The Great Rebate Debate: Are Media Buyers Getting Cash Back?

Want to quickly quiet a group of agency and marketing execs? Utter the words "media rebates." The Association of National Advertisers reported in July the eye-opening results of a survey indicating that 28% of respondents are worried that media rebates -- a reviled but tolerated practice overseas -- are becoming more commonplace here. The subject is so highly charged that numerous agency executives, while denying rebates are creeping into the U.S., would not do so on the record. But considering the source -- a survey from an entity that represents 450 major marketers that spend $250 billion annually -- it's a subject that can't be ignored. While clients are increasingly suspicious about the practice, some observers suggest they might be driving it: The increased emphasis on procurement-driven cost cuts may have an unintended side effect: encouraging media rebates to rear their ugly heads on U.S. shores. Rebates, or, as they are sometimes more colorfully termed, "agency volume bonification" (based on the word bonus), are loosely defined as an agency's receipt of a volume discount or compensation from media buys that is not necessarily passed on to the client. But even some critics of rebates say they are a natural outgrowth of marketers' efforts to squeeze agency costs. They say that marketers' efforts to pare costs, eliminate commissions that reward the most expensive media plans and create agency incentives for media performance could ironically be boxing agencies into the kind of cost-plus deals and tightly constrained margins that lead to creative deal structures. That's bunk, declares Judy Beaudry, a former Procter & Gamble Co. media executive who is now VP-media at Kao USA. "I understand everybody wanting to ensure maximum revenue," Ms. Beaudry said. "Times are tough. But you've got to respect what the business relationship is at its core. And agencies, especially some of the big holding companies, have seen their revenues increase a whole lot faster than their clients. "It's just wrong. I don't mean the rate of increase; I mean taking these kinds of things on the side. It's not like their houses are burning down and they've got to find a way to keep the place open," she added. "I have never understood agencies getting a benefit off of clients' dollars," she said. "It just rubs me the wrong way. It's a fiduciary responsibility. They're supposed to be helping me spend my money best. And that 's best for me, not best for them." To be clear, Ms. Beaudry knows of no cases of her agency, Interpublic's Initiative 's, being involved in rebates or gifts. But the chatter generated by the ANA survey still has her concerned. "Because we've been hearing some of the buzz, that piqued our curiosity again and has us inquiring again into the agency's practices and looking for assurances," Ms. Beaudry said, adding that Kao's contracts require any rebates to be returned to the client. What is a rebate? While denying any knowledge of rebates occurring in the U.S., some media buyers contacted by Ad Age conceded that the subject is complicated. They noted new forms of payment or compensation add additional revenue and margin opportunities for media agencies but said that these deals aren't rebates. Meanwhile, consultants and auditors maintain that while their use in the U.S. is limited in scope, rebates do exist. And some of the disconnect between agency and client can be explained by the fact that they usually come disguised as something else. Agencies, marketers and consultants alike agree that rebates aren't a problem if they're disclosed and fully and equitably passed through to clients. The problem is in defining exactly what is a rebate and what as a matter of fairness should be passed through. Much of the confusion -- and much of the potential problem -- may be that the deals don't generally take the form of a straight cash bonus for hitting a volume threshold. "It's not as overt or institutionalized as it is in other countries," said Manuel Reyes, former CEO of Starcom Latin America and now CEO of media consulting and auditing firm Cortex Media, Miami. "This is being done in a very clever way." Among those ways, he said, are agencies picking up fees from media companies for services such as research when the services may not really be delivered and the payments have been triggered by hitting a volume threshold. In other cases, he said, shops get a credit for early payment of invoices, whether the payment is made early, again based on a company's reaching of a volume target . 'Bad for the industry' Mr. Reyes said rebates often come in the form of free bonus inventory when a volume target has been met. Depending on how agencies handle this inventory, it could be an issue for clients. If agencies provide the inventory on a pro-rated basis to clients to reduce their costs, there's no problem. If they essentially sell that inventory to other clients and pocket the money, there is . The latter scenario, he said, would only be an issue for clients who don't require invoice backup to show what the agency paid for their media and periodically audit the books. Other times, Mr. Reyes said, rebates may ultimately flow through to shops when they are buying on behalf of clients from sibling units within their holding companies and the rebates accrue to those specialty units. Examples of this could occur at barter operations or agency trading desks, which use sophisticated demand-side platforms to buy digital inventory at discounted rates in real time. With the latter, it's not clear what kinds of margins the agency-buying operations are making or the extent to which bulk buys may lead to incentive compensation for the trading desks. Matt Seiler, CEO of Mediabrands and one of the only media-buying executives to speak on the record about the rebate issue, said if they're happening, "it's bad for the industry." Added Jacki Kelley, CEO of Univeral McCann, "We don't arbitrage around clients' investments in order to substantiate our own benefit." She added, "In my 25 years on the media [sales] side, we provided rebates back at different volumes [of buys]. Media owners need to incentivize clients to spend more, but in the U.S. that money always went straight back to the client." Often deals that Mr. Reyes characterizes as rebates take place at the holding-company level without executives at the individual agencies knowing. Lack of transparency Rebates may also flow into specialized holding-company entities, where they become even harder to track. In some of the more creative deals overseas, rebates pass into accounts but aren't recognized as income essentially until the agency loses the client's account and it's closed. The practive creates a sort of entirely undisclosed insurance policy against business loss, though Mr. Reyes said he hadn't seen such arrangements in the U.S. While he has an obvious interest in pushing media-audit services, Mr. Reyes conceded that rebate revenue streams can be set up to elude even the most thorough audit, ultimately making trust the only real guarantee for marketers. Alan Rutherford, a former Unilever media chief and now chairman of media-consulting firm Axiology, believes rebates, long common in Europe, have begun to migrate here as a natural outgrowth of European agencies expanding their foothold in the U.S. The main issue, he said, is that U.S.-based marketers aren't familiar with the practices or how to manage them, though he believes they will soon learn. An executive in the out-of -home media industry, who described rebate practices as having become more commonplace in the U.S. outdoor industry in recent years, confirmed much of what Mr. Reyes described as the ways in which rebates occur. He asked not to be identified for fear of unleashing "an unspoken blackball situation," noting that when executives of outdoor entities had spoken out against the practices in Europe, they saw their business dry up significantly. "The buying services will tell you they're transparent," he said. "And they posture that what you're paying them for is quick pay. They say that you're paying for research. They say that you're paying for all kinds of things, when what you're really paying for is for them to buy from you." The executive said all the deals are positioned in a way that 's "legal and clean, but at the end of the day, if the advertisers knew all the ins and outs and the background, I wonder if they'd want in." Contributing: Alexandra Bruell

The Great Rebate Debate: Are Media Buyers Getting Cash Back?

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