Recently the Association of National Advertisers (ANA) released findings from an eight month study conducted by K2 Intelligence that has lead to an uproar in the advertising industry. Watching AdAge and various blogs, agencies claim they have been misrepresented and have responded defensively trying to poke holes in the 62 page study. Advertisers wonder where the truth lies, facing the same question that commissioned this study and others prior--how transparent are agencies and agency holders with clients?
Seeking to shed some light on these questions and expose the prevalence of non-transparent business practices within the industry, ANA commissioned K2 Intelligence to conduct a study. K2 Intelligence is a consulting firm specializing in investigative and integrity consulting, helping firms minimize risk in the areas of strategy, operations, and reputation. They have locations all over the world and a strong network of top professionals in their respective fields to resource, resulting from over 40 years of relationship building. Whether doing compliance, cyber defense, or investigative work, K2 Intelligence utilizes traditional techniques coupled with cutting edge technology and the most advanced intelligence gathering techniques.
K2 conducted 143 interviews with 150 individual sources, keeping names and agencies strictly confidential so as to only expose industry problems, not specific organizations or professionals. Of those, 117 are involved directly in U.S. market-based media buying. K2 reported that 34 sources were involved with various rebate structures and 33 were part of "principal transactions that enabled potentially problematic practices." Regardless of agency type or media type, non-transparent practices were everywhere within the industry.
What is a "non-transparent" business practice? For the sake of this study, K2 considered it any practice where the value of a media purchase is not completely known by an advertiser because all the necessary information is not disclosed. This dilemma, though long-known in the advertising industry, is a great illustration of why in every industry, it is critical to have transparency within the procurement process.
Through the dozens of confidential interviews that K2 conducted over the eight months of the study, K2 confirmed an overall lack of transparency in the industry in agency media buying. Rebates, kickbacks, markups, dual rate cards, and buying media in the best interest of the agency rather than the client all came to light as non-transparent business practices in effect today in the industry. Ultimately, the advertiser-agency relationship is broken. The questionable practices often had "systematic elements" that suggested the practices were a normal part of conducting business and in some cases, found executives negotiated and signed off on such practices.
How do the non-transparent practices found work? In the case of rebates, K2 found that sometimes the rebate is disguised as a "service agreement" that is linked to the spend volume of an agency and covers such things as either consulting or research. In more straightforward cases, rebates were cash or free media. Principal transactions were another source of problematic business dealings. In this situation, an agency buys media on its own behalf then later resells it to a client with a markup. Often, K2 found, that markup can be 30-90% of the original purchase price, and the client does not know the original cost of the media. Further, some agencies or agency holders own equity in media suppliers and then media buyers often feel pressured to move spend in the direction of that investment.
Agencies have wasted no time in issuing statements in response to the release of these findings. Looking at those posted by AdAge, GroupM issued a statement denying any participation in or practice of rebates, service fees, or hidden revenues. Publicis Groupe issued a statement that says ANA chose a "sensational" approach where "it seems clear ANA is not trying to find a solution to the alleged problems" and ANA released a report "that relies on allegations about situations... to make broad, unsubstantiated, unverifiable assertions." Interpublic Group of Companies says "IPG has been a leader in terms of media transparency since 2005..." and it says they eliminated such practices in their dealings. Omnicom feels that the report does not use a large enough sample and does not "accurately portray how Omnicom's agencies work on behalf of our clients."
Regardless of what side is taken in this uproar in the advertising industry, this is a prime example of how essential it is to have good procurement practices. It does not matter if you are buying media working with an agency or buying office supplies or telecom service--you need to know what you are getting. Solid procurement practice includes a high level of transparency and a clear understanding of what is being purchased along with its value. Is your organization working with transparency in its procurement?