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How is Your Media Agency Making Money in 2022?

17 Feb

agency holding company profitsWritten by Oli Orchard, Partner – Fuel Media & Marketinga specialist communications consulting company focused on advising clients in media communications. 

With Publicis and OMG in the news this week (February 2022) with significant revenue increases year-over-year, now would seem a pertinent time to look ‘under the hood’ of the different revenue streams agencies have available to them.

Using the traditional commission method, still prevalent today, it is often thought that a media agency has a disincentive to save clients’ money or indeed manage lower budgets.

Because most media agencies are compensated on a percentage of media spend, if they negotiate the prices down, and potentially reduce total spend, they will earn less money.

In practice, the traditional ATL percentages involved stop this being much of a disincentive.

  • A buy of $10,000 at 3% commission provides the agency with just $300 income.
  • If the agency negotiates 25% discount on the media, the agency will only lose $75.

Obviously, the agencies are doing this at scale, and those $75 discounts start to add up, as a result the agencies have long looked elsewhere to bolster their incomes. So, in 2022, what other revenue streams are open to the agencies?

Agency income takes many forms, and too many to go through here, so we’ll stick to the top ten.

  1. Fees & Commissions – Whether Time and Materials based, or a percentage commission on media spend these should need no introduction to advertisers. At Fuel we hold data on innumerable best practice contracts, and always work with clients and agencies to come to the most appropriate basic remuneration package
  2. Bonus/Malus schemes – These programmes have become synonymous with best-in-class-advertisers, looking to reward their agency beyond the basic remuneration for exemplary work. The Malus scheme has gained more traction in recent years, as agencies look to differentiate themselves from the competition by having some ‘skin-in-the-game’, often putting part of their profit margin at risk
  3. Incremental services outside of Scope of Work – These are often the result of out-of-date contracts, and can commonly comprise things an advertiser might expect to be included in the contract, such as Quarterly Business Reviews, competitive monitoring, dashboards, post-campaign reporting and even out-of-home planning
  4. Deposit Interest on bank accounts – Historically agencies have taken advantage of bank interest rates and been fast to invoice and slow to pay. With rates on the increase again, albeit slowly, advertisers will need to become increasingly aware of this. Agencies deal in vast sums of money, and this revenue stream should not be overlooked
  5. Kickbacks from vendors – AVBs, rebates, Specialist Agency Commissions, the list goes on; kickbacks have many names, and they don’t always take the form of cash. Free Space that can be given to advertisers to bring the CPM down to hit bonus targets, or alternatively sold on to other clients is another common form these shapeshifting kickbacks can take. It is also imperative that the contract encompasses as much of the agency holding group as possible, often kickbacks can be routed through other parts of the group
  6. Unbilled media – It is not uncommon for a media vendor to forget, unintentionally or intentionally, to bill an agency for a media placement that the agency has already billed the client for. The agency should be reporting and returning unbilled media on a regular basis, though clients should be aware of the fiscal statute of limitations, meaning the vendor could invoice the agency within a specified period of time (it is currently 6 years in the UK) and demand payment, which will then be passed on to the client
  7. Agencies acting as the principal (rather than agent) – This is commonly known as inventory media, the agency takes a position on, or buys, a quantity of media directly from a vendor, with no specific client lined up for it. There will be NDAs in place with the vendor preventing the agency from disclosing the actual price paid to clients or auditors. This allows them to mark-up prices, generally by a very significant percentage when selling this space on to clients. The flip side of this is that an advertiser can get a great rate on something they may have bought anyway, though they may also be pushed into a buy that is sub-optimal for their strategy just to meet the agency’s internal need to offload inventory
  8. Subcontracting to related 3rd Parties – Agency holding groups are vast and have many complimentary disciplines. It is not uncommon for a specific task to be subcontracted (attracting an additional fee) within the holding group
  9. OOH commissions – It is worth listing these separately to those above because OOH often has a unique commission structure where both the advertiser and vendor routinely pay the poster buying specialist for placing the media. This is frequently dealt with in agency contracts as an additional ‘Disclosed Commission’ tucked away in a schedule at the back of the document as Specialist Agency Commission
  10. DSP usage – Programmatic has long been the poster child of non-disclosed fee structures further down the digital value chain but there is one significant agency revenue stream that crops up near the top of the chain in non-disclosed White Label mark-ups. The DSPs allow their clients (in this case the agency, not the advertiser) to add an additional CPM into the net media cost, meaning that it doesn’t show up in any of the auditable invoicing trails, and is passed back to the agency
  11. As you can see from above, agencies constantly evolve income streams, seeking out new ways to profit, and let’s not get the intent of this piece wrong, agencies should be able to profit from their great work for clients. However, many advertiser clients are becoming cash cows, based on the agencies’ opaque trading practices.

