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Bombshell ANA probe finds US agencies receive rebates

07 Jun 2016  |  David Pidgeon 
Bombshell ANA probe finds US agencies receive rebates

A study examining the way US media buying deals are conducted has revealed a culture in which "non-transparent" business practices are the norm across digital, print, out-of-home, and television media - as well as "across the spectrum" of agency media businesses.

The much-anticipated report from the Association of National Advertisers (ANA) and K2 Intelligence shows that cash rebates - an illegal practice in the US - were found to be "pervasive".

"Advertisers and their agencies are lacking 'full disclosure' as the cornerstone principle of their media management practices," said Bob Liodice, president and CEO of the ANA.

"Such disclosure is absolutely essential if they are to build trust as the foundation of their relationships with their long-term business partners."

The report is set to shake the $200bn US media buying market to its core. The main holding companies - WPP, Havas, Dentsu Aegis, Interpublic Group, Omnicom and Publicis Groupe - make huge profits from their media buying and planning wings.

However, it is unclear if anyone is looking at jail time: due to the confidential nature of the report, no companies or individuals are named. It is also unlikely that the vast majority of those working at agencies will be at fault, yet a blanket accusation will still make it difficult for them.

Prior to publication, an Omnicom spokesperson said: "All our US media agency clients have full visibility into their media costs, and receive all value negotiated on their behalf in the form it is received. 

"Compliance with each individual client contract has always been central to that trust at Omnicom."

Meanwhile, Publicis chief, Maurice Levy, said the report was an "unfair and an unwarranted attack on the entire industry."

The ANA began its focus on transparency four years ago already aware of "undisclosed rebates". A member survey taken at the time showed that almost 30% of advertisers claimed to have an awareness of the illegal practice of US media companies providing "rebates" or "incentives" to agencies for "referring or influencing" client spending toward that media company.

The K2 Intelligence study, published on Tuesday, was conducted between October 2015 and May 2016, and confirms there is a "fundamental disconnect in the advertising industry regarding the basic nature of the advertiser-agency relationship."

The report states that advertisers believed that their agency partners were duty-bound to act in their best interests, yet many agency executives interviewed said their relationship with advertisers was "solely defined" by the contract between the two parties.

Crucially, the study shows that senior executives across the agency groups were "aware of, and mandated, some non-transparent business practices."

Additionally, contracts for rebates and other non-transparent business practices were "negotiated and sometimes signed by high-level agency executives."

Liodice said that changing business models for media agencies over the past several years has created a "challenging new media landscape" for both agencies and advertisers.

"Whether acting as agency or principal, vast changes in technology, the complex digital supply chain, and the proliferation of media outlets provided agencies with additional opportunities to increase their profit margins beyond agency fees," he said.

"This has led to disconcerting conflicts of interest and a lack of transparency."

Founded in 1910, the ANA's membership includes nearly 1,000 companies with 15,000 brands that collectively spend or support more than $300 billion in marketing and advertising annually.

In response to the findings, the body is developing suggested contract language to address media-buying transparency. In addition, the ANA commissioned Ebiquity and FirmDecisions to develop guidelines and recommendations for ANA members to consider based on K2 Intelligence's findings.

In the UK, ISBA - the ANA's equivalent - said although the investigation was focused on the US, it will impact any company working with a media agency in any territory.

"We operate in a global industry, in a global market, with global ways of working," said Debbie Morrison, director of consultancy and best practice.

Key findings

The K2 Intelligence report indicated that non-transparent business practices employed by agencies, some of which may or may not have been contract-compliant, included the following:

- Cash rebates from media companies were provided to agencies with payments based on the amount spent on media. Advertisers interviewed in the K2 Intelligence study indicated they did not receive rebates or were unaware of any rebates being returned.

- Rebates in the form of free media inventory credits.

- Rebates structured as "service agreements" in which media suppliers paid agencies for non-media services such as low-value research or consulting initiatives that were often tied to the volume of agency spend. Sources told K2 Intelligence that these services "were being used to obscure what was essentially a rebate."

- Mark-ups on media sold through principal transactions ranged from approximately 30 per cent to 90 per cent, and media buyers were sometimes pressured or incentivized by their agency holding companies to direct client spend to this media, regardless of whether such purchases were in the clients' best interests.

- Dual rate cards in which agencies and holding companies negotiated separate rates with media suppliers when acting as principals and as agents.

- Non-transparent business practices in the U.S. market resulting from agencies holding equity stakes in media suppliers.

Expect analysis of the report from regulars Dominic Mills, Bob Wootton and Brian Jacobs shortly.

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