Earlier this month, a study published by the U.S. Association of National Advertisers (ANA) found that rebates and other non-transparent practices may be pervasive in the U.S. media advertising buying ecosystem. Michael Karg, Group CEO of Ebiquity, reflects on these findings and on the first steps advertisers are taking as they look to move forward with their media agency partners.

In June 2016, the ANA published a study conducted by K2 Intelligence titled An Independent Study of Media Transparency in the U.S. Advertising Industry. The K2 Study found compelling evidence of non-transparent, incentive-led media trading practices in U.S. media agencies which may be pervasive across the industry, including the big media agency networks.

These practices include cash rebates, rebates in the form of free media inventory credits, and rebates structured as so-called service agreements. They also include media sold to advertisers by media agencies acting in a principal capacity where material aspects of the transaction were not disclosed to the advertiser.

The K2 Study revealed a disconnect between how many U.S. advertisers see their relationship with media agencies and how many media agencies see their relationship with their clients. Many advertisers assume their media agencies act as agents and therefore effectively as their fiduciaries. The K2 Study describes many situations where this is not the case; where media agencies in fact act as principals and sell media to advertisers, and not as agents buying media on advertisers’ behalf.

What’s more, the K2 Study showed many media agencies may often see their relationship with advertisers as being essentially determined by contracts. Contracts have not, generally speaking, kept pace with the dynamic and rapidly changing nature of the increasingly digital media ecosystem. The K2 Study also identified that the contracts many advertisers have in place with their media agencies are inadequately enforced by advertisers. Some aren’t enforced at all, while others yet remain unsigned and may therefore be unenforceable.

The K2 Study suggested the factors believed by those working in the industry to have contributed most directly to these non-transparent business practices in the U.S. media industry include client pricing pressure, the increasing complexity of the media-buying landscape, and media agencies’ contractual limitation on audit rights.

To support the K2 Study, the ANA asked Ebiquity and FirmDecisions to develop guidelines and recommendations for advertisers. The full report, containing a list of detailed recommendations advertisers should consider for the short term and long term, will be released by the ANA in the coming weeks.

In the near term, that ANA has recommended that marketers should take the following steps:

•    Re-examine all existing media agency contracts and review terms and conditions

•    Implement media management training, particularly in the areas of contract development and management of the digital media supply chain

•    Confirm the basis on which media agencies transact media on their behalf. Advertisers should be clear and comfortable with the agency’s role as agent and principal

•    Assess whether contract terms permit advertisers to “follow the money” by having full accountability for every dollar that is invested through a media agency

“The K2 Study revealed a disconnect between how many U.S. advertisers see their relationship with media agencies and how many media agencies see their relationship with their clients”

 

Advertisers’ initial reactions

Since the K2 Study was published, we have spoken to a significant number of our advertiser clients keen to know how they should move forward in response to the findings. They have reacted in three ways. Bill Bruno, Ebiquity CEO for North America, explains.

First we have the Concerned. These are typically advertisers who have conducted financial compliance audits historically and are keen to ensure that they are continuing to evolve in a way that will protect their interests moving forward. They have read the K2 Study and are looking to take action to ensure that, if their relationships with their media agencies are not compliant with contracts or they are inequitable, changes are made – and fast. They recognize that not all issues will apply to all advertisers or contracts equally, and they are keen to be in the vanguard of improving agency/advertiser relationships.

Next come the Ready-for-Action. They recognize the practices identified by the K2 Study and are keen to address the nature of their relationships with their agencies or put them under increased scrutiny and analysis. The response from the media agencies (see below) has made these advertisers more inclined to take action than they had been before. Typically, these advertisers have not conducted financial compliance audits historically.

 And finally, we have the Wait-and-See. They realize and appreciate there may be an issue, but they are yet to decide what to do next. This group of advertisers have not spent time reviewing their media agency relationships in past years, nor have they placed a high priority on internal governance historically. Advertisers in this category looking to take action will have the longest journey to travel in order to secure the transparency some of them are now looking for.