At Fuel, we work with the agency and advertiser to produce the optimum contract for the situation, one where transparency around agency income is openly discussed, and the advertiser can make an informed, supported decision about the relationships they forge with their agency partners.

Here’s our checklist for advertisers:

  • Check that your contract is up to date – does it cover the entire scope of business transacted between you and your agency? The very best contracts are reviewed and revised annually to take landscape shifts and revised media strategies into account
  • Make sure that your agency is obliged to ‘call out’ and seek approval for inventory media and use of subsidiaries/sister companies
  • Have a frank discussion with your agency about the non-disclosed White Label mark-up that the DSPs allow them to add into the platform costs, and consider requesting to be part of the conversation around DSP selection
  • Undertake regular audits of performance vs. pitch or year-over-year guarantees, and tie the buying results to a bonus/malus scheme in tandem with service scores and achievement of business objective KPIs 

To find out more on how Fuel can help, contact Oli on +44(0) 7534 129 097 or email oli@fuelmediamarketing.com.

Dentsu Aegis: Poster Child for Ad Industry Transparency Concerns?

30 Nov

transparencyEarlier this month Dentsu issued a statement that it had cancelled its annual New Year party, typically celebrated in each of its five offices in Japan, citing a need for “deep reflection.”

When one considers the issues being faced by the agency, albeit of their own doing, it is easy to understand their desire for a more contemplative holiday.

Two short months ago the agency rocked the ad world with the acknowledgement that it had overbilled one of its oldest and largest advertisers, Toyota Motor Corp. for digital media placements. Ultimately, the agency confirmed that the overbilling and falsification of invoices impacted 111 clients, totaling JPY ¥230 million ($2.28 million USD).

This is on the heels of a Japanese Labor Agency ruling that the suicide of a young employee in December, 2015 was due to karoshi, or death by overwork. Prior to her death, the employee had logged 130 hours of overtime in November and 90 hours in October. In the wake of this ruling, the third such case of karoshi at Dentsu, the Minister of Health, Labor and Welfare Yasuhisa Shiozaki threatened harsh action against the company. Regrettably, according to Mediapost, reports have surfaced in Japan suggesting that the agency “may have encouraged workers to underreport overtime hours” to deceive authorities that it had been complying with regulatory limits (70 hours per month).

Thus, many in the industry were intrigued when it was reported earlier this month by MediaTel that Dentsu-Aegis was looking to launch a programmatic trading desk in the U.S. called “agyle.” The irony, for an agency dealing publicly with fraud and transparency issues, is that the model apparently being pursued for agyle is that of a principal-buy (media arbitrage) operation, where advertisers will have zero line of sight into the price paid for media inventory purchased by the trading desk.

Really? This move certainly seems to be counter intuitive for an organization trying to mend its brand image within the advertising community, while it deals with the fall-out from the overbilling and labor investigations. Particularly in light of Aegis’ own track record related to media transparency over the last ten plus years (prior to Dentsu’s 2012 acquisition of Aegis).

Some will remember that Aegis and its Posterscope division had their own problems of accounting fraud, involving the use of volume rebates it earned on its clients’ out-of-home media investments that were improperly retained by the agency to record higher revenues, rather than returning them to their respective clients. In the end, its President and Finance Director pled guilty to accounting fraud. This fraud occurred on the heels of a highly publicized scandal in which Aegis’ client, Danone successfully sued the agency, requiring it to disclose the disposition of all volume based discounts it had received for a two year period, estimated to be  $22.0 million. Notably, during the lawsuit it was alleged that Aegis’ president and five other executives had been “siphoning credits for free media airtime to a private company” and then selling that same airtime for their own profit.

