"Rebate Confirmation." It was less than 300 Chinese characters, and according to the agency that showed it to us, it was the full and only contract between this media vendor and themselves.
"Based on an agreement between Client X and Media Vendor, the agency will receive 8.539 percent rebate," the document said. It didn't even include the name of the agency involved (it was a global media agency). It was just one of many identical agreements we recently audited as part of our normal work at R3. Of course, we all know China is the home of fake brands. But in our experience, it’s not the only place that is the home of fake contracts.
How did it come to this?
How did global marketers and agencies agree to work together with lengthy 30,000+ word MSA (master services agreement) legal documents, only for one party to produce such an untrue 300-character rebate report? Have other industries ever seen such a low level of trust between two parties?
My attention got turned to an old Harvard Business Review article by Joel Brockner of Columbia Business School entitled "Why it’s so hard to be fair"—a studied piece looking at the impact of business outcomes, connected to the way employees and stakeholders are treated. When you connect these dots, it’s clear that agencies and clients urgently need to sit down individually and mutually discuss fairness.
Transparency is not a new concept in the history of both sides—but it boiled to the top at last year’s ANA Media Conference, where former Mediacom CEO Jon Mandel alleged widespread use of kickbacks in the US. This set off a firestorm, including an independent investigation by the ANA in June 2015 and an unprecedented pre-emptive strike by the 4As to try to set new guidelines in January this year. As 500 marketers descend on Florida this week for the annual ANA Agency Financial Management conference, the independent investigation is still not complete, so there are still troubled waters around us, and not enough bridges.
One interesting article in June last year still resonates. It talked about one holding group forcing its media suppliers to sign offshore contracts for media executed in the US. It makes one think—perhaps "media rebates in the US" are as accurate as "I did not have sexual relations with that woman". This month, the discussion also jumped the pond, with UK marketer’s association ISBA working on a new Framework Agreement for its members. Agencies are naturally up in arms about the approach.
For us at R3, the discussion about all this can best be described in one word: "fairness". We spend our working lives (and too much of our personal ones as well) intertwined between marketers and agencies seeking this fine line.
We used to jest, "When both sides are unhappy, that means the agreement is fair". Well, as of right now, both sides are clearly unhappy on the media-rebate issue, and agency profitability continues to stay around the 15 percent margin for the last 10 years. So should we all go back to find others things to worry about?
Because we need to sort this fairness thing out.
How agencies can be more fair
Agencies need to accept that in 2016, marketers should pay them an appropriate fee for their services, plus a bonus for outstanding work, and that should be their only form of compensation. That’s that.
Yet there are some countries in which we work (not the US) where more than half of the media agency’s revenue comes from rebates from vendors. I guess this must be why they are called "media agencies."
Clients and consultants should have the right to audit, and the right to confirm that all the hours and time mutually invested in setting up those fee agreements, was done on a transparent basis.
The mere idea that there would someone be individual client-rebate agreements between individual media owners and marketers is ridiculous—just ridiculous. Agencies pool their weight into a holding company just for that reason: to negotiate the best financial terms. Those contracts should be independently sighted and validated to let clients sleep at night, knowing their multimillion-dollar investments have been handled professionally.
The growth of programmatic has, of course muddied these waters, but the best agencies are already transparently showing the cost of the DSP, ad serving and technology, and letting their clients make a choice.
How clients can be more fair
Sad to say, this is a two-way street. When agencies get sucked into a "Mediapalooza" where cost and fee commitments become such a critical factor on outcomes, the inevitable will happen.
Marketers and their procurement teams need to step back from the edge of the 1 or 2 percent commission rates for media, and focus more on the 100 percent—that of the actual media committed. This is easy to say, and hard to do, until agencies are clearer on what their true financial baselines are. Still, there needs to be more investment in training and research of how different media mixes will lead to different business outcomes, and this is the best basis to hold agencies accountable for.
I always remember a famous turn-of-the-century campaign for the now defunct Compaq brand—'Compaq costs you less than cheaper computers'—and this sums up the challenge for marketers. How do you tolerate a campaign that may be with a 'more expensive' agency at a 'more expensive' media rate, yet you deliver a substantially better result in brand equity and business growth? In the end, aren't those the only reasons we bother to do marketing and procurement?
A plea for fairness
Independent financial and media audits of agencies should be the backbone of the business we work in. They provide marketers with the reassurance that their agency is accountable and transparent. And for the best agencies, they play the same role as Moody’s does for the financial industry: an independent rating of performance. Both sides should approach these with a more open mindset.
Brockner ended his article with this:
There is a moral imperative for companies to practice fairness. It is, simply put, the right thing to do. The sooner you realise it, the better off you and your company will be.
Let's get to work, shall we?
Greg Paull is principal and co-founder of R3 (www.rthree.com), an independent consulting firm measuring and improving the efficiency and effectiveness of marketers and their agencies.