Deal or No Deal

09 March 2015

It’s been another few weeks of less-than glorious headlines for the media agency industry. In Australia, Aegis has admitted to negotiating so-called value banks from media owners, a practice brought to public attention by GroupM who decided to audit the operations of its subsidiary MediaCom once ‘anomalies’ in campaigns placed on behalf of three large clients came to light.

In the USA, MediaCom’s ex-CEO, the respected Jon Mandel used a conference platform at the annual ANA event (the ANA is the US advertisers’ association) to claim that practices involving agencies making extra commissions via kick-backs and the like are common in the States.

This is all grist to the mill of those (me included) who believe that the media agencies operate a less-than-transparent business model, and that their future prosperity depends upon them changing this.

First – value banks. These work in different ways in different markets. In effect, the media give free inventory to the agencies to use in whatever way they see fit. Agencies can pass these along to their clients to reduce the overall cost of their campaigns, or they can use the free inventory as a cost regulator in pitches at the expense of existing clients, or they can sell the space and pocket the proceeds. Guess which is the least likely of these options.

Aegis’ Aussie CEO, Luke Littlefield said: “We have a partnership model with the media and we are all about mutual value creation.” By ‘we’ and ‘mutual’ he presumably meant agency and media owner.

The ANA platform comments of Jon Mandel made headlines because the American ad community has always assumed that these kick-backs, extra commissions and the rest are evils that only exist outside their borders.

The report in AdAge of Mandel’s speech included: “Media agencies aren’t living up to their fiduciary duties to clients and ‘cross the line of acceptable conduct in a partnership’. They are not transparent about their actions. They recommend or implement media that is off strategy or off target if it works for their financial gain.”

“Rebates, ‘kickbacks’ and other incentives for agencies that are at least potentially adverse to client interests, are happening virtually everywhere in the U.S. media landscape, including TV. The practice has migrated from cash incentives to free inventory…”

Cue Rob Norman, GroupM’s go-to guy when it comes to answering anyone daring to question the integrity of his organisation. Rob denied categorically that such activities happen within GroupM in the USA, although he admits they may happen elsewhere, albeit within the contractual arrangements that exist between agency and client.

GroupM are very good at waving the phrase ‘contractual arrangements’ around whenever they’re challenged about these matters. Of course no-one aside from the client can contradict them, an unlikely scenario. It is also only fair to point out that when MediaCom’s actions came to light in Australia it was reported that it was GroupM that called the audit. Mind you, better that than have a client auditor lift up the rock to see what came crawling out.

There are some interesting things to consider in Jon Mandel’s remarks, not least if his claims aren’t true why would he make them up?

Mandel made the point that agencies regularly put deals ahead of planning strategy. This is a topic we’ve covered here many times, and suggests that agencies benefit from allocating funds to one vendor over another.

Jon Mandel claims to have spoken to many current agency executives to help him arrive at his conclusions. I’ve done the same in the UK, and have found the same, including any number of planners who confirm that they are pressured to spend money in a certain way to benefit the agency as opposed to doing what they consider to be the best thing for their clients.

Then there is the whole value bank notion. This technique is commonly used by agencies – not only is it highly profitable, it’s virtually impossible for media auditors to spot. Free inventory of whatever complexion rarely finishes up fully benefiting those whose budgets allow it to be negotiated in the first place. The concept of agency deals (in other words deals done to benefit the agency over the client) even turns up in WPP’s annual report: “The Group receives volume rebates from certain suppliers for transactions entered into on behalf of clients”.

In effect Mandel is calling into question agencies’ objectivity, a stance that can be further compromised by taking equity positions in certain suppliers. Here is Rob’s answer to that one: “Clients are informed of our investments and can and do apply greater scrutiny to transactions with related parties”.

Really? How about when GroupM placed its 24/7 unit, an ad network into Xaxis thus placing the latter in a position of buying digital space from itself? As Xaxis famously won’t reveal to its clients where it spends its clients’ money how exactly could that ‘greater scrutiny’ be applied?

The fact is that agencies make money from their buying activities. I haven’t worked there for many years but I would be surprised if that was not the case in the USA. An element of discounts, rebates, free spots and the rest commonly stick to the sides on their way back to the client in many markets, and the client is normally not made aware of the extent of these deals. These activities do impact planning objectivity, and are one key reason why agencies aren’t trusted. As Rob Norman said: “The broader issue of trust in the supply chain is of significant interest”.

Indeed it is. If agencies are to have any kind off future they need to come clean; act transparently in their buys; and turn their negotiating skills to ensuring that they are properly paid for the work they do in planning.