With all due respect to Dentsu’s CEO, Tadashi Ishii, for his efforts to aggressively and forthrightly address the agency’s recent issues, one has to wonder how deeply seeded these issues are in the organization’s culture.

For advertisers who have followed the lawsuits, regulatory investigations, allegations and company acknowledged issues into overbilling, fraudulent reporting, timekeeping system manipulation, volume rebate programs and the like… this is why the industry must inwardly reflect and take the Association of National Advertisers (ANA) study on media transparency seriously.

Clearly opacity issues related to misleading practices employed by some within the agency community related to the pursuit of non-transparent revenue sources using client funds, for their self-gain negatively impact advertiser trust in their agency partners and ultimately erode the client/ agency relationship.

For Mr. Ishii and his team at Dentsu, we wish them luck in righting the proverbial ship and hope that their decision to use the holiday season as a time for deep reflection bears fruit.

 

 

Video: “The Truth Crisis: Marketing’s Biggest Challenge”

16 Aug

Interesting video from Campaign magazine … Click Here to watch.

transparency

Decision Time for Advertisers in Wake of ANA Study on Media Rebates

5 Jul

time to decideU.S. advertisers have long suspected their presence and agencies have steadfastly denied accepting rebates in the U.S. market. Depending on which side of the ledger one fell on, the ANA/ K2 study on media transparency may not have swayed your perspective on the topic one iota.

If such is the case, that is too bad. As the noted Irish playwright, George Bernard Shaw once said:

“Progress is impossible without change, and those who cannot change their mind cannot change anything.”

The study was thorough, insightful and shed light on some of the non-transparent sources of revenue available to agencies. These range from AVBs or rebates and value banks consisting of no-charge media weight to the spread earned by agency trading desks from the practice of media arbitrage or “principle buying” as it is often called. The source of these findings were agency, ad tech and publisher personnel that participated in the study in exchange for the ANA and K2 protecting their anonymity. Of note, not one representative from an agency holding company or ad agency was willing to go on the record and participate in this study.

We believe that the study should serve as a wake-up call for advertisers and agencies alike to engage in serious discussions regarding the level of disclosure desired by clients when it comes to the stewardship of their media investment. In the wake of the 4A’s shortsighted, premature withdrawal from the joint task force dealing with this topic and their subsequent challenges of the ANA/ K2 study methodology and findings, these discussions will have to occur on a one-on-one basis. Which, candidly, is the best means of affecting near-term change.

In most instances, it is not illegal for agencies to generate non-transparent revenue and is likely not even a violation of the agreements, which have been signed with their clients. Why? The contracts are lacking in the requisite control language to protect advertisers and agencies are masters at interpreting “gray areas” within those agreements and bending the rules in their favor. This coupled with the fact that only a small percentage of advertisers audit their agency partners and it is easy to see how such practices could exist.

Thus, as an industry we should not cast blame for the emergence of non-transparent revenue as an important element in agency remuneration programs… even if not sanctioned by advertisers. Nor should we accept the agencies excuse that client’s driving fees down somehow makes it acceptable for agencies to pursue non-transparent revenue to counter remuneration agreements, which agencies have knowingly signed on for.

Agencies are not suffering financially. Consider that in the first-quarter of 2016 the “Big 4” holding companies all saw increases in revenue ranging between 0.9% – 10.5%. WPP achieved a 10.5% increase on an 8.5% increase in billings, OMG saw net income per diluted share increase 8.4% and IPG achieved operating margins of 33.8%. Between these performances and media inflation outstripping GDP growth or increases in CPI and PPI it is easy to see how advertiser investments are fueling the trend of continued acquisition by these holding companies as they snatch up ad tech firms, content firms, digital agencies and traditional ad shops. Not to mention the fact that WPP’s chairman has an annual compensation package, which tops $100 million per year.

