OPT-IN MEDIA BUYS – BETWEEN A ROCK AND A HARD PLACE

An Issue in TWO PARTS….

Part 1: BACKGROUND ON OPT-IN MEDIA BUYS:

Agencies have been placed under tremendous pressure by continual reductions to agency fees and commissions, increased payment terms, and a rise in operational complexity due to digital media.  Not surprisingly, they have had to become very creative in developing alternative revenue models, many of which have led us down the path of eroding trust between advertisers and agencies.

Originally, agencies resorted to simple rebates from media vendors based on the overall volume they traded with them on a yearly basis.  These were commonly referred to as AVBs (Agency Volume Bonuses), rebates, rappels, sur-commissions, etc.  Agency contracts were cleverly crafted so that the client would be entitled to any discounts, bonuses or other benefits based on the client’s investment only.  This sounded like sound language but allowed agencies to keep anything that was derived on “overall” agency volume.  Many advertisers have closed this loophole, but others have appeared.  The cat and mouse game continued.

Trying to find other sources of revenue, agencies began selling services to media vendors.  This came with two problems.  First, there could be potential conflicts of interest since the media were now vendors and customers at the same time.  Secondly, there has been a concern that many of these services were sold at a “premium”.  Essentially, for much more than they were worth, allowing the agency a backdoor to get rebates in another form.  Again, language was added to agency contracts to limit this as much as possible.

Starting with programmatic media, agencies began making large scale use of undisclosed, non-transparent buying practices by promising media savings to advertisers, provided they opted in to this model.  By doing so, advertisers allow the agency to buy as principal and waive audit rights, thus preventing them from seeing what is being paid to media vendors and allowing the agency to make an unknow margin on these transactions.

Opt-in transactions allow the agency to be compliant with contract conditions and make a margin on transactions provided they get approval from their client.

Initially, opt-in transactions were truly “opt-in” — meaning the advertiser could decide to participate or not.

Trying to find other sources of revenue, agencies began selling services to media vendors.  This came with two problems.  First, there could be potential conflicts of interest since the media were now vendors and customers at the same time.  Secondly, there has been a concern that many of these services were sold at a “premium” — for much more than they were worth.  This provided the agency with a backdoor to rebates in another form.  Again, language was added to agency contracts to limit this as much as possible.

Starting with programmatic media, agencies began making large-scale use of undisclosed, non-transparent buying practices by promising media savings to advertisers, provided they opted in to this model.  By doing so, advertisers waive audit rights  and allow the agency to buy as principal. This prevents advertisers from seeing what is paid to media vendors, and it allows the agency to make an undisclosed margin on these transactions.  Opt-in transactions allow the agency to be compliant with contract conditions and make a margin on transactions– provided they get approval from their client.

Initially, opt-in transactions were “opt-in.”  The advertiser could decide to participate or not.  As long as the client went into these transactions understanding the consequences, they were entering into this at their own peril.  The issues with these transactions are obvious: (1) The agency was now an advisor and a vendor at the same time, creating potential conflicts of interest.  The advertiser could no longer trust that recommendations were in their best interest or instead to the benefit of the agency; (2) There now was potential for the agency to “comingle” their regular buys executed as “agent for a disclosed principal” (disclosed pass-through pricing) with their “principal” transactions designed to drive gains for the agency.  This could result in a situation where the “agent” buys are at acceptable price levels while the “principal” buys receive significant discounts.

This allows the agency to make a higher profit at the expense of the regular buys performed as “agent.”

As advertisers put their media agency accounts into review and agencies continue to promise huge savings, the delivery of these savings is now often contingent upon the use of opt-in buys.  In short, some agencies are requiring advertisers to agree to opt-in transactions upfront– as long as the agency is providing “equivalent” media as would have been purchased normally and offer a certain level of savings.  Once this is agreed upfront in the contract, the advertiser is no longer in control of when opt-in buys are done and what gets purchased specifically.  In other words, the agency is in full control of what gets purchased, how it gets purchased and how much margin they make.

So, this is where we are today.  Advertisers are truly between a rock and a hard-place when they decide whether to opt-in or not.  If they don’t opt-in, they may forgo value in the short-term by not taking the “discounts” offered.  If they do opt-in, they are encouraging the expansion of this practice, with all consequences involved.  Either way, value that should have gone straight to the advertiser in the old days now stays at the agency.  Media vendors don’t care which pocket they get paid from as long as they make their numbers.

No wonder trust has been eroded.

Continue to Part 2

OPT-IN MEDIA BUYS – BETWEEN A ROCK AND A HARD PLACE

An Issue in TWO PARTS….

