Two years ago the ANA published a report about non-transparent practices in the US ad industry. Now investigators have been called in.

A ground-breaking report on transparency issues

The ANA Masters of Marketing conference is taking place in Orlando next week – an opportunity for marketers from some of the world’s most famous brands to come together to discuss the issues that matter most to them. One of those issues is transparency – which is particularly pertinent at a time when brands are grappling with a wealth of consumer data but increased regulation on how to handle it, and a rapidly changing media landscape.

A little over two years ago, our hosts in Orlando released a ground-breaking report on a study they commissioned into media transparency issues in the US advertising industry. The research, carried out by K2 Intelligence, revealed that non-transparent business practices were prevalent.  This was found to be the case in both agency holding groups and independent agencies, and across digital, OOH, print and TV. Rebates were a common form of this non-transparent practice: many agency representatives interviewed by K2 indicated that rebates passed to agencies by media owners were not passed on to or even disclosed to advertisers, and in some cases were even demanded by the agencies. K2 found that rebates ranged in value from 1.62% of aggregate media spend to 20% – potentially huge sums of money.

Rebates are difficult to avoid at a local level

Rebates, often known as agency volume bonuses (AVBs) are fairly common practice in many European countries and in China and Brazil, but are not standard procedure in the US. The issue of rebates is difficult to avoid for local clients who hold contracts with their local agencies: AVBs are often paid to agency holding companies overseas, which means that the local agency effectively has no power to offer complete transparency to their local client. The fact that auditors are only able to access local contracts means that they are often unable to solve the issue either. Furthermore, there have been rumours that rebates can take the form of ‘fees’ for ‘research work’ carried out or work given to other companies owned by the agency holding group, at high costs, meaning that the rebate is difficult to trace back to a specific advertiser’s spend.

Non-transparency has led to increasing distrust between advertisers and their agencies.

Non-transparency on the part of media agencies and advertising companies has undoubtedly led to increasing distrust between them and their clients. Digiday reflects they have reacted in two ways: those who are changing how they pay agencies to reward successful campaigns, and those who are struggling to find a viable alternative to the non-disclosed arrangement they have with their agency. Agencies’ margins have got tighter and tighter in recent years, so many have looked to non-transparent means as a way to increase company profits. Digiday notes that as a result, ‘advertisers in both groups are starting to realise that transparent relationships with their agencies cost money’.

Transparency comes with incentives for high performance

At ECI we look at it from a slightly different perspective: transparency shows the true cost of working with an agency. Hidden income not only conceals the real cost of working with the agency, but also means that the advertiser has no control over the service that they are paying for. This means that they cannot steer it by setting the right incentives to ensure the right quantity and quality.

Furthermore a non-transparent model means that the advertiser can’t understand how different kickbacks might influence the agency’s buying recommendations and decisions. We believe therefore that the model by which agencies are paid needs to be questioned: a transparent model should give the agency a higher official income, and there should be a clear, measurable incentive model overlaying the base fee, so the agency is rewarded for effective work. This leads to higher quality and more bang for your buck!

Some advertisers are bringing media activity in house

A measure that some clients are taking or seriously considering in order to increase their control over their advertising is bringing at least some of their media buying activities in-house. This cuts the middleman out altogether, saving money and eliminating transparency concerns. While there is a lot to consider and upfront costs can be high, with the right strategy, talent, technology and support in place, advertisers can reap rewards.

Federal prosecutors have opened an investigation into non-transparent practices

This summer, things stepped up several notches as it emerged that it is not just clients that have reacted to the ANA’s K2 report. As the Wall Street Journal published in September, federal prosecutors in Manhattan have opened an investigation into media buying practices in the advertising industry, particularly non-transparent ad buying practices and rebates paid to agencies by media outlets. Campaign noted that the FBI investigates white-collar crime, including ‘illicit transactions designed to evade regulatory oversight’ and ‘kickbacks’.

Despite the ad companies denying any wrongdoing when the ANA report was published, several are under scrutiny. This is bad news for the agency holding companies: The Wall Street Journal quoted an industry expert who noted that media-buying activity accounts ‘for the bulk of the profit growth for ad companies since the beginning of the 2000s’. Teamed with clients bringing media buying in-house and the challenges that come with an increasingly digital and fast-paced world, agencies need to transform their business models – quickly.

An opportunity to talk about how it affects your brand

There will be a lot to talk about and digest at the Masters of Marketing next week. ECI Media Management is offering marketers a complementary consultation on the ground where we can discuss how we could help you drive greater transparency and higher media value from your advertising investments – or any other issue that is important to your business. You can sign up here. If you won’t be at ANA, we’d still be delighted to offer you this complimentary consultation, just send us an email at value@ecimm.com.

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