Report from K2 Intelligence Reveals Non-Disclosed Agency Practices
ANA Offers Guidance to Rebuild Trust and Confidence
NEW YORK, June 7, 2016 — Numerous non-transparent business practices, including cash rebates to media agencies, were found to be pervasive in a sample of the U.S. media ad-buying ecosystem, according to a study commissioned by the ANA (Association of National Advertisers).
Results of the study were released today by the ANA in conjunction with K2 Intelligence, which conducted the assessment and delivered a 58-page report.
"Advertisers and their agencies are lacking 'full disclosure' as the cornerstone principle of their media management practices," said Bob Liodice, president and CEO of the ANA. "Such disclosure is absolutely essential if they are to build trust as the foundation of their relationships with their long-term business partners."
The K2 Intelligence study, conducted from October 2015 through May 2016, reveals "evidence of a fundamental disconnect in the advertising industry regarding the basic nature of the advertiser-agency relationship." In general, advertisers expressed a belief that their agencies were duty-bound to act in their best interest. Meanwhile, many agency executives interviewed said their relationship to advertisers was solely defined by the contract between the two parties.
There were systemic elements to some of the non-transparent business practices reported by K2 Intelligence in the report. Specifically, the study revealed that senior executives across the agency ecosystem were aware of, and mandated some non-transparent business practices. Contracts for rebates and other non-transparent business practices were negotiated and sometimes signed by high-level agency executives.
In addition, K2 Intelligence found evidence of potentially problematic agency conduct concealed by principal transactions; as a principal, an agency (or its holding company or associated company) purchases media on its own behalf and later resells it to a client after a markup.
The K2 Intelligence report indicated that non-transparent business practices employed by agencies, some of which may or 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 spend 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.
- Non-transparent business practices in the U.S. market resulting from agencies holding equity stakes in media suppliers.
The study revealed that non-transparent business practices were found across digital, print, out-of-home, and television media. In addition, non-transparent practices were found to exist across the spectrum of agency media entities.
The report included detailed source accounts from dozens of confidential, personal interviews as well as documentary evidence. Due to the confidential nature of the assessment, the report does not specifically identify any companies or individuals. This was consistent with the original directives of the study.
"From the beginning, this has been a study designed to shed light on certain non-transparent practices in the media-buying landscape — not an investigation or an audit," said Richard Plansky, executive managing director of K2 Intelligence. "At the ANA's insistence, this has never been about pointing a finger at any individual or company."
Plansky said the documentation cited in the report included, among other things, emails between agency executives and media companies in which rebates were specifically discussed in detail.
Liodice indicated that a fundamental shift in the business model for media agencies over the past several years has created a challenging new media landscape for both agencies and advertisers.
"Whether acting as agency or principal, vast changes in technology, the complex digital supply chain, and the proliferation of media outlets provided agencies with additional opportunities to increase their profit margins beyond agency fees," Liodice said. "This has led to disconcerting conflicts of interest and a lack of transparency."
TRANSPARENCY IN CONTRACTS
While the report indicates that some contracts between advertisers and their agencies allowed the agencies to engage in non-transparent business practices, transparency and contract compliance were clearly not one and the same in media buying. Even if a particular non-transparent practice was permitted by contract, advertisers were often deprived of relevant information for optimum decision-making.
Accordingly, K2 Intelligence focused on bringing to light non-transparent practices throughout the media-buying ecosystem, even if those practices were contract-compliant. In fact, the study revealed that, in many cases, advertisers were unaware of details in their agency contracts that addressed the issue of transparency, particularly because some contracts had not been reviewed or updated in as long as 10 years.
"The K2 Intelligence report unearthed a 'fundamental disconnect' between advertisers and their media agencies," said ANA Chairman Tony Pace. "As media practices have become more complex, stewardship and oversight needs to become more precise, more thorough, and more fully transparent."
The ANA is developing suggested contract language to address media-buying transparency. In the near term, it is recommended that marketers immediately take the following steps in anticipation of the complete set of recommendations soon to follow:
- Re-examine all existing media agency contracts and meticulously review all terms and conditions. As appropriate, use an expert, independent third party to provide insight and contractual expertise to optimize transparency, upgrade reporting and analytics, and substantially expand audit rights if necessary.
- Implement media management training, particularly in the areas of contract development and management of the digital media supply chain.
- Confirm and reaffirm the basis on which your media agency is conducting your media business. Be critically clear and comfortable with the agency's role as agent and principal. Ensure there are no conflicts of interest, and that there are clear processes in place for resolving conflicts that might emerge.
- Assess whether contract terms permit you to "follow the money" by having full accountability for every dollar that is invested with a media agency. It is recommended that audit rights cover not only the media agency but the holding company and any affiliated companies that touch your business.
Liodice said these guidelines will help set the stage to take additional steps upon release of the complete set of recommendations by Ebiquity and FirmDecisions in the coming weeks. The recommendations will focus on contract provisions, principles, and re-establishing advertiser primacy in the industry.
The K2 Intelligence assessment was conducted from October 20, 2015, through May 31, 2016, and was based on information compiled from interviews with 150 individual sources. Those interviewed included marketers, media suppliers, ad tech vendors, current and former advertising and media agency professionals, trade association executives, industry consultants, attorneys, barter company employees, and post-production professionals. All interviewees were granted anonymity.
K2 said an additional 131 interviews were requested. Of those, 61 declined while the remaining 70 failed to respond. Five of the six major agency holding companies and their affiliated companies declined formal requests to make any of their current executives available to be interviewed.