In its much-awaited transparency report the Association of National Advertisers reveals troubling specifics to bolster its accusations of the “pervasive” use of kickbacks and rebates in an ad industry where “senior executives across the agency ecosystem were aware of, and mandated, some nontransparent business practices.” (Read more on R3’s opinion on this decision here.)
The 58-page ANA study, conducted in conjunction with K2 Intelligence, was released this morning to immediate disdain from the ad industry. While the ANA stopped short of accusing agencies of any illegal activities, the charges are no less damaging: Agencies, for instance, have made markups on media of 30 percent to 90 percent on “principal” transactions, where an agency acts as a principal and buys media on its own behalf before reselling it to a client. Media buyers also said they were sometimes pressured or incentivized by their agency holding companies to direct client spending to that media, regardless of whether that selection was in a client’s best interests, according to the ANA.
Agencies haven’t publicly addressed the findings yet, but companies were quick to deny involvement in such practices. Publicis Groupe said the ANA had “failed” the industry by issuing a “report that relies on allegations about situations involving unnamed companies and individuals.” WPP’s GroupM advised, “The objectivity of [the report’s] authors and advisors needs to be examined carefully … and should not be allowed to tarnish the entire industry, nor every company in it.” Omnicom Media Group questioned the “small sampling of unnamed sources” while MDC’s Assembly and independent agency Horizon Media also questioned the study’s credibility.
For its part, the 4As cited the study’s “immense shortcomings,” and described its findings as anonymous, inconclusive and one-sided [which] undercut the integrity of its findings.”
The K2 Intelligence assessment was conducted from Oct. 20, 2015, through May 31, 2016, and based on information from confidential interviews with 150 individual sources—all interviewees were granted anonymity, and the ANA is unaware of their identities. It showed that “nontransparent” business practices were found across digital, print, out-of-home and television media. The nontransparent practices exist across the spectrum of agency media entities, the ANA said.
Some of the nontransparent practices were allowed within the context of the contract between agency and client. But the ANA still took issue with the practices, saying, “Transparency and contract compliance were clearly not one and the same in media buying. Even if a particular nontransparent practice was permitted by contract, advertisers were often deprived of relevant information for optimum decision-making.”
Execs at the ANA and K2 Intelligence also declined to label the nontransparent practices, which often involved cash rebates, as fraudulent saying that was “well beyond the scope of the study.”
Richard Plansky, executive managing director of K2 Intelligence: “From the beginning, this has been a study designed to shed light on certain nontransparent practices in the media-buying landscape—not an investigation or an audit. At the ANA’s insistence, this has never been about pointing a finger at any individual or company.”
The study underscored the disconnect between agencies and marketers when it came to media transparency. It also reminds marketers of their responsibility to keep up to date with the terms of their contracts. Interestingly, advertisers in the report expressed a belief their agencies were duty-bound to act in a marketer’s best interest. Many agency executives, on the other hand, said their relationship to advertisers was solely defined by the contract between the two parties.
“The bigger issue is actually the dynamic between marketing, procurement and agencies,” said industry consultant Greg Paull, principal at consultancy R3. “Marketers are underpaying and agencies are undercharging. To get a truly strategic set of insights, strategy and execution requires a totally different approach to lowest cost of media and fees. This is a U.S. report but a worldwide problem. Agencies and clients need to re-set globally with clearer contractual terms and clearer agreements.”
The K2 Intelligence report indicated that nontransparent business practices employed by agencies, some of which may not have been contract-compliant, included the following:
• Cash rebates from media companies were provided to agencies with payments based on the amount spent on media. Advertisers interviewed in the K2 Intelligence study indicated they did not receive rebates or were unaware of any rebates being returned.
• Rebates in the form of free media inventory credits.
• Rebates structured as “service agreements” in which media suppliers paid agencies for non-media services such as low-value research or consulting initiatives that were often tied to the volume of agency spend. Sources told K2 Intelligence that these services “were being used to obscure what was essentially a rebate.”
• Markups on media sold through principal transactions ranged from approximately 30 percent to 90 percent, and media buyers were sometimes pressured or incentivized by their agency holding companies to direct client spending to this media, regardless of whether such purchases were in the clients’ best interests.
• Dual rate cards in which agencies and holding companies negotiated separate rates with media suppliers when acting as principals and as agents.
• Nontransparent business practices in the U.S. market resulting from agencies holding equity stakes in media suppliers.