Issues of transparency in the Advertising business

Paper presented at the conference on State of Advertising Industry in India: A Critical Appraisal. Institute for Studies in Industrial Development, New Delhi, February 2018

When I was invited to speak at this conference I was surprised and delighted to see the subject of transparency on the agenda, and instantly chose to speak on that.

Surprised, because this was the first time I saw that subject up for discussion. Never before, in my career of over 40 years in advertising and the media, have I known it to be on the table. Delighted, because, being aware of a great deal that goes on in the advertiser-agency-media triangle, I thought it was high time it was.

I did wonder, though. Perhaps in the last few years that I have not been actively involved in the business the issue of transparency has come out in the open. After all, I did serve on the TAM Transparency Panel, which was the first time I heard the T word used in the context of the Advertising business. So I asked a few people currently in the business – media agency heads, CFOs and advertisers – and the answers were the same. Had they ever had, or known of, a discussion on transparency in an industry forum? No. Did they think transparency was a serious issue? Yes.

“Something is rotten in the state of Denmark.”

In the last two years the issue of transparency has come to the fore in the United States, the world’s biggest advertising market by far. It did so when, in March 2015, a former media agency CEO publicly blew the lid off the industry’s best-kept secret.  

Speaking at a conference of the Association of National Advertisers (ANA), former Mediacom CEO Jon Mandel said financial malpractice was so common and so widespread that it caused him to leave the agency business. "[Agencies] are not transparent about their actions,” he said. “They recommend or implement media that is off strategy or off target if it works for their financial gain."

This was not a conscience-stricken agency CEO, overcome with guilt and letting it all hang out.  He was speaking for a Media Transparency Taskforce set up by the ANA.

Following the findings of the task force, the ANA commissioned a consulting firm, K2 Intelligence, to conduct a full, formal study. The report, titled An Independent Study of Media Transparency in the U.S. Advertising Industry, is in the public domain and anyone who has a role in the buying or selling advertising services, space and time must read it.

The topline of the K2 report is, “There is a fundamental disconnect in the industry regarding the basic nature of the Advertiser-Agency relationship.”  

It goes on to say, “Neither agency professionals nor advertisers in K2’s sample expressed a uniform opinion as to how their relationship should be defined, or how it actually operates. Rather, there is substantial disagreement both within and between these groups about whether and when agencies are obligated to act in the best interest of their clients.” [Emphasis mine.]

Once you’ve said that, the rest is just detail.      

The immediate response of the 4A’s, the American Association of Advertising Agencies, was sadly defensive. Instead of acknowledging the problem – which everyone, most of all the 4A’s, knows is real – they said the K2 report “is anonymous, one-sided and paints the entire industry with the same negative brush”. That is not a fair comment, because the report does have a section on “Factors enabling or contributing to the proliferation of non-transparent business practices”, which actually indicts advertisers, rather than agencies. More on that later.

Comments, statements and points-of-view followed, from industry bodies as well as individuals. A year later, in April 2017, the 4A’s invited Marc Pritchard, Chief Brand Officer of Procter & Gamble, to speak at its conference. He described the media supply chain as “murky at best and fraudulent at worst”. But, in a statesmanlike speech, he acknowledged the role of advertisers in the unhappy situation, and proceeded to lay out P&G’s action plan. Across the Atlantic, in October 2017 the British government announced a full media buying review, “with transparency at heart”.

The discussion has centered on the media side of the business, especially digital, and is almost entirely about financial transparency. But when we speak of transparency we must not lose sight of intellectual transparency. 

Let’s face it: transparency in this context is simply a euphemism for integrity. So let’s call a spade a spade: the issue at stake is integrity, both intellectual and financial. Let’s consider the intellectual aspect first.

Perhaps the most common, everyday intellectual compromise is data fudging. A media agency’s work is founded in data, and presented in a bunch of numbers. Unless you have some understanding of the basis of those numbers you cannot ask the right questions, and can do little but accept what you are told. You can get a warm glow of accomplishment from questioning the inclusion or exclusion of a particular TV channel, but you’re tinkering at the margins. The truth is deep inside.

At a media agency I was heading some years ago we were compelled to resign an important MNC account. The local client and we had a great relationship, but our global corporate parents had decided to part ways. The business was up for pitch, and four agencies were shortlisted. The client then called me and asked us to evaluate the pitches: a great idea, since we knew the business and the background and had nothing at stake. We asked for the presentations as well as the detailed working papers. And here’s what we found: in all four cases the data shown in the presentation did not entirely match what was in the working papers. Much of it was made up.

