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Would clients pay a premium for media agency transparency?

The gloves came off last week in the ongoing dispute between U.S. advertisers and their agencies – as represented by their respective trade organizations, the Association of National Advertisers (ANA) and the American Association of Advertising Agencies (4As), respectively.  Here’s what happened:

  • On Thursday, 1/28, the 4As issued a list of “Transparency Guiding Principles of Conduct” which “outline recommended behaviors to inform Client and agency agreements”.
  • The ANA reacted immediately, criticizing the content itself as well as the timing of the release. The ANA’s investigatory task force on agency transparency is in process, and the organization felt that release of the principles prior to findings from the task force (anticipated this Spring or Summer) was premature.
  • Further, the ANA took exception to the 4As’ inclusion of certain ANA member companies listed in the “Working Group” acknowledgement at the end of the document, pointing out that their inclusion in the document implied endorsement of it. Reference to these companies has since been removed.
  • The ANA went on to release a hotline and website soliciting confidential feedback from industry executives with relevant insights into the media agency transparency issue.

This situation has been intensifying since former Mediacom CEO John Mandel alleged that U.S. media agency rebates, kickbacks and other incentives were widespread at a March 5, 2015 ANA conference.  An article later that same month in Advertising Age seemed to confirm this.

  • Many of the major agency holding companies were quick to refute this, stating that they do not receive rebates or kickbacks – at least not in the U.S.
  • Dozens of the largest U.S. advertisers put their media accounts in review in 2015, and many experts cited these transparency issues as a potential driver.
  • The ANA and 4As announced a joint task force on April 24, 2015 to investigate media transparency allegations, led by executives from the world’s largest global advertisers and agency holding companies.
  • Despite the formation of this task force, the ANA issued a request for proposal on June 18 for third party consultants to investigate media rebates. On October 20, the ANA announced the launch of its investigation, identifying several vendors to assist in its execution.
  • The groups continued to work together on transparency guidelines, but reached an impasse in December over whether to publish a preliminary draft of the guidelines. There was still disagreement on the content and purpose of the guidelines themselves, as well as the timing (i.e. in advance of the findings from the ANA investigation).  The 4As apparently decided to move forward on publication, and did so last week – without the ANA’s endorsement.

Some Big Questions

The answers to several key questions will determine in the coming months how this ultimately plays out for advertisers, agencies and the U.S. paid media supply chain at large.

1.  What will the ANA’s investigation find, how definitive will the findings be, and how broadly will they be accepted by both sides and by the industry at large?

The vendors hired by the ANA are to interview key industry players and review documents in an effort to shed light on the allegations of rebates, kickbacks and other lapses in transparency.  The inquiry is tasked with “demystifying the landscape to provide a clarifying perspective on the state of transparency,” according to ANA President-CEO Bob Liodice.

The ANA has been understandably tight-lipped with respect to who will be interviewed, what they expect to be revealed, and what access they have been or will be given to agency and vendor documents and financials which would seem essential to answering the questions at hand.  Agencies and their holding companies have an incentive to put the issue to rest, but only if there truly was no issue to begin with (which of course is the question in the first place).

Interviews with key players may be enlightening, but only if their conclusions can be documented and validated.  Similarly, reviews of financials can only be conclusive if a wide enough net can be cast, allowing broad and unprecedented global access to arrangements between holding companies and their vendors.

This is not a situation where a U.S. agency makes a purchase with a U.S. vendor, pays for that purchase, and then receives a check back from that vendor.  Kickback!  Rebate!  That would be too easy.  The Ad Age investigation referenced complex deals in which global holding companies working with global media vendors receive consideration for U.S. deals via quid pro quo to foreign entities (also owned by the holding company) in completely unrelated businesses.  Similarly, opaque markups by agency trading desks and similar entities will be very, very difficult to break into their component parts.

The ANA’s position that the jointly-written principles of conduct should be informed by the results of the inquiry is a reasonable one.  It remains to be seen, however, just how conclusive the findings of the industry assessment will be and just to what degree they can adequately inform any jointly agreed principles.

2.  Will advertisers and agencies be able to agree on transparency guidelines, and will agencies permit specific contract language surrounding transparency to be included in these principles?

Aside from the timing, the ANA’s other major objections to the transparency principles as released by the 4As had to do with the clarity and forcefulness of the language, as well as the idea that the wording (once finalized) would become a template for transparency clauses in contracts between advertisers and agencies.