Some advertisers, of course, will decide that the level of transparency they currently have is acceptable. However, all of those we have spoken to since publication have said that the K2 Study and its findings are relevant or important to them. All of them realize that they need to take positive steps to foster different kinds of relationships with their media agencies. And some have already reflected that their actions and oversight of their media agencies has, in part, contributed to the status quo characterized in the K2 Study. Many are therefore also keen to develop stronger relationships – partnerships indeed – with their media agencies moving forward.

Quoted in AdAge[1] as the K2 Study was published, the world’s two leading FMCG advertisers, Unilever and Procter & Gamble, made the following comments.

 “Trust and transparency are critical to any relationship, so we take the ANA’s findings very seriously,” Luis Di Como, senior VP-global media, Unilever, said in a statement. “We support its work to ensure that as the media industry evolves these values remain a top priority. At Unilever, we are actively engaged with our agencies and the industry at large to exert greater control and responsibility around media transparency. We go to great lengths to make certain that our proprietary procedures and policies maximize our investments and fulfill contracts, in both the letter and spirit. We’re confident the right steps will be taken to strengthen our industry.”

Procter & Gamble said it appreciated the ANA’s diligence in studying media transparency practices, “particularly as technology is bringing a significant transformation in the industry”.

 “As a result of the study, it’s important that advertisers and agencies work together appropriately to deal with the changing media ecosystem,” a P&G spokeswoman said in a statement. “We appreciate the ANA’s diligence to study media transparency practices. At P&G, we want and expect strong agency partnerships based on mutual trust, transparency, and teamwork. We have a ‘trust but verify’ approach that includes having clear and thorough stipulations in our contracts, regular audits on performance, and third party verification that ensures transparency. If we find irregularities, we will take remedial action.”

Media agencies’ initial reactions

Since the report was published, several of the major agency holding groups have openly challenged the validity of the findings of the K2 Study and rejected its claims in relation to their business. Dentsu Aegis said[2]: “Today’s ANA report is an insubstantive report with subjective methodologies and anonymous input.” WPP CEO Sir Martin Sorrell commented: “It is no way independent. It is one-sided. It does not include any input from any of the six major holding companies.”[3]

Meantime, Publicis CEO Maurice Levy labeled[4] the K2 Study as “an unwarranted attack on the entire industry”, while Interpublic said[5] that “the picture the report describes is not consistent with our actual business practices”.

The U.S. media agency industry association the 4As argued[6]: “A healthy and constructive debate about media buying can only happen with a bipartisan, engaged, industry-wide approach … the K2 report … anonymous, inconclusive, and one-sided – undercut the integrity of its findings.”

ANA response

Responding to agency criticism, Tony Pace, the ANA’s Chairman wrote an open-letter to members saying: “K2’s report is an excellent piece of business fact-finding that is beyond reproach. The first step in solving a problem is identifying that one exists. When the agency community concludes that there are issues involving non-transparent business practices, and that a fundamental disconnect exists in the advertiser/agency relationship, the ANA and the Board of Directors would be pleased to collaborate with them to develop specific, well-defined solutions.”

The full transcript of the K2 Study titled An Independent Study of Media Transparency in the U.S. Advertising Industry can be downloaded from the ANA’s website, here.

SOURCES:

1 http://adage.com/article/agency-news/ana-k2-find-evidence-pervasive-agency-rebate-collection/304347/
2 http://www.thedrum.com/news/2016/06/07/wpp-publicis-and-ipg-slam-sensational-and-inflammatory-ana-report
3 http://uk.businessinsider.com/sir-martin-sorrell-on-ana-rebates-report-2016-6
4 http://www.wsj.com/articles/publicis-ceo-calls-anas-pending-report-unfair-1465228638
5 http://adage.com/article/agency-news/holding-companies-agency-groups-respond-damaging-ana-report-alleging-u-s-rebates/304350/
6 http://www.campaignlive.co.uk/article/big-not-cheat/1398090

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