The focus of clients and agencies should be on returning to a principal/agent relationship predicated on full-disclosure. This is the surest path to rebuilding trust and establishing solid relationships focused on objectivity, transparency and a mutual focus on maximizing advertiser return-on-media-investment. Secondarily, both parties need to evaluate how to minimize the number of middlemen in the media buying loop, particularly for digital media, rethinking the role of ad tech firms, exchanges and publishers and the cut that each takes, lowering the advertisers working media ratios.

From our perspective there are four steps, which advertisers can take to address these issues:

  1. Revisit client/ agency Master Services Agreements to tighten terms and conditions, which deal with disclosure, financial stewardship and audit rights.
  2. Undertake constructive conversations regarding agency remuneration, with the goal of ensuring that your agency partners are fairly compensated, removing any incentive for non-transparent revenue generating behaviors.
  3. Pay more attention to the proper construction of statements of work (SOWs), establishing clear deliverables and review/ approval processes against which your agency partners can assess the resource investment required to achieve such deliverables. This will assist both client and agency in aligning remuneration, resources and expectations.
  4. Monitor agency performance, resource investment levels vis-à-vis the staffing plan and audit contract compliance to ensure that contractual controls and the resulting levels of protection and transparency are being met.

The ANA/ K2 study can and should serve as a platform for advertisers and their agency partners to work through any concerns or expectations regarding media transparency, both in the U.S. and across the globe. Experience suggests that progressive organizations will use the insights gleaned from the study as a launch pad for improving contractual controls, working media ratios and client/ agency relations.

For the industry, it is important to dispatch with concerns regarding media transparency quickly. This will allow all stakeholders to focus on tackling the myriad of issues that dramatically impact media effectiveness including ad fraud, cross channel audience delivery measurement, viewability and attribution modeling.

 

Is the Ad Industry on the Verge of a Revolution?

25 May

White clock with words Time for Action on its face

“It was the best of times, it was the worst of times…” Charles Dickens evocative opening to his book; “A Tale of Two Cities” described the period leading up to the French revolution. It may also be an apt description of where the ad industry and advertisers stand on the topics of transparency, fraud and trust.

As an industry, all stakeholders, including advertisers, agencies, ad tech firms, media sellers and the various associations, which serve these constituencies have long been talking about the need to implement corrective measures. Joint task forces have been formed, initiatives launched and guidelines published, yet little progress has been made in addressing these issues. As evidence of the quagmire, one need look no further than the 2016 Association of National Advertisers (ANA) and White Ops report on digital ad fraud, which saw the estimated level of thievery increase by $1 billion in 2015 to an estimated $7 billion annually. This led Bob Liodice, CEO of the ANA to boldly and rightfully tell attendees at this year’s ANA “Agency Financial Management” conference that; “marketers are getting their money stolen.”

The ANA’s message has resonated with the C-Suite within advertiser organizations the world over as CEOs, CFOs CIAs and CPO’s are working with their chief marketing officers to both assess the risks to their organizations and in fashioning solutions to safeguard their advertising investments. From this pundit’s perspective, it was refreshing to see the ANA take such a strong stance and a welcomed leadership position on remedying these blights on our industry.

Some may view the ANA’s recent stance on fraud and transparency and the upcoming release of its study with K2 on the use of agency volume bonuses (AVBs) or rebates as incendiary. However, in light of the scope of the economic losses, financial and legal risks to advertisers and the havoc which transparency concerns have wreaked on advertiser/ agency relationships we view the ANA’s approach as a rational, measured and necessary stake in the ground.

Mr. Liodice was not casting blame when he suggested that the K2 survey would “be a black and white report that for us (ANA) will be unassailable documentation of what the truth is.” It is refreshing to see an industry association elevate dialog around the need for full-disclosure, moving from disparate opinions to establishing a fact-based perspective on the scope of this practice. To the ANA’s credit, this will be followed by a second report, authored by Ebiquity/ Firm Decisions, introducing guidelines for the industry to proactively address the issue.

