Regain Client Trust: Embrace Transparency Requirements

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The Association of National Advertisers recently released an updated version of its template agreement intended for use by advertisers when engaging media buying agencies.

Mark Stine, Vice President of Financial Compliance at Cortex Media, a leading media auditing and consulting firm working with top tier advertisers in the US and internationally, and one of several parties with whom the ANA consulted when developing this update, offers the following comments:

We view the updated template as an important step forward in the advertising industry’s “transparency movement.” It calls for meaningful changes in the way agency holding companies manage their relationships with advertisers–setting expectations for greater transparency in many areas of the agency’s business with their advertisers.

Significant industry transformation in recent years drives the need for these changes. Vertical and horizontal acquisitions by the agency holding companies, particularly in the digital space, have added complexity to the supply chain. The lines between agency, supplier and publisher have blurred, and agencies are now often engaging affiliated companies in areas traditionally handled by third parties.

The new ANA contract template cuts through this complexity and demands agencies act like agencies in their relationships with advertisers. It is designed to overcome many of the transparency roadblocks encountered in the digital supply chain, carefully detailing the degree of transparency expected. For principal transactions, where agency affiliates purchase and resell media on their own accounts, the template provides for limitations on allowable mark-ups, and requires that agencies provide auditors with the visibility needed to verify compliance.

We would love to see all agency holding companies jump on board and commit to full transparency in all areas with all advertisers, as should be expected in true agency relationships. However, we expect there will be continuing challenges, as some agency holding companies may continue to resist transparency expectations on some transaction types and data sets during the contracting process.

Contracting Recommendations….
• When entering contract negotiations, advertisers should be wary of any changes to the contract template language. We have seen comprehensive transparency and audit provisions nullified by seemingly innocuous contract language adjustments. Adjustment to even a single phrase could impact contract effectiveness in unexpected ways.
• Keep in mind that agency holding company legal teams are armed with intricate knowledge of their inter-company contracts and have daily exposure to industry-specific contracts. They have an advantage over advertisers who may only negotiate advertising contracts every 1-3 years.
• Improve your results by engaging an industry-specific audit firm, well before your next contract review. A good audit firm should provide insights and guidance on topics impacting your business today, as well as opportunities to improve your rights and protections under the new contract.
• Partner with your legal team early in the process to raise awareness of the industry’s transparency concerns and the new template language available from the ANA. They may begin dialog with their counterparts at your current agency, perhaps proposing transparency-focused amendments to existing agreements, or preparing for your next contracting cycle.

The stakes are high in the battle for transparency. Advertisers are determined to get the transparency they require, and agencies that resist may suffer lost business and continued distrust. We believe the holding companies who fully embrace these transparency requirements will be first to regain the trust of their clients and set the stage for healthy and mutually beneficial relationships.

Down the Media Buying Rabbit Hole. Manuel Reyes Discusses the Federal Probe into Media Buying Practices

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Last Thursday, the Wall Street Journal reported that Federal prosecutors in Manhattan opened an investigation into media buying practices by advertising agencies. According to Manuel Reyes, CEO, Cortex Media, “This is, by far, the most important news on the media transparency front to come out since the ANA (Association of National Advertisers) published their report on media transparency two years ago.”

He outlines why this changes the game:

• Subpoena Power: Investigators are now empowered to compel disclosure across all holding company units and any other party or vendor involved in the supply chain.
• Digging Power: They will be able to follow transactions across the entire ecosystem, starting with the advertiser, through the agency (and affiliates) to media vendors, other downstream re-sellers and publishers.  They will not be limited by any advertiser/agency contract and have the full resources of the US Government at their disposal.
• Perjury Power:  Investigators will also be able to interview all parties involved with their knowledge that it is not a good idea to lie to the FBI.

He says, “It will be interesting to see how far they go in looking at holding company units outside the US, as it is possible that payment of rebates and self-dealing (buying from a party controlled by or related to the holding company) might have taken place via a non-US party.”

While many advertisers are reporting unprecedented low levels of trust toward their agencies, it is clear that not all agencies are engaging in mischief and not every advertiser is affected.  However, Reyes believes it is likely that investigators will find instances of unsavory practices at some of the advertising holding companies.

He suggests that prosecutors are likely to find:

• Rebates:  Rebates may have been paid to agencies and not returned to advertisers as required by contract.  Even if the advertiser/agency contract does not require the return of rebates, this could be an issue if the agency was acting as agent for a disclosed principal.
• Revenue from Opt-in Transactions.  Agencies are making money on opt-in media buys, where the advertiser has agreed to forego transparency, the agency buys as principal, and the advertiser understands that the agency is likely to make a margin.  Provided that the advertiser opted into this, the agency is likely to be in the clear.  However, if they were careless and the advertiser was not asked to opt-in, this could also be an issue.

He adds, “Up to this point, we don’t expect agencies to have a major financial exposure since most have been very careful to enter into contracts that clearly state how rebates and principal transactions should be managed, and agencies have made efforts to govern themselves accordingly.  However, they may face significant reputational risk if these practices are further exposed by the investigation.  Government contracts could present additional complications for agencies.”

Yet, Manuel Reyes believes that investigators may also find:

• Self-Dealing: Agencies are sometimes buying from themselves when they were supposed to buy from independent third-party vendors in the open market.  This could be even more problematic if this was not disclosed to and accepted by the advertiser before the purchase was made.  Keep in mind that some holding companies have an interest in media vendors or resellers, particularly in the digital space.
• Disguised Rebates: Some agencies have been selling “services at a premium” to the same vendors from which they buy media.  While these services may be legitimate, this could also be a way to provide minimal services in exchange for disproportionately large payments.  This could be seen by investigators as a mechanism to disguise rebates.  Some types of “discounts for early payment” provided by media vendors to agencies or other “financial services” provided by agencies to media vendors could fall in the same category.
• Comingling of Media Buys: Negotiations done by agencies acting as agent for a disclosed principal on behalf of advertisers may have been comingled with negotiations done as principal for the agency’s own account for resale.

According to Reyes, “One could envision a situation where an agency is negotiating a $200 Million agent-based upfront buy for its clients while contemporaneously negotiating its own $50 Million buy as principal for resale. The agency could ask for a reasonable deal on the agent-based buys while separately asking for an outstanding deal for its own buys for resale.  This could result in a transfer of value from advertiser buys to agency buys.  It is unlikely that any paper trail would exist on this, but there may be vendors or ex-employees who may be willing to cooperate.”

We will see how far investigators get down the media rabbit hole.

In the meantime, he recommends that advertisers should review their agency contracts and set up regular and complete audit programs to protect their interests.   A strong contract and a tight audit report now may come in handy later depending on the outcome of the investigation.