Report Finds Fundamental Disconnect In Advertiser-Agency Relationship, More Oversight and Transparency Needed
NEW YORK, NY — Let the finger-pointing begin. The Association of National Advertisers (ANA) has released a study that found pervasive conflicts of interest, including kickbacks, across the entire media buying ecosystem. Evidence of non-transparent business practices were found across a wide range of media, including digital, print, out-of-home, and television.
The study, released today by the ANA in conjunction with K2 Intelligence, revealed that the behavior was systemic—involving senior executives across the agency ecosystem—and that the practices were often mandated. Contracts for rebates and other non-transparent business practices were negotiated and sometimes signed by highest-level agency executives. In addition, the study found evidence of problematic agency conduct concealed by principal transactions.
“Advertisers and their agencies are lacking full disclosure as the cornerstone principle of their media management practices,” said Bob Liodice, president and CEO of the ANA. “Such disclosure is absolutely essential if they are to build trust as the foundation of their relationships with their long-term business partners.”
K2 Intelligence’s An Independent Study of Media Transparency in the U.S. Advertising Industry, was conducted from October 2015 through May 2016, reveals “evidence of a fundamental disconnect in the advertising industry regarding the basic nature of the advertiser-agency relationship.” In general, advertisers expressed a belief that their agencies were duty-bound to act in their best interest. Meanwhile, many agency executives interviewed said their relationship to advertisers was solely defined by the contract between the two parties.
According to the ANA, the goal of the study was not to embarrass or accuse any individual or corporate entity of malfeasance. This directive informed K2 Intelligence’s fact-finding approach, so sources, including individuals, and corporate entities are described in the report, but not named. The report included detailed source accounts from dozens of confidential, personal interviews as well as documentary evidence.
Meanwhile, agency executives are firing back, in an article in the Wall Street Journal, Maurice Levy, chief executive officer of Publicis called the study “unfair and an unwarranted attack on the entire industry.” Mr. Levy said that it is “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 said that the claims have the “potential to cause great financial and reputational damage” to the ad business. In addition, WPP, Interpublic and Omnicom, responded to the report in an article in Advertising Age.
Holding companies are well known for squeezing every dime in revenue that they can from their agencies to maximize returns for their shareholders, however, this can create a catalyst for conflict. Some of the blame also rests with media suppliers who provided incentives to agencies. According to the 58-page report, media suppliers proactively established incentive programs designed to encourage agencies to direct a greater amount of spend toward certain types of ad space.
The K2 Intelligence report indicated that non-transparent business practices employed by agencies, some of which may or may not have been contract-compliant, included the following:
- 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 percent to 90 percent, and media buyers were sometimes pressured or incentivized 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.
While the report indicates that some contracts between advertisers and their agencies allowed the agencies to engage in non-transparent business practices, transparency and contract compliance were clearly not one and the same in media buying. Even if a particular non-transparent practice was permitted by contract, advertisers were often deprived of relevant information for optimum decision-making.
Accordingly, K2 Intelligence focused on bringing to light non-transparent practices throughout the media-buying ecosystem, even if those practices were contract-compliant. In fact, the study revealed that, in many cases, advertisers were unaware of details in their agency contracts that addressed the issue of transparency, particularly because some contracts had not been reviewed or updated in as long as 10 years.
“The K2 Intelligence report unearthed a ‘fundamental disconnect’ between advertisers and their media agencies,” said ANA Chairman Tony Pace. “As media practices have become more complex, stewardship and oversight needs to become more precise, more thorough, and more fully transparent.”
Liodice indicated that a fundamental shift in the business model for media agencies over the past several years has created a challenging new media landscape for both agencies and advertisers. “Whether acting as agency or principal, vast changes in technology, the complex digital supply chain, and the proliferation of media outlets provided agencies with additional opportunities to increase their profit margins beyond agency fees. This has led to disconcerting conflicts of interest and a lack of transparency.”
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