October 16, 2019

The following is republished with the permission of the Association of National Advertisers. Find this and similar articles on ANA Newsstand.

 

By Stephen Broderick

The 2016 ANA report on media transparency was a welcome and long-overdue wake-up call for the global advertiser community. By highlighting the existence of nontransparent trading practices in the U.S. media market — by most measures the largest and most sophisticated in the world — the report focused many national and global advertisers' attention on the issue of transparency in media. It was the first stepping stone on the journey to more transparent media trading.

The world's biggest advertisers took the lead in addressing the issue of transparency, on both their own behalf and that of the industry, through their own businesses and from the conference stage. At the 2017 IAB Annual Leadership Meeting, P&G Chief Brand Officer Marc Pritchard called the digital supply chain "murky at best, and fraudulent at worst." Months later, Pritchard's peer, Unilever's then-CMO Keith Weed told Facebook and Google it was time to "drain the swamp or lose advertising revenue."

What solutions, then, have been identified in these intervening years? The starting point for restoring trust between advertisers and agencies must involve comprehensive contract reviews. Because of the increasing rate of change in the media and marketing ecosystem, advertisers need to be more vigilant than ever before.

Agencies Reviewed and Contracts Renewed

Each year since 2016, hundreds of the world's leading advertisers have reviewed their media agencies of record, with cumulatively more than tens of billions of dollars in media spend analyzed and evaluated annually, campaign reports. And while many brands chose to stay with their incumbent agency or added an agency to their rosters, many others did choose to switch to new partners.

What was common to the new deals struck by most of those agency reviews was renewed assurance that enhanced transparency would be delivered as a priority. Many used the model contracts offered by the ANA in the U.S. and ISBA (Incorporated Society of British Advertisers) in the U.K., following the guidelines and recommendations of the ANA report developed by FirmDecisions and Ebiquity. This flurry of activity helped to put transparency firmly on marketers' agenda and to-do list, a must-secure criterion for agency partnership.

The report and subsequent activity sensitized advertisers to the fact that regular and comprehensive reviews of their contracts with agencies should become the new normal. Some progressive advertisers have even chosen to remunerate their agencies according to entirely new models, including moving away from negotiated deals at a group level.

Still Room for Improvement

While many advertisers have improved the levels of transparency in media trading, the media and marketing ecosystem has been in a constant state of flux and development since 2016. If anything, the past three years have been characterized by a quicker rate of change than at any time in the industry's past 150 years. This has meant that some contracts have not been able to keep up with the changes in both the technology and terminology used to describe new trading practices.

Increasing complexity in the media supply chain has introduced more agency-owned service providers and advertising and marketing technology intermediaries between brands and publishers. In some instances, this has made the ecosystem more opaque. This requires advertisers to invest time and resources into understanding the evolving ecosystem if they are to retain the levels of transparency they desire in their media trading.

Complexity has arisen in part because the big players in marketing support services are continually evolving their business models. Consultancies are increasingly offering services traditionally offered by agencies — most notably creative, content, and media trading, particularly programmatic media buying — while agencies are enhancing and expanding consultancy services. The lines between entities have become blurred. As a result of this complexity, advertisers and agencies are taking longer to agree to contracts, and the extended negotiation period means sign-off typically takes between six and 12 months.

There are three specific areas where advertisers need to remain ever alert to ensure they're receiving optimal value from their agency partners: media benefits, inventory media, and servicing levels.

The changing face and names of media benefits.

Historically, media benefits were called AVBs (agency volume benefits) or bonification, depending on the market. One of the challenges facing advertisers looking to secure rebates under the terms of their existing contracts is that the terminology used to describe benefits and rebates has changed, and continues to morph. Terms used to describe benefits today include: "value pots," "free space," "service level agreements," and "inventory media."

It is widely reported that contracts are failing to keep pace with changing terminology. And if the specific terms identified above are not covered by the advertiser-agency contract, the benefits often fail to find their way back to the advertiser. This is why, when reviewing the terms and conditions of their media agency contracts, advertisers should make sure that all relevant rebates, and all relevant terms for rebates and media benefits, are adequately covered.

The price — and opaque cost — of inventory media.

Under the terms of their contracts, advertisers are not always entitled to know the actual cost of some media sold to their agencies. Agency groups buy media inventory from publishers in bulk and at reduced cost with the aim of delivering a better price to advertisers than if inventory had been bought piecemeal, deal by deal. Agency groups carry all the risks associated with buying and owning the inventory. Often, however, this inventory is made up of free space provided to the agency group by publishers and it costs them nothing at all.

As the 2016 ANA report showed, agency groups can make significant, nondisclosed mark-ups on inventory media which, under the terms of many contracts, they are not required to disclose to their clients. Section 4.3.3 of the report on "Media Purchase As a Principal" is clear on the mechanisms of such transactions, which advertisers need to be aware of and address when they revise and renegotiate their contracts.

Nondisclosed inventory deals originated in the U.S. … But the practice is spreading worldwide.