To be clear, it is not a level playing field for advertisers. There are many forces at play as a variety of entities look to siphon off portions of an advertisers media investment for their own financial gain. Thus, we’re hopeful that the ANA’s message to marketers to “take responsibility” for their financial and contractual affairs when it comes to protecting their advertising investment takes hold.

In our experience, the path forward for advertisers is clear. It begins with re-evaluating their marketing service agency contracts to integrate “best practice” language that provides the requisite legal and financial safeguards. Additionally, this document should clearly establish performance expectations for each of their agency partners, introducing guidelines to minimize the impact of fraud, including mandating the use of fraud prevention and traffic validation technology, banning the use of publisher sites that employ traffic sourcing and establishing a full-disclosure, principal-agent relationship with their agency partners.

Experience suggests that another key element of a well-rounded accountability initiative should include the ongoing, systematic monitoring of agency contract compliance and financial management performance to evaluate progress. Of note, wherever possible, these controls and practices should extend to direct non-agency vendors and third-party vendors involved with the planning, creation and distribution of and advertisers messaging.

The advertising industry is on the verge of a revolution and for the sake of advertisers we hope so. One that can usher in positive change and allow all legitimate stakeholders to refocus their collective energies on building productive relationships predicated on trust. It is our belief that knowledge and transparency are critical cornerstones in this process:

“I believe in innovation – and that the way you get innovation is you learn the basic facts.”

                                                                                                                                                  ~ Bill Gates

What is the True Cost of Opacity? (part 2 of 2)

1 May

iceberg riskPart 2 of a two-part look advertiser concerns regarding “transparency” and the impact it is having on client-agency relations.

Why is a tight client-agency agreement important? One need look no further than the recent comments of Maurice Levy, Chairman of Publicis; We have a clear contract with our clients, and we are absolutely rigorous in respecting transparency and the contracts.”  It should be noted that other agency executives have also cited their compliance with the terms of their client agreements as part of their response to recent questions regarding transparency in the context of rebates and the lack of full-disclosure associated with trading desk operations.

As contract compliance auditors we would suggest that most of the client-agency agreements, which we review do not have sufficient language to deal with the evolving advertising landscape.  It is common to find contract language gaps when it comes to items such as; AVBs, related party obligations, disclosure requirements and or right to audit clauses. Therefore, it is quite possible for an agency to be in compliance with an agreement as Mr. Levy suggested and still not be operating in a fully transparent manner.

To the extent that reducing the level of opacity is an important step in establishing a solid client-agency relationship founded on the basis of trust, we would strongly encourage advertisers to review their marketing agency partner agreements.

If agencies truly functioned as principal agents for the advertiser, a less structured agreement may pose less risk. However, today we operate in a complex environment where agencies may have a financial stake in certain outcomes and those stakes are not always fully disclosed to clients. Thus the reality is that the potential for bias to impact an agency’s recommendations clearly negates the principal of agency neutrality.  Think about it, agencies today operate as independent agents, partnering with a range of third-party vendors in the research, technology and media sectors and actually owning and reselling media inventory to their clients.

Don’t agree? Consider the comments of Irwin Gotlieb, CEO of WPP’s Group M at the aforementioned ANA conference; “Those relationships, rightly or wrongly, don’t exist anymore” he said, adding that “You cease to be an agent the moment someone puts a gun to your head and says these are the CPMs you need to deliver.”

It is imperative that advertisers protect themselves from a legal and financial perspective by crafting contract language and implementing the appropriate monitoring and control processes to insure that they have the transparency that they seek in the context of their agency partners’ financial stewardship of their advertising investment.  This does not mean that clients cannot forge solid relationships with their agencies or that their agency partners should not be afforded positions of trust. Quite the contrary, it simply means that candid, direct dialog must occur so that each party in the relationship is clear and comfortable with regard to the guidelines that will be put in place to govern their relationship.

Once clients and agencies have aligned their interests in the context of their relationship, the ability to focus their time, talent and resources on driving business forward and tackling industry challenges will be greatly enhanced. Interested in learning more about industry best practices when it comes to client-agency agreements? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management, LLC at ccampeau@aarmusa.com for a complimentary consultation on this important topic.

