Tag Archives: Principal-Agent Relationship

Why Are Media Agencies Forgoing Objectivity?

24 Jul

dreamstime_m_35343815Consumer media consumption behavior is ever evolving. And advertisers must select from an expansive array of content venue choices to communicate their messaging. Balancing these two dynamics is the key to optimizing media investment decisions.

Time was when agencies based their media resource allocation recommendations on insights gained from an exhaustive, objective review of media performance and audience delivery data. 

In traditional principal-agent relationships, agencies have a fiduciary responsibility to act in the best interest of their clients. This includes providing advertisers with informed recommendations, free of bias or conflicts of interest, that are advantageous to the advertiser. Most advertisers understand that in the twenty-first century, unless the principal-agent relationship is firmly established in the Client/ Agency agreement, all bets are off when it comes to their agency being bound to adhere to principal-agent guidelines.

Over the course of the last decade or so, practices such as “principal-based media buys” and ABVs (rebates) came into vogue. This is where an agency takes ownership of the media inventory and resells that inventory to the advertiser at a non-disclosed mark-up, making a profit on the spread and or receives an incentive based upon its total spend with a media seller. Good Client/ Agency agreements require the agency to secure the client’s written authorization before employing these type of practice and in the case of rebates to remit the advertisers pro-rata share of such rebates.  

Fair enough. Buyer beware. Trust but verify. Got it.

There is another practice that seems to be gathering steam between media sellers and media buyers that raises questions about the objectivity of an agency’s media planning and buying recommendations. Simply stated, media owners, seeking to lock-in a revenue stream from a given agency holding company, are offering to reserve inventory in bulk for that agency to allocate to its client base at some point in the future.

One recent example of this is Omnicom Media Group’s (OMG) commitment earlier this month to spend $20 million of its clients’ media funds to advertise in podcasts distributed by Spotify. Given the nature of the advertisers represented by OMG (McDonalds, AT&T, P&G, PepsiCo, etc.), their total media spend and the fact that 2020 media plans have been completed and buying commitments presumably made perhaps there is little risk of such a deal influencing whether or not an advertiser should commit dollars to Spotify podcasts.

Separately, it was recently reported by Digiday that TV networks and agencies, in an effort to jump-start the annual upfront marketplace, were considering share of spend deals to “address advertiser commitment issues.”  In this scenario, an agency holding company would commit to spend a percentage of its clients’ aggregate upfront budgets with select network groups. However, client budgets are in flux and there are multiple questions surrounding the traditional upfront marketplace. Thus, the commitments being made by agencies are being done in advance of any client media authorization process. It would be natural for one to ask; “What incentives are being offered by the network groups to facilitate such deals? And How are such benefits distributed to an agency’s clients?”

The primary concern with this type of approach is the potential for these buying commitments to bias an agencies recommendations to its client base. As the author of the Digiday article points out if aggregate spend projections come up short, the holding company may find itself in a position where it may “need to push clients to spend their money” with a given network group.

Practices such as these are fraught with risks. When an agency has already committed to a pool of inventory on a network group based upon hypothetical aggregate spend levels across its client base objectivity is lost.

We are simply not fans of this practice, believing that agencies have a fiduciary responsibility to their clients to make media recommendations, based upon an unbiased fact base, that are in the best interest of the advertiser.

 

 

Is It Too Late for the 4A’s on the Topic of Transparency?

26 Sep

toolateEarlier this month, the 4A’s announced that it was pulling out of the Association of National Advertisers (ANA) “Transparency” panel scheduled during Advertising Week in New York City.

In light of the organization’s decision to break from ANA / 4A’s joint media transparency initiative earlier this spring, ostensibly to chart its own course, this move comes as no surprise. However, it is nonetheless disappointing. After all, why wouldn’t the 4A’s and it member agencies want to share the stage with the ANA to address the advertiser community on the topic of transparency?

The quest for improved standards and performance related to transparency would benefit mightily from the involvement of the 4A’s. The ANA, advertisers and many within the agency community have sought the 4A’s cooperation on this issue and would welcome a united effort to address this topic.

Clearly a full-court press is necessary if the industry is going to improve both transparency and ultimately the level of trust between advertisers, agencies and publishers. Aside from the eye opening findings from ANA / K2 study on media transparency, there have been two recent announcements that certainly seem to bolster the results of this study. First, just this past week Facebook indicated that it had misrepresented average viewing times for video ads played on its site. Secondly, the global agency holding company Dentsu came forward and cited multiple instances where there were “failures of placement,” “false reporting” and “inappropriate operations” which impacted over 100 of their clients. Dentsu’s CEO, Tadashi Ishii issued a statement saying that there were “instances where our invoices did not reflect actual results, resulting in unjust, overcharged billings.”

In fact, the impact of the 4A’s decision has resulted in two agencies, Empower and Mediasmith, pulling out of the 4A’s citing the associations failure to take a more progressive stance when it comes to working more closely with the ANA to resolve the issue of media transparency.

From the perspective of advertisers, they are rightly concerned about the issue of transparency and are taking matters into their own hands. Consider the September 23rd article in the Wall Street Journal; “Major Marketers Audit Agencies“ in which firms such as J.P. Morgan, General Electric Nationwide Mutual Insurance and Sears Holdings Corp. indicated that they “had hired outside counsel” to conduct audits, due in part to the ANA study. Additionally, the article identified more than a half-dozen other firms that are “trying to get more liberal auditing rights” to improve the protections afforded them under their Client/ Agency agreements.

Given the importance of transparency and full-disclosure in establishing productive, long-term relationships between advertisers and agencies it is unclear what the 4A’S hopes to gain with its current approach. While the 4A’s has issued transparency guidelines of their own, advertisers and many industry observers have indicated unequivocally that these guidelines are inherently biased in favor of the agency holding companies and that they simply don’t go far enough to address advertiser transparency concerns.

The very fact that many agencies are deriving non-transparent revenue from the budgetary dollars entrusted to them by advertisers is an affront to a principal-agent relationship. And even if, as some agency leaders have suggested, not all client / agency contracts espouse a principal-agent relationship, it is simply not a good practice (and promotes distrust) for an agency to leverage an advertiser’s funds for its financial benefit without its knowledge. This is particularly true when such gains undermine the notion of “objectivity” when it comes to the media investment counsel being provided by these agencies to their clients.

Noted novelist, Thomas Hardy once said that, “The resolution to avoid an evil is seldom framed till the evil is so far advanced as to make avoidance impossible.” One might argue that as an industry, when it comes to transparency, trust and their impact on client / agency relationships the point in time to frame a resolution is long past due. Sadly, for the 4A’s, change is afoot and the organization’s actions may render it as an observer rather than a co-author of a doctrine for positive change.

 

 

 

 

 

 

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