Can Advertisers Really Tell Their Agencies How to Make Money?

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Let bygones be bygones seemed to be the theme of this year's 4A's conference in Los Angeles.

Both agencies and clients signaled that their appetite for confronting one another was much diminished, and execs were also relativity subdued when it came to blaming the big digital players for their transgressions.

In fact, much of the conference could be viewed through the prism of digital advertising brought to you
by Google, Facebook, YouTube, Twitter and Pinterest, even when speakers said they had "zero tolerance" when it comes to brand safety.

Outgoing 4A's chief Nancy Hill and her board last summer helped create the adversarial position between agencies and clients when the 4A's rejected the Association of National Advertisers' financial transparency guidelines on agency rebates and other indirect compensation.

At the 4A's conference, however, Hill implored her members to "rise above the negative discourse. We are better than that," a line she liked enough to repeat.

And incoming 4A's CEO Marla Kaplowitz said she had been doing a lot of listening since she signed on, and she's concluded that job one is "repairing relationships. ... We have a common interest: Grow our partners' business."

The new chairman of the ANA, P&G's Marc Pritchard, also tried to smooth the troubled waters. He called the "so-called rift" between the 4A's and the ANA "overstated," but added that he didn't see any need for digital agencies and talked about how he's working to recombine creative and media functions. Pritchard said that P&G and its agencies are "joined at the hip and ready to make great things happen." He even closed with a symbolic hug of Nancy Hill.

I got the distinct feeling that advertisers are no longer looking to draw a line in the sand as to how agencies make money as long as they own up to how they're doing it.

The problem is that different agencies do different things to bolster their bottom line. WPP, for instance, makes no bones about buying inventory for its own account, enhancing it and (hopefully) reselling it at a profit in a process called arbitrage.

Interpublic, on the other hand, insists it only acts as an agent in its transactions with clients. Michael Roth, chairman and CEO of IPG, said during the opening session that the agency holding company is "agnostic" where it spends its clients' money because it doesn't have "any economic interest in the inventory." Roth added that "the risk to a brand is enormous, so we've got to be very, very careful."

But he did say that IPG does barter, and that the company invested $5 million in Facebook and sold its stake for $230 million. Interpublic sets aside money for mergers and acquisitions (IPG allocates $250 million annually for M&A), and recently said it would sponsor a technology accelerator program with Snap Inc., which will include taking a small ownership position in the tech startups. Roth said IPG prefers partnerships, "but if we can't make it work," it will buy.

But how agnostic can IPG really be if it made a killing on Facebook stock and is investing in Snap?

I fully understand why it's in the best interests of agencies not to pick a fight with clients, as they were doing with their contention that what they do outside the traditional agency-client relationship is none of the clients' business.

But why are clients just as anxious to put the whole mess behind them?

My take on this is that the ANA opened up a can of worms with its transparency document. The ANA document spells out in excruciating detail what agencies can't do: "Financial and other benefits should be defined as widely as possible." Agencies must return cash rebates, discounts, free/bonus inventory, early payment discounts, barter income, service agreements with media suppliers, consulting or research agreements with media suppliers "and any other forms of consideration."

This laundry list of what's off limits provides a handy shopping list for client procurement people to poke their noses into, and provides one more reason why ad budgets are under such scrutiny.

Almost a year ago, the ANA came out with its explosive findings that agency rebates in the U.S. are pervasive. The group's 58-page report, which alleged that contracts for rebates and other nontransparent business practices were negotiated and sometimes signed by high-level agency executives, outlined the various agency practices it said were involved, based on "detailed source accounts from dozens of confidential, personal interviews as well as documentary evidence" such as contracts and emails.

The 4A's branded the report as having "immense shortcomings—anonymous, inconclusive, and one-sided." Since the report was issued last June, very little has happened to verify the allegations. Omnicom, for one, said its outside legal counsel had asked the ANA and K2 to provide specifics on the investigation, "and they have provided none."

Some industry execs feared that the findings could trigger an SEC investigation that could include advertisers. ANA CEO Bob Liodice acknowledged that some advertisers had not ever reviewed contracts to see if their agencies were allowed to keep rebates. So advertisers could be blamed for aiding and abetting.

Agency holding companies' financial obligations aren't only to their clients. Equally important are their obligations to stockholders, who expect a robust bottom line. If advertisers insist agencies act solely as agents (and not principals), that's going to restrict the fiduciary duties to their stockholders. Talk about a rock and a hard place!

The question is: Can advertisers get in trouble for restricting how agencies make money for their public stockholders?

All of the above is just one more reason why advertising is increasingly out of favor at the highest levels of the corporation. There are too many things that can go wrong, there are too many things to measure, there is too much waste. Marc Pritchard said growth has been "pretty anemic" of late, and if the industry believes that advertising is one of the most reliable engines of growth, that's why a trusting client-agency relationship is so crucial.

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