Tag Archives: agency volume bonification

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.

What’s Fueling Agency Holding Company Profit Growth?

27 Aug

agency holding company profitsAccording to a new report from Marketing Services Financial Intelligence, agency holding company profits for 2011 were up almost 30% on an 8% revenue increase.  The firm tracks publicly traded holding companies such as WPP, Omnicom, Interpublic, Havas, Publicis and Aegis along with some smaller organizations.  Of note, it was reported profit margins also rose for the group, “averaging 15%.”

Clearly, in spite of what has been a tough global economic climate, the agency holding companies continue to perform well from a financial perspective.  In addition, they have continued to expand their footprint via a robust level of merger and acquisition activity as well.

So what can we make of the stellar results?  Certainly, life is good for the holding companies.  Perhaps more intriguing is to ponder how a collective of holding companies managed to achieve a 4X multiple on profit growth vis-à-vis topline revenue.  On the surface it’s easy to understand, control expenses and boost the margin yield on incremental revenue.  However, the agency business falls into the “professional services” category.  Their primary expense is direct labor.  So as revenue increases, so do direct labor costs.  Right?  If not, how do you add business without expanding staffing coverage at the same rate?  Wouldn’t this negatively impact client service levels or the caliber of the work?

So if agency staffs are growing commensurate with revenues, what is the source of the extraordinary profit?  While the answer may be complex and varied there are certainly aspects of the agency holding company model that likely have contributed to this growth:

  • Increased utilization of agency owned resources/affiliates on existing client business ranging from in-house studios to trading desks, barter firms and production companies.
  • Improved employee utilization rates, whether in the form of associates working longer or devoting a higher percentage of their time to billable activity.
  • Non-transparent revenue growth on existing client business including but not limited to interest income associated with float, growth in agency volume bonification (AVB) revenues along with other vendor discounts and credits.

Let’s be clear.  There is nothing wrong with an agency holding company making money.  Further, there is nothing wrong with the aforementioned practices as a means of driving profitability.  The issue that advertisers should more clearly understand relates setting transparency standards and clear financial rules between themselves and the agency.

As a first step, to understand the current state of affairs and use it as a basis for improvement going forward, it is a best industry practice for the any advertiser to implement a detailed contract compliance audit.  This initial review boosts the advertiser’s understanding of the agency’s billing practices, and their basis, to assess time value of money treatment, fees vs. agency time-of-staff investments, AVB calculation methodology, adequacy of financial terms, manual vs. system treatment and the like.  The advertiser can then answer the questions – “where are my financial risks?” and “how do we mitigate them?”

Once accomplished, then perhaps the advertiser won’t have to “ponder” agency holding company profit growth rates and can join their agency partners in celebrating their hard earned financial success.

If you would like to gain the benefit of what we’ve learned first-hand through our agency contract compliance auditing practice and would like to schedule a complimentary consultation on “Transparency in Action,” please contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com.

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