Transparency, shared value, and avoidance of conflicts of interest: These are principles we hope that our business partnerships are built upon. Many were surprised when Jon Mandel, former CEO of MediaCom, publicly acknowledged that the advertiser-agency relationship was broken at a spring 2015 conference of the Association of National Advertisers (ANA), a leading trade body whose members collectively spend more than $250 billion in marketing communications and advertising.
According to Mandell, media agencies today “cross the line of acceptable conduct in a partnership…They are not transparent about their actions. They recommend or implement media that is off strategy or off target if it works for their financial gain.”
Separately, ANA Group Executive Vice President Bill Duggan has stated that he, “personally believes we’re living through the least transparent time for the media industry in our careers.”
Following Mandell’s stinging presentation, the ANA hired K2 Intelligence, a firm staffed with former federal prosecutors, investigative journalists, and intelligence operatives to examine the issue. Just over a year ago, K2 Intelligence released their findings on media transparency and the ANA published recommendations for how to improve advertiser-agency relationships. Ultimately, there are several lessons that we can take away from the reports as both advertisers and business partners.
Let’s break the two reports down into quick bites.
K2 Intelligence Report
K2 found four major areas of concern that were said to be pervasive and far-reaching:
“There is a fundamental disconnect in the industry regarding the basic nature of the advertiser-agency relationship”
Advertisers often view their agency as their “agent” who is acting in the advertiser’s best interest. However, agencies often view themselves as a vendor to the advertiser, believing their only allegiance is to their agency. This disconnect on the nature of the advertiser-agency relationship is the basis for conflict.
“There is substantial evidence of non-transparent business practices in the U.S. market in the form of rebates”
Publishers give rebates to agencies that buy media in bulk or in advance, but this rebate isn’t passed on to the advertiser. In fact, most advertisers were unaware of the discounts and didn’t even ask about their existence. As agencies and their holding companies continue to consolidate, the increase in bargaining power of the media buyer is of major concern (see Porter’s Five Forces).
In some cases, companies held under the same agency holding company as the advertisers’ agency of record provide services to publishers and collect ad rebates through service agreements with the adjacent company without disclosing the revenues to the advertiser.
“There is substantial evidence of potentially problematic agency conduct concealed by principal transactions”
Agencies and agency trading desks under the same holding company buy media in bulk and sell it back to advertiser clients—all without disclosing how the media was purchased, how much it cost, or the amount of inventory acquired. Rather than serving as an “agent” acting in the best interest of their client, agencies serve as a principal acting in their own best interest by basing sales on their own margins and financial interests.
“There is substantial evidence of non-transparent business practices in the U.S. market arising from agencies holding or soliciting equity stakes in media suppliers”
Agencies that hold equity stakes in publishers and other media suppliers have a clear interest in sending business to that investment. However, these financial interests are not always best for their client, and the client is often unaware that these conflicts exist.
The ANA Report and Recommendations
About a month after the K2 report, the ANA published their assessment of the K2 report and recommended three pillars for productively moving forward:
- “Advertisers should establish overarching media agency management principles that can be easily understood and executed”
- “Advertisers should establish primacy over the client/agency relationship. Advertisers should regularly re-evaluate and upgrade internal processes and practices”
- “Advertisers and agencies should have a uniform Code of Conduct to guide relationships and engender trust”
Both the K2 and the ANA reports make great recommendations, however, most of their points are high level. Several themes require a buy-in that seems improbable to many, but when boiled down we all can take steps to improve relationships and ensure that media budgets are spent wisely.
Prioritize value over cost
David Indo and Tom Denford of ID Comms refer to the race to the top and not the bottom in their entertaining and educational “Media Snack” YouTube series. In other words, the value an agency proposes should be the value that they bring to the brand (the top), not how cheaply they can buy media (the bottom). This is dead-on. If your agency’s message is or if you’re shopping for “the cheapest in the industry,” you are starting with a deeply flawed objective.
