Sponsor Content Above the Clutter with Pete Krainik
Episode Seven: Man And Machine
Brought to you by: IBM
Last year, the Association of National Advertisers apologized to the American Association of Advertising Agencies, so it's only fair that the 4A's now apologizes to the ANA.
What we have here is a bad case of hurt feelings, and I'm afraid the wounds on both sides are likely to fester for some time to come, regardless of what happens in the ongoing media rebates and transparency debates the two parties are engaged in.
Beneath the surface lies the real reason for the misunderstanding—the agency-client relationship is becoming inoperable.
In the old days, it was simple. The ad agency created and bought the advertising for the client, the media owner kept the bulk and paid the agency a 15% commission on what the client spent, and everybody was happy.
But nowadays agencies get paid for their work like accountants and lawyers do—based on a negotiated fee. They get paid whether their ads run or regardless of how much their clients spend. In most cases they get paid the same for good advice or bad advice (also just like lawyers do).
It's been over 60 years since the 4A's and five media associations signed a Department of Justice consent decree prohibiting the 4A's from requiring that its members charge a 15% commission. The irony is that the media still give the agencies a 15% cut, but agencies rebate some or all of it to their clients.
O. Burtch Drake, former president of the 4A's, told me he'd "been waiting years for some media owner to say it's ridiculous" for the media to continue to pay what amounts to fictitious commissions.
I sometimes think that when agencies switched from commissions to fees, client companies hired the first procurement guy to immediately start beating those fees down. And beat them down they did, forcing agencies to seek supplemental revenue streams.
It's evolved to the point where in some cases agencies get undercover rebates from the media to bolster their declining fees—and the clients look the other way so they can keep a lid on their agency compensation.
That's why it was so surprising when the ANA apologized to the 4A's last year for tarring the entire industry with accusations made by former MediaCom chairman Jon Mandel, who asserted that agencies were taking kickbacks.
$142.5B 2015 U.S. ad spending for 200 LNA
Maybe the ANA felt it groveled too much, because it is now demanding an apology from the 4A's after the agency trade group issued its Transparency Guiding Principles of Conduct without getting buy-in or sign-off from the ANA.
"We didn't feel the principles were strong enough or complete enough that it would allow us to endorse what was taking place," ANA CEO Bob Liodice told us. "We made a good-faith effort and agreed to disagree. What was particularly troubling was that in the release the 4A's acknowledges contributions from ANA members. The implication that the ANA members are endorsing that is blatantly false."
The 4A's principles basically said that what happens between the client and the agency is the client's business, but what the agency does outside this direct interaction is off limits for the client.
Here are two examples: "The agency (agency group and holding company) may enter into commercial relationships with media vendors and other suppliers on its own account, which are separate and unrelated to the purchase of media for their clients."
And the next principle is also germane: "The agency is paid by the media partner for services provided, such as barter, content production or research projects. Where this is the case, the agency may consider such relationships confidential and commercially sensitive."
Wow, pretty strong stuff. Keep your nose out of our business unless it directly involves your account.
The problem is that agencies are making more and more of their money by aggregating all of their clients' activities and deriving revenue from the total spend—or in some cases other valuables.
In most of the world, ad agencies get rebates from media companies based on all the money they spend for all their clients. In the U.S. the concept hasn't been accepted (yet), but now agencies have the opportunity of using similar buying and selling techniques in the digital media realm, especially when they're taking ownership of digital media inventory. In that scenario, they're buying low and selling high, a technique called markup or arbitrage. Agencies are able to sell high because they add audience and behavior data from their multiple clients to individual digital media buys.
The big issue between clients and agencies, and destined to be incorporated in the transparency principles issued and agreed upon by both sides, is (1) whether the agency should use an individual client's data to enhance a product the agency sells to other parties and (2) should the client get a cut of the proceeds from the pooled data sale?
These issues are fundamental to any transparency agreement, but I don't see how they can be resolved if the agencies say such relationships, beyond the purview of any one client, are "confidential and commercially sensitive."
The ANA said that, at its core, transparency is about marketers' ability to "follow the money." That's pretty hard to do when agencies put up "no trespassing" signs on most of the main routes where the money flows.