Part 2: CONSIDERATIONS FOR ADVERTISERS ON OPT-IN ISSUES:

What should advertisers consider as they approach opt-in transactions:

  • Make sure they are truly opt-in.  Agency contracts should not include a contractual obligation requiring advertisers to “approve” these transactions if the agency says the media being proposed is “equivalent” to what they would buy as agentand/or supposed savings will be delivered.
  • When negotiating savings guarantees, ensure these are not contingent on opting-in.  Any additional “savings” from opt-in transactions should be on top.  During agency pitches, agencies should be made aware from the start that any savings guarantees should not be tied to opt-in requirements.
  • Set up clear internal procedures on how opt-in approvals should work.  An agency should be required to provide a recommendation in advance with a clear rationale supporting the media being proposed, as well as an outline of savings against the same media being purchased through regular, disclosed, “agent” transactions.  Advertisers should also limit approval authority to senior management who have a clear understanding of what is being approved and the issues involved with opt-in transactions.  Training should also be provided to marketing, media and procurement personnel who have anything to do with these transactions.
  • Understand the media agency landscape.  Some agencies are very aggressive in pushing opt-in transactions.  Other agencies also offer savings and efficiencies, but do not engage in this practice.  There is choice in the market regarding this.
  • Negotiate directly with key media vendors.  Many large advertisers are doing direct deals with large media vendors such as Facebook and Google.  In some cases, these deals are global.  Direct deals give advertisers full transparency to what was negotiated and reduce the risk of agency rebates and other leaks in the system.
  • Inhouse.  Many advertisers are taking their media buying in-house, particularly programmatic buys.  This allows advertisers to take full control of these buys but require investment in technology and specialized personnel.
  • Unbundle media planning from buying.  Agencies should not be recommending what to buy and be your exclusive sellers of the same media.  Opt-in media purchases should be arms-length transactions.  In order to do this, advertisers should consider assigning planning and buying duties to different companies. Advertisers could have a planning agency and several buying agencies to whom they could bid out the plan.  If agencies want to be media vendors, they should be subject to the same rules as other vendors. 
  • Ensure you negotiate maximum audit rights regarding these transactions.  At a minimum, the agency should report what they are charging you on a unit-by-unit basis, so you can evaluate if opt-in buys deliver savings vs. regular buys.  Some advertisers are asking for caps on margins for these transactions with audit rights that allow them to verify this. 

With everything going on, we agree with Reed Smith, General Counsel to the ANA, that 2019 should be The Year of the Audit.

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.

Agency Conflicts of Interest are a Larger Issue than Transparency

 

The entire industry has been abuzz with discussions on transparency. This is still a huge issue, but there is something larger lurking below– conflicts of interest. Essentially, conflicts of interest mean that clients can’t be completely certain they are being recommended the right media.

Transparency is a major issue that comes in many flavors. There are the traditional kickbacks received by buying agencies, which are prevalent internationally, but– while still present– are less common in the US. Some media agencies also provide ‘services at a premium’ to media vendors, allowing them to make unusually large margins from projects they do for the very same people from whom they buy media. Another widespread practice in every country, including the US, is for agencies to make large margins on non-transparent principal buys on their programmatic platforms or through their ‘inventory’ or ‘capital’ buying programs; this normally occurs when a client has ‘opted-in’ to non-transparent buys executed by agencies acting as principal’.”

Transparency is a fundamental topic, but a larger and more pernicious issue is conflict of interest. When a client opts-in to non-transparent buys with the promise of lower media rates, a lot of things happen in the background. Agencies are now in a position to recommend a specific media buy where they will make a profit, instead of another buy where they may make a lower margin or no margin at all.” In other words, even if the agency acts in the best interest of the client, and possibly against its own interests, they have placed themselves in a potential conflict of interest.

Another major concern is the prospect for agencies to co-mingle regular client media buys that are done as “an agent for a disclosed principal”  with media buys done by agencies as “principal” for resale to clients at a profit. This situation would unfold as follows: A holding company is negotiating a large buy for a client or multiple clients with a media vendor. Suppose for a moment that clients are placing $200 million in media with the vendor. Concurrently, the agency could be negotiating $50 million as principal for resale to clients through their inventory or capital programs. It would not be unimaginable for the agency to apply the clout of the entire $250 million to get an OK deal for the client buy and get the best possible pricing for their own buy for resale at a profit. The potential conflict of interest would involve a transfer of value from the client’s buy to the agency’s buy. Furthermore, no paper trail would be left behind if this was done by a simple insinuation across the negotiating table.

Trendsetters: Cortex Media’s Manuel Reyes Asserts that Agency Conflicts of Interest are a Larger Issue than Transparency

“The entire industry has been abuzz with discussions on transparency. This is still a huge issue, but there is something larger lurking below– conflicts of interest,” says Manuel Reyes, CEO of Cortex Media, a leading media auditing and consulting firm working with top tier advertisers in the US and internationally. Essentially, conflicts of interest mean that clients can’t be completely certain they are being recommended the right media.

He explains: “Transparency is a major issue that comes in many flavors. There are the traditional kickbacks received by buying agencies, which are prevalent internationally, but– while still present– are less common in the US. Some media agencies also provide ‘services at a premium’ to media vendors, allowing them to make unusually large margins from projects they do for the very same people from whom they buy media. Another widespread practice in every country, including the US, is for agencies to make large margins on non-transparent principal buys on their programmatic platforms or through their ‘inventory’ or ‘capital’ buying programs; this normally occurs when a client has ‘opted-in’ to non-transparent buys executed by agencies acting as principal’.”

