Havas have increasingly been generating profits through controversial business practices that are not visible to their clients. Subsequently, in April, it launched a new contract providing marketers with a framework for negotiating with agencies.
Debbie Morrison, ISBA’s director of consultancy and best practice, says the ANA report shows the “naivety” of the client community, which trusted their agencies to act in their best interests and therefore failed to update their terms.
“ISBA’s template terms for media agency services and this report will make marketers smarter and savvier when it comes to contract negotiations with their agencies. Helping them understand and navigate through the quagmire that is the online advertising industry. This will certainly go a long way towards holding agencies to account and restore the trust that this report will surely have dented,” she says.
And Bob Liodice, CEO of the ANA, said today’s (7 June) report proves that many agencies are now profiting from the rise of digital advertising.
“Whether acting as agency or principal, vast changes in technology, the complex digital supply chain, and the proliferation of media outlets has provided agencies with additional opportunities to increase their profit margins beyond agency fees,” he explained. “This has led to disconcerting conflicts of interest and a lack of transparency.”
To combat this behaviour, the ANA has recommended marketers do the following:
- Re-examine all existing media agency contracts and meticulously review all terms and conditions. As appropriate, use an expert, independent third party to provide insight and contractual expertise to optimise transparency, upgrade reporting and analytics, and substantially expand audit rights if necessary.
- Implement media management training, particularly in the areas of contract development and management of the digital media supply chain.
- Confirm and reaffirm the basis on which your media agency is conducting your media business. Be critically clear and comfortable with the agency’s role as agent and principal. Ensure there are no conflicts of interest, and that there are clear processes in place for resolving conflicts that might emerge.
- Assess whether contract terms permit you to “follow the money” by having full accountability for every dollar that is invested with a media agency. It is recommended that audit rights cover not only the media agency but the holding company and any affiliated companies that touch your business.
Marketers, not just agencies, are to blame
Speaking on a press call today (7 June), K2 Intelligence’s executive managing director Richard Plansky said the blame cannot solely be placed on the heads of agencies. He said marketers must also step up to the plate.
He added: “There is a responsibility for marketers to do more, not just agencies.
“Marketers need to be tighter on their agency contracts, have better training to increase their knowledge of the digital media supply chain and take more responsibility.”
Richard Plansky, executive managing director, K2 Intelligence
The World Federation of Advertisers agrees advertisers must take the lead but is calling for cross-industry collaboration to help resolve the issues: “Advertisers should take the lead in addressing the challenge but WFA also believes in, and calls for, global cross-industry collaboration to find answers. That’s why we have been conducting systematic dialogues between media agencies and clients around the world to better understand the issues and ultimately try and engender greater trust in the marketplace,” says CEO Stephan Loerke.
Perhaps as expected, agencies have criticised the report. Publicis’ CEO Maurice Levy called the ANA study “an unwarranted attack on the entire industry’.
Levy added that it was “shocking” that the ANA would put out a report that doesn’t name specific companies and makes “broad unsubstantiated and unverifiable assertions of unethical behavior against some or all advertising agencies.” He also said that the claims have the “potential to cause great financial and reputational damage” to the ad business.
However, Plansky has defended the ANA’s position. He countered: “From the start, this has been a study designed to shed light on certain non-transparent pratises in the media-buying landscape – not an investigation or an audit. At the ANA’s insistence this has never been about pointing a finger at any individual or company.”