The Justice Department's investigation into whether advertising agencies have been unfairly directing production business to their in-house departments over independent shops paints another shade of grey on a somewhat murky year for the advertising industry. But what exactly does it mean and what are industry insiders saying about the alleged shady practices?
"It's yet another sign of an annus horribilis for agencies," said R3 principal Greg Paull.
It's no secret that margins have been getting thinner and clients have been looking for ways to cut costs, which is putting increasing pressure on agency partners. One way agencies have been trying to bring in more money, while keeping costs down for clients, is by producing work through their own in-house production departments.
This becomes problematic when agencies control the bidding process for clients and put their own in-house unit in the competition among outside vendors, according to people with knowledge of the matter. "It's an inherent conflict of interest," the people told Ad Age.
The Justice Department, which has already contacted a standalone domestic Interpublic Group of Cos. agency for the investigation, is examining advertising agencies for allegedly fixing the bidding process by encouraging production houses to increase their prices so that the contract is given to the agency's in-house team, the Wall Street Journal reported.
Why would production houses voluntarily do this? According to people with an understanding of the issue, they sometimes do not know that agencies are asking for a higher bid in order to undercut them and bring the work in-house, which is why they agree to a higher number. In other cases, these people said, production houses agree to up their bids because ad agencies promise them work in the future or threaten not to give them any more work down the line if they do not agree.
Agencies originally employed these so-called "check bids" on production services to ensure that fees from vendors were reasonable. For example, if an agency was single bidding a director, check bids helped to make sure his or her fee wasn't completely outrageous.
According to Matt Miller, president and CEO of the Association of Independent Commercial Producers (AICP), a non-profit organization that supports commercial production companies, "This scenario is 180 degrees from that – this alleges agencies are setting this up to bolster their own in-house production opportunities. That's an entirely different game. If that's really what's going on with how agencies are growing in-house operations, that's a grave concern."
Two years ago, the Association of Independent Creative Editors made similar allegations to those of the Justice Department, claiming there were transparency, competition and ethical concerns with post-production capabilities moving in-house at agencies.
At the time, AICE claimed that agencies were steering post-production work to their own facilities in an overt conflict of interest. The association also said in 2014 that "agencies have an "unfair advantage" when it comes to post production, given their direct access to clients that post houses don't have.
Rachelle Madden, executive director of AICE, said in a statement that it has been talking to its members and the Association of National Advertisers for some time and continues to "encourage advertisers to carefully scrutinize how their post-production dollars are being spent."
"As our policy statement indicates, our goal is to make sure the post-production process reflects the same degree of transparency advertisers are demanding today from all of their vendors across the marketing communications spectrum," she added in the statement.
ANA CEO Bob Liodice said in an earlier statement that the investigation is "especially interesting to note that this revelation comes only six months after we released the results of our own investigation with K2 Intelligence into allegations of rebates, non-transparency, and related issues in the U.S. media ecosystem."
Over the summer, the ANA released the results of an investigation conducted by independent firm K2 Intelligence in a 58-page report, which found that rebates, including "cash rebates," and "other non-transparent practices" are pervasive in the U.S. media buying ecosystem.
Douglas Wood, a senior partner at Reed Smith and general counsel to the ANA, said the investigation is "a big deal." While he is not directly involved, he said he has been "aware of this investigation for months." According to people with knowledge of the matter, the ANA has been and is currently looking into the matter.
"It's this cloud that is hanging over the agency side of the business," said Mr. Wood. "When you couple the transparency, the K2 investigation, with this revelation ... it's just really eroded trust," he said. "It's really put a black eye on the agency community." He added that "this is just another reason for advertisers to question the trust that they allegedly have with their agencies."
R3's Mr. Paull, said via email, "With the growth of decoupling and the rise of [in-house] production units ... it would be logical agencies would want to increase their share of the production pie."
He said, however, that the production issue is going to be smaller than the ANA media investigation.
"A lot of TV production is specialized and outsourced to independent firms, so this work cannot and will not be done internally," said Mr. Paull.
It's too soon to say what impact the investigation will have on certain agencies or the industry as a whole, but in the meantime, industry experts said there are ways to avoid the appearance of impropriety. Agencies should only be allowed to control the bidding process if they don't have a horse in the race, they said, and clients should be more involved and aware of the bidding practice.
Contributing: E.J. Schultz and Ann-Christine Diaz