The ANA has a point.  On the one hand, the principles as released by the 4As do say that the “default principle in all client/agency relationships where the agency is agent and the client is principle is full disclosure and full transparency in media planning and buying, unless there is an exception that the client has agreed to in advance and is covered by a separate agreement.“  The document goes on to say that “Rebates and other non-transparent incentives on U.S. media spend are not accepted industry practices in the United States.

”However, the principles as released by the 4As go to some length to point out that “The agency, (agency group and holding company) may enter into commercial relationships with media vendors and other suppliers on its own account, which are separate and unrelated to the purchase of media as agent for their clients.”  As written, the language states that ”the agency may consider such relationships confidential and commercially sensitive.

In these cases, the agency would disclose “on a confidential basis to the client, the general type of commercial relationships and explain the controls and procedures it has in place to ensure that these relationships are on an arm’s-length basis.”  The document goes on to stipulate (as guiding principles) that with respect to relationships of this nature:

  • They should be “kept separate and do not promise or commit to client spending”
  • It should be “clear that the agency’s commercial transactions do not influence communications and media planning and investment recommendations for the client, which should be done on behalf of the client and according to the client’s stated objectives”
  • Where the agency “recommends any proprietary media (including pre-owned agency inventory) on a media plan, it should be disclosed as such, and if approved by the client, it should be documented with an opt-in agreement”

The question here is, how do you assure that the agency is acting in the client’s best interest?  Because they say so, in their trade group’s guiding principles?  The ANA is right to be pushing on this.  Otherwise, it is really no different than the now all-too-infamous situations where Wall Street banks have found themselves in positions where their responsibilities to their clients and their interests in various other “separate commercial relationships” were at odds with one another.  Wall Street isn’t the ANA’s problem.  But the marketing budgets of their member companies most certainly are.

3.  Finally, how do you give all of this teeth?

It is one thing for the two sides to agree on guiding principles with respect to transparency (which, as we’ve seen already is no slam dunk) and it’s yet another entirely to make any such agreement actionable and enforceable.  This requires not only agreement on the expectations themselves, but upon things such as contract language and audit rights.

As currently written, the 4As principles are not even positioned as universal.  “They do not represent mandates – but recommended courses of action.”  The ANA has expressed a desire that any final agreement include specific language that could be incorporated into client/agency contracts.  The 4As have thus far demurred.“The advertiser group [the ANA] sought to go beyond developing guideline language into prescribing contract language; the 4As believes that should be left for discussion between individual agencies and clients and does not believe that is the role of an industry trade organization,” the 4As said in a statement.

Let’s set aside whether or not it is the role of an industry trade organization to attempt to protect its members from opaque selling practices and potential conflicts of interest by its agents.  It seems pretty reasonable, but let’s just let that sit.Regardless, this is a tough one.  Really tough.  Can the two organizations agree on expectations that fully protect both sides?  Does such a thing exist?  And in the event that they somehow can, does the level of transparency required to enforce such commitments exist?  Can it?

For a variety of reasons (including increasing pressure from clients on fees), agencies and their holding companies find themselves in multiple businesses that extend far beyond the traditional principal/agent paradigm.  Unquestionably, there exists the possibility that the objectives for these disparate businesses may come in to conflict with one another.  Given the complexity of these organizations (and the equally complex nature of the media sellers with which they do business), is there a level of transparency which would exhaust the possibility for opaque incentives?

Transparency As Competitive Advantage?

Suffice it to say, the two organizations have a difficult year ahead of them in trying to iron this out to the satisfaction of both.  Given the various pressures in place, and the current nature of the media supply chain, the question is … can they?

And if not, how important is this issue to specific advertisers?  Are there advertisers out there who would select an agency to act as agent if that agency were in no other business?  If there were an opportunity to work with a world class agency that removed all potential conflicts and other opaqueness from its business practices, would advertisers flock to it?  Further, would they be willing to pay a premium for full transparency?

If such an agency were to exist or to emerge, it would need to be compensated to a degree that it were incented to remain only in the principal/agent business.  All of its margin would need to come from that business.  If there were one or more agencies with good enough offerings, who worked for premium fees in return for total and complete transparency, and no conflicts, could they make a go of it?

Advertisers are paying premiums for “viewable” impressions.  Forget whether they should have to.  We shouldn’t have to pay premiums for aisle seats on airplanes, either, but we do.  Perhaps true, absolute media agency transparency, from a best-in-class provider, would be worth a premium as well.

If you enjoyed this post, you might also like “What's Next for Ad Industry as ANA Media Transparency Results Roll Out?”.

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