Yes, the dishonesty starts with the pitch, and there is no reason to think it stops there.

Even if they don’t actually fudge the numbers, often an agency in a pitch does a great deal of window dressing to present recommendations that look cost-efficient above all else: prioritizing efficiency over effectiveness. In the context of media management effectiveness is buying the optimal plan at the best possible price; efficiency is buying cheap whatever you buy. Efficiency is directly measurable: in the current context, in money – by CPRP, CPT, Effective Rate, or whichever measure you choose.  Effectiveness, on the other hand, is a function of what you set out to achieve, so it most often has no objective measure: it must be contextual and judgmental.  

This is at the client-facing level: the front office, so to speak. Behind, there is a plethora of practices, even whole organization structures, designed to get the agency financial advantages unknown to its clients and outside the terms of its contracts – in my book, the very definition of financial malpractice.

The most ubiquitous practice is of course rebating: Agency Volume Bonus, or AVB. Increasingly, client-agency contracts require the agency to pass on all discounts and benefits over and above its contracted fee or commission. But that’s again one of those things that give a warm glow of satisfaction to those who create them but are meaningless in practice. It doesn’t take genius to do the paperwork such that the rebates cannot be associated with specific clients, or even show up in the agency’s books.

In my agency some of our global clients had audit rights. Their auditors made surprise visits, but not one of them ever found, after inspecting our books, a single rupee going astray. Were we not taking AVB’s? Of course we were. And we passed most of those rebates on to our clients, but not because we were holier-than-thou. It was only because our jobs were at risk. CEOs and CFOs were under threat of dismissal if we sat on any money that rightfully belonged to those clients. Was the global management holier-than-thou? Of course not. They didn’t care what you did to deliver the financial results as long as you didn’t get caught doing it.

Digital media are rarely, if ever, bought directly from the publisher. Often the media agency buys from a sister company that belongs to its holding company, or even is its own subsidiary. The agency may on paper make only the contracted commission and nothing more, but no one knows how much the selling company made. In programmatic buying there is an unknown number of links in the value chain between publisher and media agency, and several of them could belong to the agency holding company or to the agency itself. In the process the cost to the advertiser could be anything up to fifty times what actually reaches the publisher.

Even after all that multilayered buying with hidden margins advertisers are not sure of what they get for their money. Early last year the so-called YouTube brand safety scandal broke, when brand owners found their ads appearing with all kinds of undesirable and inappropriate content. Shocked advertisers reviewed their buying processes, and many started whitelisting sites for their ads. Procter & Gamble dropped 70% of the sites it was using.

Enough about what is happening.  Let’s talk about why it’s happening.

“There are none so blind as those who will not see”

First, whatever its causes, the situation is perpetuated by ignorance, apathy and even denial.

The K2 study reports an amazing degree of ignorance and apathy. Many advertisers were unaware of the practice of rebating, and many were unaware if their agency contracts took a position on rebating. Yet others were generally aware of it, but took their agencies’ word that they did not engage in the practice and left it at that. And, again, that is in the world’s largest advertising market.

There is no organized information about India, but there is one interesting pointer. In 2014 EY conducted a study titled Reality Check: Fraud, Bribery and Corruption in India’s Media & Entertainment Industry”. An overwhelming 89% of respondents agreed there was an increase in the incidence of fraud in the previous two years in India as a whole; 56% agreed in relation to the M&E industry; but only 17% thought it had increased in their company.

So the incidence of fraud nearly doubled in the country and increased very substantially in my industry, but not much in my company! If the first step in solving a problem is to recognize it, we are clearly a long way away from solutions.

“As ye sow, so ye shall reap”

Coming back to the question, though, why do they do it? We are speaking here not of small shops and fly-by-night operators but of a 550-billion dollar global business, dominated by listed multinational holding companies, serving clients who in many cases spend tens of billions of dollars, and buying from media owners with tens of billions of dollars in advertising revenue.

K2’s lays the blame squarely on advertisers:

-          Pricing pressure:

• Driving down agency fees, causing agencies to seek additional sources of revenue;
• Shifting focus from strategy to price;
• Demanding extended credit

-          Lacking subject matter expertise to assess media plans or protect their interests

-          Not fully exercising audit rights where they have them

In many cases the biggest advertisers want the agency to commit upfront specific rates for different media for a year, and expect it to bear any overruns. This is after they have already twisted its arm to accept an unviable fee. The agency does, but where do you – or they – think it gets the money? From hidden rebates, arbitrage, and generally – let’s use the right term – cheating clients, including the very clients to whom it has committed rates.

