On the one-year anniversary of the Association of National Advertisers' landmark study and subsequent recommendations on media transparency, it's time to review the issues in this ongoing debate and see where we stand today.
The issues raised in the subsequent transparency debate are complex, and if the allegations against the agencies are true, the behavior is reminiscent of past high-profile financial scandals.
- What happened? On June 7, 2016, K2 Intelligence released an ANA-commissioned report detailing how rebates and other incentives that media buying agencies receive from media owners are being retained by the media buying agencies instead of being passed back to advertisers.
- What does the K2 report mean to an advertiser? Using a six-year statute of limitations in an action for breach of contract, an annual spend of $100 million equates to $600 million over that time frame. Estimates are that the retention by media buying agencies could be five percent to 20 percent. Assuming this is the case, an advertiser with a $100 million annual spend may have claims from $30 million to $120 million. Regardless of the margin of error, the amounts remain staggering for any major advertiser. Even assuming an advertiser elects not to pursue a claim, the advertiser should ensure that the continued diversion of assets stops.
- It is real? Top-level executives of some of the media buying agencies railed against the K2 report, assuring the marketing community that their companies never engage in the behavior reported by K2. But the K2 report's detailed findings -- deeming the behavior pervasive and systematic throughout the ecosystem -- make it difficult to believe the sincerity of these pleas of innocence.
- Is it serious? Whether the denials are real or feigned isn't the immediate issue. For now, transparency is the center of attention. Eventually, any media buying agencies that previously did or continue to engage in the subterfuge reported by K2 will most likely get caught and the behavior will be stopped. At some point, executives complicit in the alleged behavior may also face consequences.
- What has been the aftermath so far? One year ago this week ANA and Ebiquity/FirmDecisions published a series of recommendations in "Media Transparency: Prescriptions, Principles and Processes for Advertiser." Since the K2 report was published, the industry has taken steps toward reconciliation and change. They include:
- Significant increases in renegotiation of contracts.
- Significant settlements.
- RFPs that now include transparency as a key requirement to participate.
- Industry concern over an ongoing investigation by the U.S. Department of Justice into transparency in production and the possible expansion of that probe. The recent silence from the DOJ should not be seen as a positive.
- Are advertisers pleased with the results one year in?
- Advertisers that have addressed the issues and renegotiated contracts or held firm on RFP requirements are making progress. According to press reports, some advertisers have settled for millions of dollars in various forms, e.g., cash, credits, free media, etc. How much is dependent upon many factors, e.g., media spend, geographic scope, existing relationships, etc.
- According to a recent agency compensation study by the ANA, 25 percent of the advertisers surveyed were not aware of the transparency issue. Of the remaining 75 percent, only half have addressed it. It's impossible to know the percentage of those in that group that have achieved satisfactory results.
- Advertisers are not blindly accepting claims by agencies that the agencies are Sarbanes-Oxley compliant, as if such an assertion proves financial accountability. As far as transparency is concerned, such an assurance is meaningless. Nor does it satisfy the advertiser's obligations to its shareholders.
- Advertisers have a new concern following the recent ANA Programmatic Transparency report in which the trading desks of the major agency holding chose not to participate. The report shows:
- Full transparency in digital is possible despite agency protestations to the contrary.
- Excuses for non-transparency, e.g., NDAs, non-cooperation, etc., lack merit and have been eliminated by strong-willed advertisers like those who participated in the study.
- The solution is for advertisers to make transparency a condition of programmatic buying.
In addition, advertisers need to reassess whether buying sourced traffic should continue, given its propensity for fraud and non-human traffic. Advertisers and digital media platforms must also increase efforts to protect brand safety amid allegations that the monies flowing to criminals in the ecosystem are used to support illegal activities, including terrorism.
- How are agencies responding? It depends on the agency. Some media buying agencies, particularly those now owned by one of the holding companies, publicly support full transparency. Others have been forthcoming in private meetings and agreed to greater transparency, or have been honest about situations where transparency is not acceptable. Many continue to be uncooperative and in denial. Their hope appears to be to create enough fatigue in the process that advertisers lose interest in further negotiations. Delay is to their advantage. But that is becoming a failed strategy, as the issues become more public and advertisers make transparency a prime initiative.
