The Sad Truth of the ANA Report: Clients Are to Blame for Lack of Agency Transparency

In Client-Agency Negotiations, All the Power Is With the Client

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Last week, the ANA released its Media Transparency Report. The report has been framed by much of the press as a bombshell. Words like "kickbacks," "fraud," "unethical practices," and even "jail time" have been seen in a variety of recent headlines.

While there might indeed be, in some select cases, unethical behavior by an agency here or there, the general finding of this report is far more mundane. The ANA and its members may be best served by focusing less on what agencies are doing and focusing more on why they are doing it. They may see that, rather than agencies being unethical, they are fighting, often well within the bounds of ethics, for survival against a continuous onslaught of client financial demands that threaten their very existence.

Digging beneath the gaudy headlines, it is clear that the report is unlikely to have any real legal repercussions. This is probably not a criminal or fraud issue.

Instead, it is an issue of contracts. A recent article noted that the ANA report cited an agency executive describing "how his agency adopted a 'defensive retreat' approach to transparency-related language within client master service agreements." He explained that "the agency's default position was to avoid including any transparent clauses at all."

Managers in some agencies are scrupulously avoiding promises of transparency in their contracts, which puts them just tenuously within the lines of ethics. This is happening because many clients, and their procurement departments, relentlessly drag any and all visible profit margin out of agencies and back into their own coffers. And they do it over and over again, year after year, via contract renegotiations with longstanding agency partners, or by pitching their business and offering lower margins.

The reality is that a client-agency negotiation is no negotiation at all. All of the power is with the client, and the client knows it. The negotiation often becomes a margin mandate. I remember attending a roundtable conference once with the head of procurement from a major client. They told me in detail how they tried to understand the unique needs of agencies when negotiating new contracts in order to be "fair and equitable." I asked them if they had ever renegotiated a contract with their agency where the agency was awarded a higher margin. They said "no, that would not be an acceptable result." Unfortunately, against this sort of fair and equitable negotiating, some agencies see what is "hidden" as the only protection from eventually running a non-profit company.

The ANA knows this and would do well to embrace it. Ironically, just a few days before it released its report, the ANA pushed out -- over its daily ANA SmartBrief email -- a video of Mike Farmer, author of the recent book "Madison Avenue Manslaughter" from a speech he gave at the ANA's 2016 Advertising Financial Management Conference.

Farmer's speech cut right to the heart of the matter. He told clients: "The combination of growing workloads, declining fees and downsizing of offices has had the effect of reducing agency capabilities at a time when your problems have never been more complex … You can continue the assault on agency economics, and I am sure you can continue to squeeze more fees out of the them. They will take it because they need you … Or you can strengthen the agencies because you need them." Farmer believes the current economic situation is dire and that clients need to create a "Marshall Plan" for agencies. He says agencies have "been destroyed" by what has gone on "… and now you [clients], the winners, need to rebuild them."

A perfect example of the onslaught comes from the creative review announced by McDonald's in May. The financial and timetable demands were so onerous that WPP dropped out of the competition before it started. Given the size and prestige of the McDonald's account, that is saying a lot about the client's demands.

Here in a nutshell is the problem. The going-in position of many clients today is that agencies should make no profit except performance-based profit. That performance target is usually decided by the client, and when it has been reached the margins are still paltry. In other words, much of the compensation made for a great performance is just basic margin that the agency needs to stay in business.

The work of the agency itself is seen as having little or no value. In a world where no agency and no client can win all the time due to the nature of competition, this puts agencies in a chronic condition of anemic economic returns. Agencies have shareholders, just like clients, so if the margins cannot be gained by revenue, they must be gained by cost-cutting. This leads to agencies cutting capabilities that clients desperately need in the "always on" world of digital marketing.

The current state of agency economics is unfair and unethical. And clients are perhaps more to blame than agencies in this regard. That some agencies are assiduously avoiding uncovering sources of revenue only to see them gobbled up in the next contract "negotiation," may just be a combination of smart business and survival.

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