The Fog of Trust and Transparency

April 25, 2018

By Doug Wood

Hvostik/Shutterstock.com

This June marks two years since the Association of National Advertisers released the K2 Intelligence investigation of non-transparent transactions in the media buying industry. This was followed in July 2016 by the ANA sponsored Ebiquity/Firm Decisions guidance, Media Transparency: Prescriptions, Principles, and Processes for Advertisers. In the aftermath, we witnessed unprecedented erosion of trust between agencies and advertisers. As we approach this second anniversary, one question looms over all others: Has trust been restored?

I wish I could respond with an unequivocal yes. But I cannot. In fact, after negotiating dozens of major media buying agreements since the K2 Intelligence report, trust remains as much in flux as it was when Jon Mandel first dropped his bombshell accusations in 2015.

History, however, has lessons to offer. This is not the only assault on trust or the first time the industry has come to this fork in the road.

In 1982 two brothers, Maurice and Charles Saatchi, came to New York. And they came with money. A lot of money.

In just four years, they bought 14 U.S. based ad agencies culminating in a blockbuster deal to buy Ted Bates for a whopping $500 million, more than twice the agency's book value. Bob Jacoby, the CEO of Ted Bates, reportedly walked away with more than $50 million.

In 1985, Martin Sorrell, Saatchi & Saatchi's CFO, bid farewell to the Saatchi brothers and acquired a company named Wire and Plastic Products. He shortened the name to WPP and began his journey building the largest advertising agency holding company in history. His buying prowess was enviable and included a $566 million hostile takeover of J. Walter Thompson. That was followed by an $825 million hostile takeover of Ogilvy & Mather. He eventually added Young & Rubicam and Grey.

While Sorrell was building his empire, others followed suit. Maurice Levy built Publicis. John Wren built Omnicom. IPG continued to grow. Paris-based Havas and Tokyo-based Dentsu joined the game. Others dabbled in the holding company race, but no one did it as well as the big six — WPP, Omnicom, Publicis, IPG, Havas, and Dentsu. By the mid-90's the six holding companies were well on their way to the monoliths they are today.

Over a relatively short time, the spotlight fell on the ad industry and how much money agency companies and their top executives were making. And many were making a lot more than the top executives at the advertisers they served.

Amid this buying frenzy, advertisers started demanding more transparency and lower commissions. Trust was lost. But unlike the current environment, the millions being earned were transparent. No one could hide the financial terms of the deals being struck and agencies actually offered more transparency as a move to regain trust. Over time, however, the 15 percent commission and 17.65 percent markup became relics of the past and agency profitability faced a crisis.

New models emerged that included lower commissions coupled with blended hourly rates. Or costs plus profits models. FTEs. These eventually gave way to deals that included compensation coupled with bonuses based on the advertiser's performance in the marketplace or how well the advertiser thought the agency serviced its account. KPIs. Advertisers wanted the agencies to have some skin in the game. Some agencies objected, pointing out that an advertiser's marketplace performance depends upon many factors, not just advertising. What about issues with the sales force, distribution channels, regulations, and more? Those protestations fell on deaf years.

It was never clear if any of these variations really worked. As the years passed, one heard a fair amount of moaning by agencies and holding companies that advertisers were killing them by squeezing agency margins with lower commissions resulting in ever declining profits. But stocks stabilized and growth, together with trust, returned.

As prosperity crept back, agencies divided to conquer. Rather than operate one agency to do it all for an advertiser, they split the roles and formed different subsidiaries to do creative and production on the one hand and planning and buying media on the other hand. From there, it didn't take long for the holding companies to realize that the leverage they had to drive lower prices from media by aggregating the media dollars from all of their clients into one pot offered great opportunities.

Advertisers loved it. They trusted their agencies to marshal their dollars in the advertisers' best interests. While advertisers might be vicious competitors in the supermarket aisles, they were staunch allies when their collective buying clout could drive down costs of media. And no one beat up media better than the holding companies.

 

In part two of this post, Doug will help readers draw their own conclusions as to whether trust between advertisers and their agencies has been restored two years after ANA's K2 and Ebiquity findings.

 

Douglas J. Wood is a partner with Reed Smith LLP, a global law firm, and is general counsel to the Association of National Advertisers.

comments (1)

Bob Siegal

April 27, 2018 1:37pm ET

I think you proivide a great perspective. I also think a major factor in this discussion on the advertiser side is the introduction of SOX in 2002. This directly led to management demanding the same types of cost controls / fee consideration as every other service the company is procuring (it didn't help that many CFOs have long expressed concern that marketers may not be good stewards of the company’s money) which in turn led to -

a) Procurement being tasked with managing the business processes of marketing – and the oft heard agency complaint that they only fcoused on cost (so the agency couldn’t just rely on the CMO to make their deal)
b) Internal audit / finance being tasked with financial oversight / compliance and regularly auditing the agencies/vendors for compliance / transparency / process improvement which yielded concompiance findings

The result of nthe above was that just “keeping the client (marketing/CMO) happy” from a creative/service perspective isn't always enough to maintain the account. Plus of course CMO tenure fell and the 2 groups above decided that ROMI/investment was just as important as the performance KPIs you referenced.


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