Association of National Advertisers report finds rebates and other non-transparent business practices are "pervasive" in the US media ad-buying ecosystem — despite agency groups persistently saying they don't take rebates in the US.
The study found "evidence of fundamental disconnect in the advertising industry regarding the basic nature of the advertiser-agency relationship."
The investigation found senior executive across the agency ecosystem "were aware of, and mandated," some non-transparent business practices.
The study also found evidence of "potentially problematic agency conduct concealed by principal transactions; 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."
Advertising agencies in the US have been systematically padding their profits by using non-transparent practices such as taking rebates from media companies and not disclosing them to clients, according to the Association of National Advertisers (ANA), which released the highly-anticipated findings of an eight-month investigation into the sector on Tuesday.
The ANA — which represents the biggest global brands including Procter & Gamble, L'Oréal, Coca-Cola, Toyota, and Apple — said in its report that "numerous non transparent business practices" were "pervasive" in the media ad-buying ecosystem.
“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 58-page report, which compiles the findings of investigations firm K2, does not name names, but it suggests non-transparent business practice is widespread in the US media buying industry.
The findings will have huge implications on the advertising agency industry, which is dominated by six holding companies: WPP, Omnicom, Publicis Groupe, Interpublic Group, Dentsu Aegis, and Havas. Those companies' media buying and planning arms are the most profitable areas of their businesses. In the US alone, $192.6 billion was spent on advertising last year, according to research firm Strategy Analytics.
Business Insider has contacted all the major advertising agency holding groups for comment. We are compiling their responses as they come in at the bottom of this story.
The 4A's, the trade body that represents advertising agencies, said in a statement (which you can read in full below): "A healthy and constructive debate about media buying can only happen with a bipartisan, engaged, industry-wide approach -- and that is precisely the opposite of what the ANA has pursued. The immense shortcomings of the K2 report released today – anonymous, inconclusive, and ane-sided – undercut the integrity of its findings."
There is no immediate suggestion at this stage that anything illegal has taken place. The scope of the investigation was to investigate the current state of practice in the marketplace, rather than attempting to trace the flow of individual cases (K2 said in a conference call in journalists that doing so would compromise its anonymous sources.)
What is clear is that the report has brought to light practices that lots of marketers might not have been aware of.
Media agencies are paid by advertisers to secure the best-performing advertising slots. Marketers entrust their agencies to spend their money in the most efficient manner possible to achieve pre-determined outcomes — such as the ads reaching a guaranteed number of people, the ads resulting in a certain amount of visits to their website, or an uplift in sales.
Any evidence that media agencies have simply been spending advertisers' money with the media owners that bring the biggest benefit to the agency — such as with media owners that provide a rebate if an agency group spends a set amount of their aggregated client budgets over an agreed period — will anger marketers, not least if those rebates have not been disclosed to them.
Rebates are media common business practice in markets such as Europe, China, and Brazil, but for years, the biggest players in the business have denied that they take rebates in the US.
This report suggests at least some of them do.
What the study found
In a conference call with journalists, K2 executive managing director Richard Planksy outlined some of the main findings from the report.
K2 interviewed 150 sources of which 117 were directly involved in the media buying process. Of those, 59 reported direct experience with non-transparent business practices, while some reported multiple experiences.
Plansky said K2 found "substantial evidence" of non-transparent activity, including:
41 sources reported direct knowledge of rebate deals occuring in the US market. 34 of those sources indicated they were not disclosed to marketers, they were not returned to marketers, or they had been demanded of media owners from agencies.
K2 said it also had documents including email threads and contracts between media suppliers and agencies that show evidence of this.
There was evidence that senior executives at media agencies and holding companies were aware of and mandated contracts for rebates and non-transparent practices, suggesting they were a "regular course of business," Plansky said.
Those rebates fetched betwen anywhere of 1.67% to approximately 20% of aggregate media spending, depending on the deal, K2 found. Planksy said there was also evidence of deals wehre the percentage returned would increase as spend increased.
Types of rebates:
Cash rebates from media companies being provided to agencies with payments based on the amount they 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 usually described as "consulting or research" that were often tied to the volume of agency spending. Sources told K2 Intelligence that these services “were being used to obscure what was essentially a rebate.” Planksy said often the non-media services were of "minimal utility, significantly over-procied, or in some cases not supplied at all."
Markups
K2 found evidence that agency holding groups were engaging in "principal transactions" — buying media ahead of time. The individual media agencies would then sell that media back to clients, but not disclose the original purchase price.
Markups on media sold through principal transactions ranged from approximately 30% to 90%.
K2 said media buyers were sometimes pressured or incentivized by their agency holding companies to direct client spend to the highest-margin media, regardless of whether these 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.