Will Transparency Concerns Undermine Trust?

17 Mar

transparencyAt the 2014 ANA “Agency Financial Management” conference, representatives from the Association of National Advertisers, Association of Canadian Advertisers and the World Federation of Advertisers each presented member survey results which indicated that their advertisers were concerned about the lack of transparency which existed into the financial stewardship of their advertising funds.

In their February, 2014 study, the ANA found that forty-six percent of the members’ surveyed expressed specific concern over the “transparency of media buys.” As contract compliance auditors, we know from our dealings that the resulting lack of clarity and in some instances, honesty surrounding issues such as data integrity, audience delivery, trading desks, reporting and financial reconciliations creates financial risks for advertisers. Sadly, the lack of transparency ultimately can serve to undermine attempts to improve trust levels between clients, agencies and media sellers. 

Fast forward one-year and two events come to light, which raise serious issues regarding trust.

The first was a speech made by Jon Mandel, former CEO of WPP’s Mediacom unit at the ANA’s “Media Leadership Conference” in early March, where he alleged the widespread use of volume based rebates or kickbacks from media sellers to agencies. He suggested that these practices, which have the potential to negatively affect advertisers, had migrated from cash advances to no-charge media weight which an agency can then deal back to clients or liquidate in barter deals. Mr. Mandel specifically stated that media agencies “…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.”

The second event, which coincidentally involves Mr. Mandel’s former employer, Mediacom, deals with revelations regarding the use of “value banks” and the falsifying of media campaign reports by its Australia operation. For those not familiar with the term value bank, this is where media sellers provide a certain level of no-charge media weight to agencies based upon their aggregate client spending with that entity.

In a story which broke in Mumbarella, a media news website, it was reported that media “discrepancies” were found in late 2014 in an audit of Mediacom. The audit, conducted by EY was actually commissioned by Mediacom once it had learned of the problems. Among the findings of EY’s investigation were that Mediacom personnel had “altered the original demographic audience targets to make it appear as though the campaigns had reached the official OzTam audience ratings numbers.” Further, the review found that the agency had been taking “free or heavily discounted advertising time given to it by TV stations” and selling it back to its clients in violation of its parent company’s (GroupM) policy.

While Mediacom terminated several of the employees allegedly involved in these matters and pro-actively engaged an auditor, it should be noted that the audit found that the aforementioned fraud had been taking place undetected for a period of “at least two years.” This certainly raises questions regarding the efficacy of the controls that were in place at the agency to safeguard advertiser funds. The combination of lax controls and limited transparency had a negative financial impact on some of the agency’s largest clients (i.e. Yum! Brands, IAG, Foxtel).

As an aside, following Mr. Mandel’s comments to the ANA conference attendees, Rob Norman, Chief Digital Officer at WPP’s GroupM stated that; “In the U.S., rebates or other forms of hidden revenue are not part of GroupM’s trading relationships with vendors.” Sadly, in light of both Mr. Mandel’s revelations and the Mediacom Australia situation U.S. advertisers will likely take little solace in these reassurances from WPP. Worse, given the levels of advertiser concern about the lack of transparency within the industry, there is a high likelihood that other agencies will be painted by the same broad brush and assumed to be engaged in similar practices… whether they are or aren’t.

For an established industry with estimated 2014 global ad expenditures of $521.6 billion (source: MAGNA GLOBAL) it is amazing that some of the aforementioned practices would take place and that the industry would continue to deny rather than acknowledge their existence in an overt manner. Unchecked, the murky dealings of some media owners and a handful of agencies may ultimately push trust, not transparency to the fore of advertiser concerns and that is not a healthy dynamic when it comes to client/ agency relationships. The words of American humorist and journalist Kin Hubbard may serve to synthesize the crux of the issue:

“The hardest thing is to take less when you can get more.”

Interested in learning how you can improve your transparency into the financial management of your organizations marketing investment? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com.

 

 

 

 

Have You Discussed AVBs With Your Media Agency?