- What can be done with existing contracts? If an advertiser has a signed a contract that is not up for renewal any time soon, it does not mean renegotiation is inappropriate. An advertiser can always renegotiate a contract due to materially changed circumstances. The ANA reports on media and programmatic transparency, together with the soon-to-be released report on production transparency, materially change the landscape. If a contract is ending and the advertiser has chosen a new agency, then it should also consider a full exit audit of the previous agency. Regardless of any prospect of renegotiation, every advertiser needs to talk to its agency on the issues, conduct at least a perfunctory internal investigation on its contracts and audit history, and satisfy its financial control requirements under Sarbanes-Oxley (at least in the United States).
- Can there be transparency when the agency is buying media as a principal and reselling it to the advertiser -- the so-called "principal transactions"? Whether an agency is acting as an agent or a principal is irrelevant when it comes to transparency. A contract can require transparency regardless of the agency's status. It's simply something to negotiate. On the other hand, if an agency is purchasing as a principal and not as an agent, absent contractual language to the contrary, status as a principal carries additional liabilities. A principal is generally responsible for the integrity and performance of its products and services. It cannot avoid liability to its customer by claiming it is not responsible for the suppliers it uses to manufacture what it sells. Where an agency is reselling media, an advertiser has every right to demand responsibility from agencies throughout the supply chain, just as the advertiser is responsible to consumers who buy the advertiser's products and services.
- What should an advertiser do now? What is front-and-center is whether agencies are going to be transparent or not with their advertiser clients on rebates and other incentives they receive. Who gets to keep the dollars -- the agency or its advertiser -- more often than not depends on vague contracts, no contracts at all, or common law basics governing agents for a disclosed principal. Bringing greater formality to the market is long overdue.
An advertiser has a right to know if it is receiving a fair share of rebates and incentives earned by its agencies using the advertiser's spending, either individually or in the aggregate, to secure concessions. No one can legitimately deny that agencies are receiving rebates and other incentives all over the world (including in the United States, according to K2). In the aggregate, billions of dollars are involved.
- Step One – A Look Inside. Advertisers may want to conduct an internal investigation that will provide an early assessment of potential claims and risks. This assessment should determine:
- Whether the advertiser has been receiving its fair share of rebates and incentives earned by agencies using the advertiser's spend, either individually or in the aggregate. If not, why not?
- Whether the advertiser was aware of an agency's retention of rebates and incentives and, if so, why was that permitted and how did it factor into agency compensation?
- Whether the advertiser is Sarbanes-Oxley-compliant with respect to financial controls to address the issues.
- Whether current contracts are lacking protections sufficient to warrant renegotiation or amendment.
- Whether RFPs include transparency obligations.
- Step Two – A Look Outside. Advertisers may want to audit their agencies to determine:
- What their agencies are doing with rebates and other incentives.
- If an advertiser's agencies are retaining benefits (including via the schemes alleged in the K2 report), the approximate amount of the advertiser's claim, and how it will be reconciled.
- If the agencies are not forthcoming or if their answers lack clarity, advertisers must consider steps necessary to protect the interests of the advertiser and its shareholders. In light of the K2 report and other revelations in the past year, simply trusting an agency's promise that it does not engage in questionable activities is no longer sufficient. There must be verification.
- Step Three – A Look to the Future. As an advertiser looks forward in this new era of transparency, it should undertake at least two initiatives:
- Renegotiate current contracts and/or identify the best provisions to insert in agreements.
- Insure transparency is a cornerstone in all future RFPs.
The industry is on the road to restoring trust, but has a long way to go. To preserve marketplace integrity and protect shareholder values, advertisers cannot let up and must continue to pressure agencies for complete transparency. The delays and public denials by agencies (despite reality) cannot continue. Agencies should prove their sincerity through cooperation in audits and legitimate contractual provisions that insure transparency, or make it clear where an agency refuses to embrace it.
Read what the ANA's Nick Manning has to say about transparency issues here.
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