Tag Archives: Principal-Based media buying

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.

 

 

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.

 

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