Agencies holding stakes in media suppliers
K2 said it also found evidence of senior employees feeling pressure from senior executives at their agencies or within the holding company to direct spend to a media owner in which the holding company holds an investment.
The ANA said the study found non transparent practices were found to exist "across the spectrum of agency media entities" as well as across digital, print, out of home, and television media.
K2 said there were many factors contributing to these practices, but there were three key reasons why this is happening:
Advertisers have been driving down agency fees and offering difficult payment terms, making it difficult for agencies to sustain their businesses.
Advertisers are struggling to respond to the rapid changes in the media buying market and many lack the subject expertise to ask the right questions.
Some advertisers do not exercise their full audit rights, or only have limited audit rights, or are simply not aware what auditing rights they are permitted.
The impact
As we detailed last month, at the very least, the report may lead to many marketers asking to renegotiate their contracts with their current agency — as the ANA suggests they do.
Some marketers may look to appoint auditing firms to assess whether their current agency is providing them value for money — potentially getting media money refunded if it was found not to be spent in their best interests.
It could cause some marketers to want to switch agencies — or take their media-buying in-house.
There's a slight possibility some brands could even sue their agencies if they are found to be in breach of contract. However, most of the industry experts we spoke to ahead of the report's publication said this would be unlikely: it's a time-consuming, costly exercise that, for a marketer, could expose to their CFO and CEO that they were negligent in their decision making.
Coca-Cola's former marketing boss Peter Sealey told Bloomberg on Thursday, ahead of the report's release, that the Securities and Exchange Commission "should be involved." If evidence of criminal behavior or fraud is found by marketers that do intend to take the matter further, that's when things get really serious. Advertising executives have gone to jail for over-billing clients and for their part in operating kickback schemes before.
From the agency perspective, the report is hugely damaging to their reputations — not least as the report suggest non-transparent practice is widespread, meaning companies that have not been involved with the types of activities outlined may be still be hurt by association.
Not only that, but investors in ad agency holding company stocks may also now start questioning the business practices of media-buying firms if they believe their margins are padded with money that may be at-risk for legal challenge.
Luis Di-Como, SVP of global media at Unilever, told Business Insider: “Trust and transparency are critical to any relationship, so we take the ANA’s findings very seriously. We support its work to ensure that as the media industry evolves these values remain a top priority."
He added: “At Unilever, we are actively engaged with our agencies and the industry at large to exert greater control and responsibility around media transparency. We go to great lengths to make certain that our proprietary procedures and policies maximize our investments and fulfill our contracts, in both the letter and spirit. We’re confident the right steps will be taken to strengthen our industry.”
How the investigation came about in the first place
In March last year, the former CEO of WPP media agency MediaCom, Jon Mandel, alleged agency kickbacks were still "widespread" in the US and cited them as one of the reasons he left the industry.
"Have you ever wondered why fees to agencies have gone down and yet the declared profits to these agencies are up?" Mandel said at the time.
Later, he told Australian trade publication Mumbrella: "It was like somebody had died in the room."The interview was headlined: "Is this the most hated man in advertising?"
Meanwhile, the ANA was brewing its plan to investigate the kickbacks issue and the general transparency issues plaguing the sector. A survey it had commissioned the prior year, conducted by Forrester, revealed there was growing concern amongst marketers about whether they were receiving full transparency from their agencies about how their money was being spent.
In October 2015, the ANA appointed two firms to investigate the issue.
One of those firms was K2, an investigative consultancy staffed by former FBI agents and founded by "father-son detective duo" Jules and Jeremy Kroll. Jules Kroll founded the Kroll Inc. private security and intelligence empire.
The ANA also hired Ebiquity's Firm Decisions division, a specialist marketing auditor, which works with clients including Unilever, Coca-Cola, Microsoft, and Jaguar Landrover.
K2 interviewed 150 sources between October last year and May this year. Interviewees included media agency professionals, trade association executives, consultants, attorneys, barter company employees, and post-production professionals. All interviewees were granted anonymity.
K2 said five of the six major holding companies and their affiliated companies declined formal request sto make any of their current executives available to be interviewed.
Firm Decisions is set to publish a report later this week that will contain a list of long-term recommendations.
But in the near term, the ANA suggests marketers re-examine all their media agency contracts and "meticulously review" all the terms and conditions.
The ANA also recommends marketers implement media management training across their businesses, and assess whether contract terms permit them to "follow the money" by having full accountability for every dollar they invest with a media agency — allowing their audit rights to cover not only the media agency, but the holding company, and ever affiliated ad company that touches their business.