Agencies should be transparent about the cost of the media they’re buying and charge their client for the value that they are bringing to their firm. If an agency can buy media cheaply, that is certainly an advantage, but transparency about what allows the agency to buy their media so inexpensively builds the trust required to nurture strong, long term business relationships.
The ability to buy inexpensive media is becoming a point of parity for many of the large firms, but the focus for businesses looking to hire these firms should be on the total value it brings to the brand, not commoditization of agencies. Transparency will become a point of difference and a selling point for successful agencies.
Follow the money
There is no doubt that the advertising value chain is long and complex, but complacency is irresponsible and foolish. We talk to a lot of advertisers and brand managers and are still surprised when marketers tell us that they “just let their agency handle media buying” without a second thought about the details of how their advertising money is spent.
Last year, The Guardian bought media on its own site and found that only 30 pence of every pound they spent made it back to the publisher. If I presented a situation to my CEO where 70 percent of my cost added no value to my product, he would either have a heart attack or jump at the opportunity to optimize the process. So why all the shoulder shrugging when it comes to an advertising budget?
Ad tech has carved out a staggering chunk of the advertising value chain, and it’s no wonder why there are more than 5,000 companies vying for their chance to get rich. While there is no question that advertising targeting has made quantum leaps in the last two decades, there is also no doubt that some marketers are getting fleeced in the process.
For advertisers, if you’re not already working with your agency to understand where every dollar of your budget is going then it’s time to start asking questions.
For agencies, if you can’t answer the question of where every dollar of your client’s budget is going then it’s time to invest in processes and systems that help you do so.
Talk about the hard stuff
The advertising industry can learn a lot from Salt-N-Pepa’s hit “Let’s Talk About Sex.” The empowering group appealed to “talk about all the good things, and the bad things that may be.” While this may seem like a comical comparison, it is surprisingly relevant.
Advertisers need to address conflicts of interest, equity holdings, and publisher kickbacks. Agencies can no longer bury small, but important, details in legal contracts that marketers and procurement officers don’t have the time or resources to fully comprehend. Marketers need to become intimately familiar with the financial interests that drive agencies’ media buying decisions. Most importantly, advertisers need to mandate transparency and unrestricted audit rights.
If the secrets hidden behind non-disclosure agreements, holding companies, and audit restrictions add value to an ad campaign, then both agencies and advertisers should have no problem talking about them. If they don’t, then it’s time to take an honest look at agency practices.
Re-evaluate your processes and systems
There is something to be said for evaluating the systems that agencies and brands have in place to plan and buy media. One reason many advertisers outsource their media buys to agencies is that it is a time consuming and complex process. The absence of technological solutions to facilitate a consistent, streamlined planning process leads to time wasted wrangling spreadsheets and presentations instead of plotting strategy, setting goals, and optimizing performance.
Spending money on media transparency, control, and primacy are investments, not costs. The amount that many companies spend on media, taking control of data, cost, and truly measure performance can have a massive return on an investment in subject matter expertise. Building knowledge and understanding in media buying is the first logical step in regaining control over non-value-added expenditures. What’s more, agencies need appropriate compensation for the unmatched value that they create in copy, creativity, production, strategy, and optimization.
Managing and Monitoring Your Media Investments
Advertising is a complex and daunting world to live in. However, we cannot let complexity lead to complacency. Brands like P&G are getting fed up with the state of advertising, and are driving change as a result. Even a year after the reports, frustration from brands continues to rise, and the number of new entrants into the ad tech market indicates that there is still a lot of cleaning up to do.
Rather than waiting for these conflicts to force change, both agencies and brands must get ahead of the tide and take control of media planning and spending by demanding transparency and structuring your business to create value—not extract it. Advertisers deserve to know where their money is going. Agencies deserve appropriate compensation for the value that they create and not have to hide fees in non-transparent media buying practices.
Louis Brandeis famously quipped, “sunlight is said to be the best of disinfectants.” We agree. Bionic aims to be part of the solution with systems that enable you to manage and monitor your media investments through a simple, clean, and transparent interface. Please contact Jarett Berke at email@example.com to learn more about this initiative.