How to Navigate the Agency Rebate Thicket Going Forward

Advertisers Should Consider Forming Direct Relationships with Media Sellers

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With the Association of National Advertisers preparing to release working guidelines for its members, it's time to cut to the chase on the issue of agencies padding their compensation in ways that are not transparent to their clients. Notice that while I say it's time, I do not say it will be easy, particularly for global marketers.

One key to bringing more clarity to advertiser/agency relationships is that advertisers should strongly consider having direct relationships with media sellers. There's been little to no conversation about this.

Before offering practical solutions to afford advertisers and agencies as much transparency as possible, there needs to be a refutation of some of the canards that have been put forth to either deny the rebates exist, or to minimize the impact they can have on relationships between advertisers and agencies -- relationships which in my view are at an all-time low.

The American Association of Advertising Agencies criticizes the ANA's report as consisting of anonymous allegations. This is after the ANA's investigative firm, K2, interviewed 41 sources who reported that media rebate deals occur in the U.S. market. These non-transparent practices are described as "pervasive." A reasonable person could therefore ask, why would all of these people concoct such accusations, which the K2 sources say apply not just to digital media -- which certainly has seen its share of opaque practices -- but also out-of-home, print and television?

To be blunt, some advertisers really have not demonstrated a great deal of concern about rebates or other schemes through which agencies profit. They either have not wanted to be bothered expending the time and effort to close every loophole -- from the agency level all the way up to the holding company -- or they have perhaps felt that their agencies truly deserved more compensation but have not wanted to pay it in traditional fees. Moreover, they have had little or no contact or involvement with the media sellers themselves (the entities purportedly paying the rebates).

That leaves us with the advertisers who do care about knowing exactly what they are getting for their billions of dollars in media expenditures. Publicly held marketers should fall into this camp, given their obligations to shareholders, not to mention the Sarbanes-Oxley Act of 2002. The same can be said for franchisees (think quick-serve restaurants) and automotive dealers, many of which typically contribute to a pool of advertising dollars over which they have limited control or oversight.

Looking at the broader picture, on the digital side we can expect to see a continuation of marketers taking their programmatic media activities in-house. This is a trend that has been evident for several years now. Besides increasing transparency, this brings the buying process closer to advertisers' first-party data, of which they are naturally and understandably very protective.

So how best to navigate the rebate thicket going forward?

There are three key parties involved, and advertisers must address the role of that each contributes to the situation if they wish to fully protect themselves.

1. Client organization. Advertisers must start with themselves in order to forge a deliberate, systematic approach. Relevant disciplines (marketing, media, finance, procurement, internal audits, legal, etc.) should examine the organization's past behavior and reach alignment on a path forward. Does the current agency contract address rebates, principal-based buying, transparency, and audit rights? How does the agency's current compensation model play into these areas? What does the advertiser ultimately want to accomplish with respect to rebates and agency transparency?

2. Agency. Once an advertiser is aligned on its position with respect to transparency, rebates and agency compensation, it should examine its relationship with its media agency. This includes conversations with high-ranking agency executives to understand the agency's position on rebates, transparency, and principal-based buying. It also includes examining and updating contract language to align with client expectations around these issues -- including audit rights at the holding company level, according to the ANA.

3. Media vendors. Very little has been said to this point about the role that media sellers play in the media supply chain with respect to rebates and incentives. In fact, the K2 study provided examples where the seller was instrumental in devising and marketing rebates to the agencies acting on the clients' behalf. Advertisers should forge direct relationships (in concert with their agencies) with key media suppliers, and should establish an understanding of rebate and incentive practices for these key vendors. Agreements involving all three parties regarding acceptable practices are not something that have been discussed at length in the aftermath of the K2 report, but they should be.

It also bears to keep in mind that it's not unusual for global advertisers that use a global advertising/media network to become a captive of sorts to those networks as client and agency become deeply intertwined. Think about the disruption to a marketer's business of having to launch a review covering multiple countries. Sometimes it's easier to succumb to Stockholm syndrome and just stay the course with a current agency.

All in all, the time for denial is long past. For the good of both organizations, the Four A's and the ANA have no choice but to engage with one another in meaningful dialogue to wherever it ultimately leads, although hopefully with less antagonism along the way.

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