6 Feb

agencies as resellersIf not, the obvious question is: “Why Not?”  More importantly, if your media agency hasn’t initiated dialogue with you on this topic don’t wait any longer; engage them directly to gain an understanding on their practices in this area and to share your organization’s perspectives on this complex topic.

What are agency volume bonification deals?  Commonly referred to as AVBs, agency volume deals, rebates or media kick-backs, these deals typically take the form of cash incentives offered to media agencies by media owners to incent them to spend more on their properties.  Long a part of the media landscape around the globe, there’s growing concern within the industry that the use of AVBs is more prevalent (and non-transparent) in the U.S. than had been previously thought.  Those were the findings of a 2012 survey conducted by the ANA in conjunction with Reed Smith on this topic. 

The value of AVBs, which vary by media, by spending level and by country, can be significant, ranging between 3% – 20% of an advertiser’s net media spend.  There are two primary issues with these deals.  The first concern regards the potential of this incremental revenue to unduly influence agency decisions on advertiser media placements, potentially allocating more dollars to a particular media or outlet than would be warranted based upon approved media strategies and or the media properties share of market.  The second has to do with the lack of transparency around these deals between the agency and their clients. 

Unfortunately, a lack of transparency into the presence of AVBs usually results in the advertiser not receiving their pro-rata share of any rebates secured by the agency as a result of the client’s media investment.  While the view regarding “who’s” entitled to the proceeds from AVBs varies somewhat depending upon the country and whether you’re speaking with an agency or an advertiser, one thing is clear… AVBs are earned as a direct result of the cumulative financial investment made by an agency’s client base.  Thus, it isn’t surprising that a majority of advertisers believe that they are entitled to their pro-rata share of any and all earned rebates by the agency brand and or holding company that they are working with.  In fact, in the aforementioned ANA survey on the topic, 85% of survey respondents believed that agencies “should remit all dollars to clients.”

As it stands, an advertiser’s contract with their media agency may not even address this topic, either specifically or in the broader context of any and all earned discounts, no-charge media weight and or rebates.  Thus, the best place to start is a review of the current Letter-of-Agreement that governs the client/agency relationship.  Additionally, direct open and candid conversations between senior members of the advertiser and agency teams are warranted to sort out whether or not the agency is in fact participating in AVB programs and, if they are, the resulting media allocation and or financial impacts on the advertiser.

A forewarning, do not get frustrated.  Too often when it comes to AVBs the first response back from an agency is often “What is an AVB?”  This is typically followed by a firm denial of the agency’s participation in any such incentive program.  To be fair, the day-to-day account team at the agency usually does not have insight into the agency or agency holding company’s practices in this area.  That is why it is best to engage senior representatives from the agency when it comes to this sensitive topic.  Let’s face it, if the agency is currently collecting and retaining any level of AVB rebates that goes directly to the agency’s bottom-line, they often keep this information extremely confidential.  Thus, clients requesting transparency into this practice and or demanding their pro-rata share of the AVB activity has the potential to significantly impact the agency’s income in a negative manner.  In the words of Winston Churchill:

“There are a terrible lot of lies going about the world, and the worst of it is that half of them are true.”

In our experience, a discussion regarding AVBs will likely lead to a broader conversation regarding agency remuneration, scope of work, agency staffing and deliverables.  It is our opinion that advertisers and agencies alike should welcome this conversation with open arms.  Why?  This represents an opportunity to put everything on the table ranging from billable rates, overhead rates, overhead components and guaranteed profit levels so that both parties can discuss the financial aspects of their relationship in a comprehensive, transparent and open manner. 

Finally, one of the more startling findings in the ANA research on this topic was that 40% of the advertiser organizations surveyed were “not sure” if their agency agreements had language dealing with AVBs.  If you harbor any doubt about the appropriateness of the language governing behavior in this area within your agreement, now would be a great time to review the document with your legal team. 

Interested in a second opinion of the soundness of your client/ agency agreement or whether your agency has been remitting any AVBs due your company?  Contact Cliff Campeau, Principal at AARM via email at ccampeau@aarmusa.com to schedule a complimentary review.

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