How the agency groups have reacted
Business Insider has contacted all six major ad agency holding groups and we'll publish their responses once we hear back.
4A's (THE TRADE BODY THAT REPRESENTS ADVERTISING AGENCIES)
A healthy and constructive debate about media buying can only happen with a bipartisan, engaged, industry-wide approach -- and that is precisely the opposite of what the ANA has pursued. The immense shortcomings of the K2 report released today – anonymous, inconclusive, and ane-sided – undercut the integrity of its findings.
We call upon the ANA in the strongest terms to make available to specific agencies on a confidential basis all of the materials related to them. Without an opportunity for agencies to assess and address the veracity of information provided to K2, sweeping allegations will continue to drive attention-grabbing headlines; this does nothing to foster a productive conversation or to move our industry forward and could cause substantial economic damage to all media agencies.
Faced with a report that views media buying from the perspective of only one of the three parties to such transactions, agencies are hard-pressed to defend themselves, which could cause substantial economic damage to all media agencies.
The advertising ecosystem is increasingly complex, and we are firmly committed to ensuring appropriate governance practices are in place. In an effort to address today’s challenges and modernize industry practices, the 4A’s worked productively for six months with ANA last year. Our joint task force developed principles of conduct to establish clear standards for transparency in media buying. When the involvement of third parties in tackling this challenge was suggested by ANA, the 4A’s was supportive, even offering to be a partner in the RFP process. The entire industry is harmed and at risk of further damageas a result of the path the ANA has chosen.
With or without ANA’s collaboration, the 4A’s is committed to taking a leadership role in achieving fairness and transparency in the marketplace for all parties to media buys.
Despite the fact that our paths have diverged, the 4A’s are determined to build upon the significant groundwork laid by the joint task force, including a number of agreed-upon principles, which we released in January of this year and which can be found here.
PUBLICIS GROUPE
We fully understand that clients need to be certain that their investments are managed in a professional way and according to the contracts they have signed. Mutual trust has been a pillar of our Groupe for decades. Had the ANA been willing to have an open dialogue with our industry we would have been immediately ready to cooperate, as we did last year, and that is reflected in our engagement with the 4A’s. By refusing such a dialogue and choosing a sensational approach, it seems clear that the ANA is not trying to find a solution to the alleged problems, and instead is acting with other goals in mind.
The ANA has failed its members, advertisers, agencies and the entire industry by releasing a report that relies on allegations about situations involving unnamed companies and individuals to make broad, unsubstantiated and unverifiable assertions. Despite repeated urging by Publicis Groupe and others in the industry to include names and sources in its report, the document hides behind suspicions and anonymity rather than encouraging real accountability.
As a result, the report fails to achieve a constructive outcome of encouraging change that can assure advertisers and agencies are well-equipped to work together in a rapidly evolving media environment. The various highlighted practices distort the picture of the marketplace by suggesting that they are pervasive. These allegations are too serious for the ANA to act in suchan unhelpful way.
If the report’s authors have evidence of wrongdoing by specific agencies, they should come forward and state their case, so that the appropriate action can be taken.
The unsubstantiated claims are already causing serious damage to the reputation of the industry and endangering the most valuable component of the agency-advertiser relationship: trust.
Trust is a key tenet at Publicis Groupe. We are committed to understanding and respecting our clients’ transparency requirements in all situations, and this is a standard part of our client contract negotiation process. Publicis Groupe has strict internal rules, including a code of conduct that serve as important controls on our practices and public reporting. In addition, we continually examine our processes and procedures to ensure we are following best practices, and our people are expected to meet these high standards.
We are crystal clear: we are committed to full compliance with the terms of the client-agency agreements we sign. We always want to hear from any client that has concerns about the delivery of our services and how we are compensated, so that we can address those directly with them. We also recognize that some alleged practices under question may not be egregious transgressions, but rather outmoded practices that have not kept pace with the fast changes in the media landscape that require more engagement and dialogue between agencies and clients, and better alignment to assure comfort and consensus.
Consistent with our strong advocacy for the industry and our clients’ best interests, we were active participants in discussions last year with the ANA and the 4A’s toward the shared goal of enhancing media transparency. We were on the verge of announcing a broad set of principles when these efforts were unexpectedly abandoned by the ANA. We remain strong advocates of developing industry guidance now.
Our letter sent to the 4A’s on May 30, before the report was released, outlined our concerns about the ANA’s approach, which went unheeded.
Ultimately, the industry has been diminished and maligned by the ANA’s short-sighted andunilateral agenda of casting aspersions on an entire industry, rather than promoting trust and transparency, which should be paramount.
We are continuing to review the ANA’s report, and will comment further as appropriate.
More to follow ...
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