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A picture of two businessmen exchanging money and shaking hands

Ad agency kickbacks benefit ad agencies, not clients. Source: Google

Marketers within large corporations often rely upon external agencies to assist them with the development and execution of marketing strategies and tactics. The creative component of marketing campaigns or the distribution through media of marketing content is often outsourced to organizations specializing within these areas. These Agencies, in many cases over half a century old, are able to generate a level of confidence and trust from other organizations that is often crucial for the type of work they perform. Many large organizations will partner with an advertising agency for many years and place a tremendous amount of trust in that agency to act in the best interests of the organization.

Given the fact that advertising agencies often act as intermediaries between their clients (the organization whose marketing managers engaged them for their expertise in a marketing campaign) and the vendors they use to help produce the end result (e.g. media sellers) there is the potential for the advertising agency to face multiple conflicts of interest between its clients and vendors.

For instance, The Wall Street Journal and Advertising Age report that, on Thursday, former Mediacom CEO Jon Mandel (current CEO of media consultancy Dogsled Enterprises and marketing-analytics firm PrecisionDemand) presented at an Association of National Advertisers (ANA) conference that media agency rebates and kickbacks are widespread throughout the industry.

Some marketers claim that agencies are distributing ad money to best suit their own businesses as opposed to those of their clients, thus breaching their fiduciary duties to clients. Ad agencies have been criticized for the lack of transparency of their practices and compensation. It is also disconcerting that a marketer would not necessarily know the impact of the ad agency selecting one vendor as opposed to another.

Numerous previous events have revealed ad agency kickbacks in the United States. In the late 1990s, Proctor & Gamble mandated that its ad agencies reimburse it for bonuses it had received. Ten years ago, Interpublic had to return money to clients that it had received from media companies as part of volume media deals.

In some cases, media sellers reward ad agencies for their spending with lower ad rates, extra inventory that can be resold to another client for a profit, free ad spaces, or even cash. Clients may be unaware of these relationships, and the rebates that should be going to the clients are instead going to the agencies. Mandel points out the strange fact that fees to agencies have gone down while their declared profits have risen.

This reflects a growing mistrust that marketers have for their agencies. A 2014 ANA and Forrester Research survey reveals that nearly half of senior marketers are concerned about the transparency of their media buys, and more than half expressed a high level of concern that agencies may receive a rebate from the media seller. Indeed, ad agencies could be induced based on these factors to recommend media that is off strategy or target if it contributes to their financial gain.

The challenge for marketers when attempting to identify whether their ad agencies are behaving in this manner is that most of the

rebates and other questionable dealings occur at the holding-company level. Due to the size and interconnectedness of holding companies, former marketing chief of Cocoa-Coca Joe Tripodi states that it’s easy to “move stuff around and hide stuff.” Indeed, holding companies are difficult to track or audit.

However, rebates are not the only way that agencies profit from the vendors they work with. Some vendors promise to grant ownership stakes to ad agencies that spend a specific amount of their clients’ money with them. Others invest in vendors, increasing the amount of business they do with those companies. This is arguably a much more deep-rooted and problematic form of dysfunctional ad agency behavior.

To support his claims, Mandel showed a heavily redacted document to those at the conference in which a media agency agreed with a media vendor to an industry-standard 2% commission, but as much as 9% in volume-based incentives. He gathered his information from private conversations with media executives.

Naturally, some people oppose Mandels’ claims. CEO of the American Association of Advertising Agencies Nancy Hill states that available data and information is insufficient to support such accusations. Rob Norman, the Chief Digital Officer of WPP-owned GroupM (Mediacom’s parent company) denied all claims.

As this issue is explored further, marketers are urged to pay closer attention to their ad contracts and ensure that deal terms with ad buyers clearly disclose that discounts or cash stemming from a volume discount is passed along to the marketer. Another recommendation is for clients to periodically check with ad-tech vendors who were not placed on the “recommended” list by their media agencies to find out why they were excluded. Knowing the reasons why a media agency was passed over could provide greater insight into the less “client focused” practices that could be happening within an ad agency.

From a marketing management perspective, here are some questions to consider:

  • What possible conflicts of interest can arise from ad agencies taking stakes in media or tech companies?
  • Discuss the advantages and disadvantages of handling advertising in-house vs. out-of-house.
  • If you were a part of the ANA Media Transparency Task Force, what would be your initial steps?