The media rebate scandal has been brewing in the U.S. for a long time but only now is it having a real knock on effect for agencies.
For the first time, shares of the agency holding companies fell last week on the back of fears that the sector could be subject to “emerging concerns among marketers around different forms of agency rebates in the United States.”
Since Brian Wieser, senior analyst at Pivotal Research Group, wrote those words shares have since rallied but his note sent a clear message to shareholders to take care.
The Association of National Advertisers, the leading U.S. marketing trade body has stepped up and announced a joint task force, including a panel of marketing leaders and agency trading executives to address the issue.
Agency holding company CEOs used the Q1 reporting season to issue robust denials of rebate practice and it is notable that other agency groups have joined a debate that was previously focused on GroupM.
The issue for clients is perhaps not that this rebate practice might be present in the U.S. market but that the level of transparency is such that they even don’t know if any commercial benefits (whether you call them rebates or not) are being derived from their media trading.
Since their creation over the last 10 years, the agencies’ media buying groups have leveraged their scale to negotiate better pricing and added value for their clients, but have traditionally been coy about what additional benefits might be secured on the back of that scale.
The perennial challenge for advertisers has been to work out what their share of those added benefits might be and making sure that they get them.
There isn’t necessarily anything underhanded about an agency negotiating added value for their clients, as Omnicom’s media chief Daryl Simm pointed out this week: “Media agency clients in the US receive all the value that gets negotiated in the US on their behalf, whether it's quantitative or qualitative benefits. Our buyers are pushing hard to extract a maximum value out of those vendors to meet the individual client expectations.”
However, the structures of these aggregated buying groups, and the fact that most clients don’t have direct contractual relationships at that level, which they should, makes it acutely difficult for any single advertiser to know how their “added value” compares to anyone else’s. There is nothing to benchmark it against and the agencies don’t offer that level of transparency at trading group level.
The result is a stalemate and standoff between agencies, clients and analysts that is in danger of escalating to a point where trust between the parties is further damaged.
Marketers’ trust in media agencies has been eroded in recent years by a succession of transparency concerns while agencies have struggled to defend their value proposition and fees to clients. This has led to a vicious circle as agency fees are put under more pressure and so bad behavior (if it exists) on the part of the agency becomes potentially legitimized by clients’ refusal to pay fairly.
These pressures are global but in the US, in particular, there is ongoing pressure on agency fees, lack of sufficient media auditing and a lack of good quality client-side governance for media.
The result is that client relationships with media agencies become low value, ridiculous considering the amount of money and risk to value at stake.
Marketers need to make sure that agency planning recommendations have legitimate rationales and that the full benefits of agency negotiations are being passed back to clients in equitable and transparent ways.
This requires both the capability to write a strong media brief and the ability to effectively judge how appropriate the agency’s recommendations are.
Without these basic skills marketers leave themselves exposed to being potentially disadvantaged when the agency has media value to pass back to their clients.
What we are left with is a pretty serious breakdown in the client-agency relationship. Rebate practice on the one side and punitive commercial practice by clients on the other are not the by-products of healthy respectful collaborations of mutual understanding. Instead they hint at significant loss of trust (and value) on both sides.
The net result is that trust in the global media agency industry has dropped down a further peg or two and is likely to be making shareholders in the agency groups rightly nervous.
As the ANA’s Financial Management conference kicks off in Phoenix this week, I’m looking for signs of good will on both sides to make progress: clients listening carefully to the agency perspective and agencies offering a transparent, holistic view of how media trading creates value and exactly how that is distributed across their client rosters.
The ANA’s task force should provide the right forum for this and ANA members need to hold this task force to account to deliver a position quickly on the following questions:
- Do media vendors ever offer incentives to media buyers?
- Are these incentives ever accepted by the media buyer?
- Does the media buyer document these in a transparent way?
- Can the advertiser be reassured that his or her agency is passing back these incentives in full?
- Does the agency ever generate a benefit (cash or something of value) from a media vendor as a result of passing over some of their clients' budgets?
- Do they return these benefits to clients in full?
- Does the agency make any financial gain (directly or indirectly) as a result of their transactions with media vendors?
- Does the agency holding company or trading group leverage agency billings to generate financial upsides for the parent company, trading group and or the agency?
It’s becoming more urgent than ever to get the answers and if agencies can’t provide this quickly then I expect more analysts will be lining up to advise caution to investors in the sector.