Conflicts of Interest Sap the Industry
Also like bureaucratic corruption, the conflicts of interest don't at first seem detrimental to the industry as a whole. Any one instance of a conflict appears merely inconvenient. But taken together, the conflicts present a poor business environment - one that discourages marketers from trusting partners enough to increase advertising budgets.
What's a Conflict?
Any time an agent, like a media buyer, is capable of earning more money by recommending a less-than-optimal deal to a client, we have a conflict of interest.
In its most common form, we have media reps taking buyers out to expensive dinners and currying a reliance on an unaffordable, opulent lifestyle. But, truth be told, most buyers are perfectly capable of extorting such freebies from any media vendor, so this fails to present a very strong conflict toward any one seller.
(When I told a board member of the IAB that we should have an month-long experimental moratorium on freebies across all media vehicles, he responded, "That would be your worst nightmare: you'd then have to start paying your buyers a reasonable salary." Touché.)
The most obvious conflict comes in the form of a bribe. When I was at Leo Burnett in the early 90's, a media supervisor acquaintance of mine was offered a $150 gift certificate to a department store by a spot cable rep. She reported it to her media director, and the rep got in a little bit of trouble. The rep had made the offer because he had to cancel a dinner that would have likely cost just about $150. He thought he was just making good on a previous offer. When asked if he was intending it as a bribe, he responded with perfect candor, "No more than the dinner was."
Putting too much scrutiny on conflicts can become silly, however. A common form of conflict silliness can be seen when clients disallow their agencies to do business with firms that may indirectly compete in a similar market.
When GM hires an ad agency, it doesn't want it to be the one that also handles Ford. Especially with accounts of that scale, individual staff members would be susceptible to exchanging data and ideas about automotive marketing across the accounts. But in the past few years, this has been taken to some extremes.
When we won the Ameritech account back at Leo Burnett, the Hallmark client initially protested that they were both "communications" firms. When I renegotiated an agency contract with Microsoft, their initial list of their claimed competing industries was so broad, we would have been limited to handling advertising for buggy whips, water dowsers and apothecaries.
I think it became fashionable to force agencies to forgo business. It's an ego boost to a company to force an agency to kowtow to their whims. It's an exercise of power. But these "conflicts" serve only to misdirect the clients attention from the real problem.
The Client-Agency Compensation Conflict
The biggest and most systematic of our conflicts of interest, though, do not come at the execution level, where buys are made. The huge conflicts come from the very way in which agencies work for clients. The very agreements they strike when an agency wins an account puts the client in a conflict-threatened position.
Typically, the ad agency earns a percentage of the media deals placed through its services. Often there are other, additional fee arrangements, but few agencies completely forgo the commission-based compensation. In the old days, when media markets were more predictable and creative and media services had not yet been "unbundled," the commission would amount to about 15 percent of the media spend.
Here's a little home economics experiment that you can conduct to see the inevitable effects. Tell your child (or nephew, or the nearest neighborhood kid) that you will pay him $5 to go out and buy your $100 worth of groceries. When he comes back, you might find that the cost amounted to $98 or $103 due to changing prices, but you're very likely to see a result very close to your expectations.
The next week, have that very same child go get your groceries, except this time, ask him for his advice on what proportion of the grocery bill you should spend on candy. And here's the kicker: tell him that for his services, he will receive 15 percent of the candy. You will quickly find that the child's sense of proportion can be quite flexible.
Marketers find this true of agencies as well. When one agency controls a print budget and another controls the online budget, the client can be guaranteed to receive conflicting recommendations when it comes to slicing up the budget pie. This has the net effect of making clients distrust any of the agency recommendations. When online buying firms complain that traditional marketers irrationally give short shrift to online media, they have only themselves to blame.
A study recently showed that of all the buy-sell recommendations stock analysts made, only two percent of them were to sell. Obviously, the analyst industry is horribly biased, probably due to the linkage between these analysts and the sell-side of the brokerages. Yet, I'd bet my broadband access that ad agencies recommend a spending reduction less than one percent of the time, an even worse record.
Next week, this column will feature some of the underlying causes of the conflicts and begin to address how marketers and agencies can correct them.
- Tig Tillinghast helped found and run several of the largest agencies' interactive groups, including those of Leo Burnett, J. Walter Thompson and Anderson & Lembke. At several Internet startups, he helped design several of the industry's media standards and financial practices. He is currently writing a book on interactive marketing to be published in the fall.