Transparency is a fundamental topic, but, in Manuel’s opinion, a larger and more pernicious issue is conflict of interest. Here is how it comes into play for media agency/client relationships: “When a client opts-in to non-transparent buys with the promise of lower media rates, a lot of things happen in the background” says Reyes. “Agencies are now in a position to recommend a specific media buy where they will make a profit, instead of another buy where they may make a lower margin or no margin at all.” In other words, even if the agency acts in the best interest of the client, and possibThe entire industry has been abuzz with discussions on transparency. This is still a huge issue, but there is something larger lurking below–ly against its own interests, they have placed themselves in a potential conflict of interest.

Another major concern is the prospect for agencies to co-mingle client media buys when acting as “an agent for a disclosed principal” by using the agency’s own “principal” purchases for resale to clients at a profit. According to Reyes, the situation would unfold as follows: “A holding company is negotiating a large buy for a client or multiple clients with a media vendor. Suppose for a moment that clients are placing $200 million in media with the vendor. Concurrently, the agency could be negotiating a $50 as principal for resale to clients through their inventory or capital programs. It would not be unimaginable for the agency to apply the clout of the entire $250 Million to get an OK deal for the client buy and get the best possible pricing for their own buy for resale at a profit.” The potential conflict of interest would involve a transfer of value from the client’s buy to the agency’s buy. Furthermore, no paper trail would be left behind if this was done by a simple insinuation across the negotiating table.

Manuel Reyes recognizes that agencies have been under tremendous pressure from advertisers to reduce their fees/commissions and extend payment terms. He adds, “They have been forced to find other ways to make money to stay in business. We are all guilty of creating the current environment.”

Improving contract terms and active contract maintenance, including media performance and financial compliance audits remains the best practice today, but are not foolproof. “We need to have a hard look at how we are working today” says Reyes. “Agencies have stated that they are positioning themselves as media vendors and not agents. If so, advertiser practices also need to change. The industry is ripe for a major change to introduce separation of duties between planning and buying if this continues.”

Manuel Reyes is the founder of Cortex Media and has been providing media auditing and consulting services to top-tier advertisers in North America, Latin America, and Europe since 2001. Before that, he was Chief Executive of Starcom Latin America. He also led MediaVest’s Latin America and US Hispanic divisions. Over the last 25 years, Manuel has held management positions at several agencies, advertisers, and media companies.

Cortex Media helps create a media value advantage for marketers. The company is recognized globally as a resource for balanced and independent viewpoints on key advertising media topics in US and worldwide– from Media Performance Optimization to Digital Media Cost Benchmarking and Review to Financial Compliance and Transparency to Agency Management and Evaluation.

Don’t Ask—”Am I getting the Best Agency?” Pose a Different Question.

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Today, the agency of record is being replaced with the agency du jour. Media agency reviews are part of the “new normal.”

But do they need to be? More importantly, are they helping?

Of course, there are times when a review is the right thing for the business– especially at a time when the media landscape itself is changing so fundamentally. It is a marketer’s responsibility to ensure that the right resources are in place for their brands. Additionally, many clients today feel angst and mistrust as transparency issues continue to take center stage in top management discussions. Sadly, the notion of the agency as a ‘partner’ has become a quaint idea for many. It’s easy to see why agency reviews have become so pervasive.

Nevertheless, many believe the pitch process has gotten out of control, especially given how the disruption, human energy expenditure and actual cost often taxes an entire operation. This is not only the cost to the agency, which has certainly been well documented and bemoaned, but the cost to the client and the business. Pitches today can span six to twelve months, which certainly interrupts the flow of business in a world that looks for seamless solutions and immediate response. That’s a tremendous distraction from the business of growing the business.

Changing agencies often discounts the value of continuity at a time when continuous improvement and optimization are key. Optimization is the job in today’s media agency. All those FTEs at the agency aren’t negotiating pricing so much as they’re optimizing outcomes. They are mining data to refine targets and personalize messaging through a process that constantly moves, changes, and tweaks placements to find the higher return. As much as the data itself is prized, the magic lies in how it is interpreted and applied. Surely there is value in that experience. How does one become a learning organization without valuing what’s been learned?”

An enduring agency relationship benefits the advertiser, not just the agency. An enduring relationship doesn’t mean– can’t mean– a stagnant relationship. Maintaining an enduring relationship at optimum performance – getting the agency’s best – requires ongoing attention and discipline, ongoing measurement of performance and ongoing refinement of goals and expectations. Also, both parties need to be able to review the contractual terms regularly and be open to amendments and addenda as required. Terms that made sense only a year ago may not be optimum today.

After decades of working with all the agency groups and nearly every agency brand, I am often asked which agencies are best. I can only say that all of them are capable of work that is outstanding and of work that is unworthy. So maybe the question shouldn’t be: Am I getting the best agency? But rather: Am I getting my agency’s best?“