A little over a year or ago, Jon Mandel, who is a widely respected media maven, made a statement in front of an ad convention that kickbacks were rampant in the media and agency businesses. He alleged that agencies were receiving funds back from various media sources and these payments were never reported to the clients. It was such a widespread issue that he left a position as head of one of the biggest ad agencies in the US in part over it.
I worked with Jon in my past life and I’d certainly not cite him as one who is prone to rash groundless statements. Apparently, neither would the Association of National Advertisers (ANA), the trade group that represents marketers. They commissioned a security firm to conduct an investigation of the allegations and the report came out last Friday. It’s not pretty.
You can read the report here but some topline results found 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 response by the agency community? Because the study did not name names, many of the big players seem to be denying there is a problem. The 4A’s, which is the agency trade group said:
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.
It seems to me that the “productive conversation” needs to have happened quite a while ago. When some media buying companies realized that they couldn’t make any profit executing buys, rather than have a heart to heart with the people paying their bills they chose, in essence, to cheat. Is it painting with too widespread a brush? Probably, but one can imagine the lawsuits that would follow the publication of a list of the offenders.
It’s a good lesson for any of us in business. Just as our clients’ problems become our problems, a healthy business relationship should foster open exchanges of the issues we face as well. Labelling this problem as “unsubstantiated claims” and denying there is a problem doesn’t solve anything – ask the climate change deniers if ignoring the problem is making it go away. Transparency and good communication are high on any list of best business practices. Are they on yours?