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Why American ad agencies are being accused by their clients of having secret agendas

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American ad agencies routinely use hidden business arrangements to boost profits without their clients' knowledge, according to an explosive new report from the Association of National Advertisers.
The report says that these undisclosed dealings, such as rebates awarded by media companies based on how much agencies spend or pressure to do business with agencies linked to a parent company, are "pervasive" across the U.S. media-buying industry.

For the brands buying the advertising, the concern is that these secret incentives might cause agencies to spend their money in a way that puts the agency's own best interests before that of their clients. 
That's why the ANA, a marketing trade group that represents big global brands like Coca-Cola, Procter & Gamble, General Motors and AT&T, has an interest in uncovering these practices.
A research firm called K2 Intelligence prepared the report on the group's behalf based on interviews with 150 anonymous sources. Of the 117 of those sources with a direct role in the media buying process, 59 said they had been involved in undisclosed dealings of this sort in at least one instance. 
The highly-anticipated release stirred up plenty of debate across the industry on Tuesday. Though the report avoided naming any individual agencies or cases for the sake of protecting anonymous sources, several agencies and their holding companies lashed out at its findings in statements.
"A healthy and constructive debate about media buying can only happen with a bipartisan, engaged, industry-wide approach — and that is precisely the opposite of what the ANA has pursued," a spokesperson for the American Association of Advertising Agencies said in a statement that captured the sentiment among many of the agencies responding.
"We call upon the ANA in the strongest terms to make available to specific agencies on a confidential basis all of the materials related to them," the statement continued.
At the very least, brand marketers are likely to come away from the report with some questions for the agencies that spend money on their behalf. Agencies will in turn have to reassure them that they are not doing anything unethical.  
But there could also be serious consequences; in the past, ad execs have even served jail time for anti-competitive practices and overcharging clients.

How rebate schemes work

When brand marketers at corporations like McDonald's or Ford want to buy a television commercial, magazine spread, billboard, online banner or any other type of ad, they usually turn to an agency or an agency division that specializes in buying media space.
As part of this transaction, they expect these agencies to buy whatever slots are needed to meet their demands at the best possible price for the client. They also expect agencies to be transparent about how they go about it.
According to the report, however, many of the media suppliers selling the advertising space regularly offer to pay the buyers rebates of anywhere between 1.7% to around 20% of their spending if they agree to take a certain amount of their total business to them. 
Sometimes these rebates are paid in cash or free ad space; other times in the form of cheaper rates for services like consulting or research. But the report found that these services were oftentimes "of minimal utility, significantly overpriced or not provided at all."
Media buying agencies generally work on behalf of a roster of different brands. So when one buyer gives preferential treatment to any one supplier, there's a chance it could serve its own bottom line — which is rooted in the aggregate interests of all of its clients — but not necessarily that of any of its individual clients.

This chart shows how the savings from a 10% rebate might not benefit all an agency's clients equally. In this case, the agency's incentives are skewed.
IMAGE: K2 INTELLIGENCE
Advertising rebates and other such bonuses are common practice in Europe and much of the rest of the world, according to various surveys, but U.S. ad execs have claimed for years that they aren't used here.   

An industry of empires

The advertising industry has consolidated at an accelerating pace in recent years to better compete with deep-pocketed tech giants like Facebook and Google.
As a result, the industry is currently dominated by six big holding companies: WPP, Omnicom, Publicis Groupe, Interpublic, Dentsu and Havas. Together, they control nearly half of the world's $6 billion ad market.
Each of those companies owns dozens of agencies that operate at every conceivable level of the advertising supply chain. Those resources allow them make the case to shareholders and clients that they can meet all of a brand's advertising needs within the same company.
But the probe also pointed to some conflicts of interests that come with having so many tentacles. 
For instance, the report alleges, some holding companies will buy media at one rate, hike the price by anywhere between approximately 30% and 90%, then resell it to clients through another agency without ever disclosing the original cost. Essentially, they act as their own suppliers.

The flow of money if holding companies use hidden markups to sell media space at inflated prices.
IMAGE: K2 INTELLIGENCE
Media buyers are also reportedly pressured or incentivized to buy through these in-house channels, even if doing so is not in the client's best interest. In other instances, agencies might have an undisclosed stake or an advisory role at a media supplier.
These hidden business practices aren't just limited to big holding companies though; evidence of such dealings was also found at small independent agencies and across all types of media.

Fierce reactions

As noted above, ad agencies have responded to these findings with anger, arguing that accusations should have been made on an individual basis or as a collaborative effort as to not condemn the entire industry.
"We believe that the key findings – neither quantified nor qualified, and based on a small sampling of unnamed sources – do not accurately portray how Omnicom's agencies work on behalf of our clients," an Omnicom spokesperson said in a pre-emptive statement. "In so doing, it does not serve the best interests of the clients that the ANA purports to represent."
In a now-deleted blog postMarco Bertozzi, global chief revenue officer at Performics and formerly of Publicis' Starcom MediaVest Group, said "blanket accusations" make it hard for the "kids who are working their socks off" and tarnish the industry's image when it's already struggling to lure new workers.
Pivotal Research analyst Brian Wieser factored in early reports of the ANA probe to hissomewhat muted growth forecast for the holding company stocks earlier this year.
Brand marketers, meanwhile have been predictably more receptive to the investigation's findings.
P&G said it relies on regular audits to root out any transparency failings on the part of its agency relationships.
"We have a 'trust but verify' approach that includes having clear and thorough stipulations in our contracts, regular audits on performance, and third party verification that ensures transparency," a company spokesperson said in a statement. "If we find irregularities, we will take remedial action."
Most reactions in the corporate marketing world seemed to focus on assessing the findings in terms of their own business relationships.
"Trust and transparency are critical to any relationship, so we take the ANA’s findings very seriously," a Unilever spokesperson said in a statemtent. "At Unilever, we are actively engaged with our agencies and the industry at large to exert greater control and responsibility around media transparency."
The full impact may not be felt until the investigation's findings have more time to reverberate the industry.

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