The Fog of Trust and Transparency Continues

April 27, 2018

By Doug Wood

Hvostik/Shutterstock.com

Editor's Note: Throughout the 1980s and '90s, trust between advertiser and agency was immutable. Then came the recession of the 1990s. The way business was conducted began to change, and trust began to splinter. In part two of "The Fog of Trust and Transparency," Doug Wood takes us through the industry changes that ultimately led to a severe breakdown in trust and billions of dollars of media reviews that many termed "Mediapalooza" in 2016 and are already dubbing "Mediapalooza II" in 2018.

 

The recession in the early '90s saw agencies and advertisers go broke, leaving media unpaid. Some advertisers ended up paying twice while some agencies were squeezed by media refusing to run ads for any agency client until the agency covered unpaid media for bankrupt clients. This disruption brought on complicated escrow arrangements for media buys and the 4A's theory of "sequential liability" whereby agencies were on the hook for media only after the advertiser had paid them. Until paid, the advertiser was solely liable. Media balked, and to this day sequential liability is more a theory than reality. Trust was lost again, but it was restored once the economic downturn reversed itself and profitability returned.

As the market continued to grow, it became apparent that pushing media prices down had the untended consequence of further reducing already shrinking agency margins. Advertisers had reduced their commissions to unprecedented lows, even some under 4 percent. How could agencies possibly keep stock prices up on such a small margin?

At first, the solution was retaining some of the cash rebates media companies paid. But savvy advertisers demanded their proportionate share.

So media buying agencies allegedly came up with new ways to leverage media owners. According to K2, those schemes included free time or space the agency could later sell on its own, complicated barter transactions, scam consulting agreements, and more.

Digital further complicated the situation and brought with it trading desks and real time bidding. Suddenly, the world was run by algorithms, not humans. In turn, digital specialists brought complexity and opaqueness — a perfect storm where agencies hid new schemes. Billions of dollars flowed through the system, most of which were impossible to track. But everyone in the supply chain made money. Except the advertiser. The advertisers simply paid the bills.

For holding company shareholders, their fortunes took off as well. Stocks performed well. And the CEOs got their share too. In 2015, Martin Sorrell's salary package was over $50 million, making him, according to the British press, the highest paid public company CEO in Great Britain.

By 2015, the big six holding companies controlled more than 80 percent of the $500-plus billion-dollar global media buying market, including digital. WPP's GroupM claimed that it placed one out of every three commercials Americans watched in 2015.

Then came Jon Mandel and K2, a one-two punch from which the holding companies have yet to recover. Their initial reaction was to deny that they engaged in anything improper or the types of non-transparent transactions reported by Mandel and K2, especially since names weren't named. Yet the evidence was pretty overwhelming to any objective observer. The denials continued amid assurances advertisers could trust their agencies. For many, unlike in the past, the assurances fell on deaf ears. The evidence was there. The continuing denials did not serve to restore trust. Quite the opposite occurred. So advertisers put transparency front and center in renegotiating contracts and as mandates in new RFPs. The agency response? Delays. The agency tactic that developed appeared to be protracted negotiations as the need of getting ads placed proceeded unencumbered. Advantage to the agencies and each day of delay cost the advertisers leverage. It's working. But for how long? It is a poor strategy to restore trust.

And now we've seen WPP, the bellwether of the industry, falter. Its stock is down — way down. Its management is in upheaval. Some analysts are speculating it could spell the end of the holding company and that others may follow suit as these monoliths are broken up.

So in the past two years, has the industry restored trust and embraced transparency?

Trust. It would be foolish to suggest that trust is restored. Regrettably, it may be as bad as ever, particularly where executives and senior management are facing mounting pressures to increase performance. And as long as the denials and delays continue, the lack of trust will be a dominant theme. To add to these woes, some agencies are now disguising schemes as benefits to advertisers when in reality they're no more than rebates clothed in faulty logic. Value pots are a good example. In a nutshell, value pots are schemes in which agencies make upfront commitments to media owners in exchange for free media the agency then allocates to its brands, often not in proportion to the amount a particular advertiser spends through the agency. This allows for manipulation of KPIs to reach goals for one advertiser at the expense of others. In truth, a value pot is nothing more than a form of rebates and incentives that should be disclosed or allocated among the brands whose spending allowed the agencies to extract concessions from media owners. Such undisclosed or unaudited transactions erode trust.

Transparency. On the other hand, transparency is becoming more of a norm than the exception. It's come about far slower than most predicted but it is irreversible. Some big agency groups are still refusing to accept sufficient transparency language in contracts or are inserting restrictive language around access to contracts and deals. Among the latest efforts are attempts to avoid transparency and audits by characterizing traditional free or inventory media as "value pots" and exempting them from the scope of an audit. But this is not a game that agencies can win in the long run as long as advertisers stay the course. The reality of transparency is growing and the ability of agencies to deny, delay, or disguise — including with schemes like value pots — is shrinking as advertisers become savvier and insist on transparent contracts, legitimate audits, and honest brokering.

So back to my first question: Has trust been restored? Put another way, has a true partnership between an agency and advertiser where the agency is looking after the best interests of its advertisers returned?

What do you think?

 

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


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