It is unlikely that CMOs, CFOs and even CEOs of advertisers, for many of whom advertising is one of their top two or three heads of expenditure, are unaware of what happens. If they don’t know, they shouldn’t be in those jobs. If they know and choose to turn a blind eye, they shouldn’t be in those jobs.

Rance Crain, Editor-in-Chief of Advertising Age, wrote in 2015, soon after Mandel’s ANA speech, “It’s incredible how lethargic marketers are when it comes to policing the financial shenanigans of their agencies and the media.” The reason, he says, could be to keep agency fees low.     

Amazingly, Crain reports that after Mandel’s sensational speech advertisers were reluctant to believe that there was fraud, and the ANA was not quite keen to move forward on the findings of the task force it had set up. “Some marketers don’t care how much revenue agencies get from other sources,” he says, “as long as they can keep agency fees low.” It’s not just that they don’t know. They don’t want to know.

Marketers all too often have a very limited understanding of the increasingly complex media landscape and how it works. We saw that starkly demonstrated during the formation of BARC, the Broadcast Audience Research Council. It was initiated as a joint venture of the industry bodies of broadcasters, advertisers and advertising agencies. Somewhere along the line two of them – the broadcasters and the advertisers – decided they didn’t need the third, the agencies: it was the advertisers’ money and the broadcasters’ product, so why have the middleman at the table? It didn’t take long for them to realize that between them even at the level of the industry, at the national level – let alone of a single company – they did not have the necessary knowledge, skills and understanding. They came back to the agencies and asked them to come back in.

If Marketing doesn’t know enough about media, Finance and Procurement know even less. What they can understand is the number that shows up in the agency contract. Procurement departments are required to show how much they saved, and they can happily report the difference between what the agency asked for and what it settled for.  The pity of it is they are only pinching pennies, never mind how much real money leaks out as long as the leaks are invisible.

Negotiating with one client after a new business pitch, I was asking for 2.5% commission and they were offering 2%. I pointed out that what was in contention was only 0.5% of their media budget, but 20% of my revenue, which for me was the difference between profit and loss. They didn’t budge, and I declined the business.

Consider the implication of that. All the time and effort we put into the pitch was now down the drain. The client, on the other hand, now had for free the work and thinking of what in their view was the best agency in the pitch, which they could make use of while hiring the cheapest agency. What I should have done was to accept the 2% commission and make money on the side. That’s the way business is done today across the world, not only in India.

If you hire and pay someone for buying cheap rather than right, that is what they will do. Agencies have the expertise you need critically but don’t have. If you don’t pay them fairly they will find other ways to make money – without your knowledge, but at your cost. 

Over time market forces have shaped the operating model into one in which agencies have reduced commissions to patently untenable levels because that is no more their main source of revenue and profit. Thus far advertisers have turned a blind eye to it, but the underlying corruption – again, let’s use the right word – is now out in the open and it is increasingly hard to pretend it doesn’t exist.

Now comes the hard part

The public revelation of the state of affairs is a starting point, but it is only a potential starting point in a long, hard journey. Revelation must be followed by recognition; and only then can there be resolution.

While the K2 report revealed their misdemeanours it was actually quite sympathetic with agencies, blaming advertisers for creating the compulsions. Ironically, neither side was happy. The agencies were immediately defensive: to say, “Yes, but you forced me into this,” would be to implicitly acknowledge that there was wrongdoing, in the first place. Advertisers were slow to acknowledge the wrongdoing of the agencies, because to do so would be to accept that they were asleep at the switch: and so their complicity, even if passive.

In the last couple of years many advertisers have reviewed and renewed their contracts to plug loopholes, and many are taking digital media buying in-house. Of course, taking it in-house does not ensure that there aren’t multiple layers: it only means that now you are responsible for the whole thing.

For agencies it is potentially a double whammy: they lose the extra income they were making on the side but they can’t raise their commissions, which are untenable without that income. Some analysts believe the collapse of media agencies has already begun: holding companies have already begun reporting lower incomes. And some predict that digital will be followed by TV and other media buying going in-house.

Will this go away if you pay agencies more? Of course not. It has become a way of life. Personal corruption is easier to handle: this is institutionalized, industry-wide corruption. Whole corporate groups are structured around the opportunity to make earnings that are not legitimate. It will take years for new structures and new ways of doing business to come into being.