Where contracts state that agencies are required to disclose inventory media buys on their plans, there is a risk that agencies either ignore this clause altogether or else go the other way. For instance, one way in which the requirement of disclosure manifests itself is by including the line "may include inventory media" on all media line items. This has a "may contain nuts" effect, with advertisers soon filtering out this ubiquitous, caveat emptor disclaimer.

This is a global issue, but it tends to be more significant and prevalent in the U.S. because of the bigger volume of media traded and because the technology is typically more advanced. Nondisclosed inventory deals originated in the U.S. and have been accelerated because of the sheer volume of advertising technology and marketing technology trading platforms in the market. But the practice is spreading worldwide.

To confirm that they are paying the actual net cost of the media, advertisers should seek to clarify via their contract the composition, origin, and price paid by their agency group and ensure complete transparency exists in these transactions. Therefore, all advertisers should read and re-read the ANA's transparency report to ensure they understand current trading mechanisms and the associated risks/rewards.

Reconcilable versus nonreconcilable fees.

In recent years, some agencies have been charging their clients fixed fees for the media planning and buying work. Time and timesheet data is provided for information only and has no consequence on the fixed fees levied. This has raised challenges for brands seeking greater transparency, including:

  •         Potential for underserving of planned resource
  •         Greater possibility of duplicate fees for the same employees working across multiple, different accounts
  •         Room for junior staff to fulfill senior roles
  •         Lower level of seniority resourcing against plan
  •         Indirect resource being directly charged
  •         Vacant positions where agencies have been unable to recruit team members required at the appropriate level

With a fixed-fee model, advertisers have no recourse to recover what they have agreed to pay, even if the relevant personnel don't undertake the work required for the appropriate duration. Because this analysis has to be undertaken retrospectively, it often comes too late to affect even the following year's fee negotiation.

The best way to address this trend and for advertisers to protect their interests is to write and agree to contracts that base the fee on actual hours supplied. In the event that the agency is unable to provide the relevant personnel at the appropriate level for the time required to do the work, the agency is required to reduce the fee. Advertisers can also cap total fees while still ensuring that they are reconcilable. In effect, this means that agencies are unable to charge additional time — and money — for "over servicing" and that the client can claim back for "under servicing."

Increased Focus on Reviewing Other Marketing Services Partners

The 2016 ANA report convinced advertisers they should pay attention to issues pertaining to media transparency. The report's practical set of recommendations established a blueprint for increased vigilance and the requirement for regular, ongoing activity by advertisers to drive transparency into all aspects of their media trading. It is unsurprising that attention first focused on media, as at least 30 percent of all marketing spend goes toward media (forecasted at $563 billion for 2019, according to Statista). That is the biggest single line item.

And while significant challenges remain, which advertisers must to continue to address around benefits, inventory media, and agency compensation, the ANA report has had a net positive effect on advertiser-agency relationships — and for many advertisers that has made media trading more transparent.
With the rate of change increasing all the time, advertisers need to be more vigilant more of the time.

As agency holding companies have diversified their interests and the services they provide, the sensitization to transparency in media is highlighting the importance of transparency in other areas of marketing expenditure too. Agency holding company groups often include different marketing services providers, including creative, print and production, direct marketing, event management, point of sale, and market research. These categories tend to be more subjective and people-oriented (and therefore less commoditized) than media. But as brands have woken up to transparency in general, they are increasingly scrutinizing nonmedia marketing investments with more rigor too.

Most notably, the drive for increased transparency has spread from media to production and other areas of marketing. And although a lack of transparency in production and other nonmedia areas of marketing is not a new issue, a renewed energy and focus has developed since the 2017 publication of an ANA report on production transparency, thanks to the ANA's Production Transparency Taskforce.

This is timely because over the past four or five years, media agency holding companies have invested in the advertising production supply chain, buying TV production houses and editing suites in a conscious decision to integrate vertically and control more of the supply chain.

Reviewing production and other nonmedia spend can reveal ownership structures that may otherwise remain opaque and has already revealed compromised payment proposals and supply chain rigging previously not disclosed. This is why it's important for advertisers to remain on their guard. They must ensure that their agencies are acting in their best interests, maintaining transparent relationships, allocating resources accurately, and ensuring that all marketing rebates and benefits are rightfully returned in a timely fashion. This is true whether those agencies are associated with media vendors, creative agencies, production houses, or tech suppliers.

In summary, since the 2016 media transparency and 2017 production transparency reports from the ANA, many advertisers have started to address issues of transparency across the media and marketing supply chain. With the rate of change increasing all the time, advertisers need to be more vigilant more of the time to ensure that they are receiving optimal return on their media and marketing investments.

"Trust but verify" should be the watchwords of building increased trust in the ecosystem, with constant, annual vigilance and reviews, rather than intermittent reviews every three, five, or 10 years. Transparency truly is an issue for the whole marketing ecosystem.

Stephen Broderick is the global CEO at FirmDecisions, a partner in the ANA Thought Leadership Program.

 

 

 

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