ANA’s K2 Report: Evidence of ‘Pervasive’ Agency Rebate Collection
This article likens the industry to a group of thugs ready to shake down anyone they can… shame on the big guys… who are taking more than they state and not giving the value back to their clients. Hopefully, the upcoming millennials have more integrity to bring to their leaders!
An investigation by the Association of National Advertisers has found that rebates, including “cash rebates,” and “other non-transparent practices” are pervasive in the U.S. media buying ecosystem, the trade association announced this morning.
Findings from the eight-month-long investigation conducted by independent firm K2 Intelligence are contained in the ANA’s 58-page report.
The report, which alleges that contracts for rebates and other non-transparent business practices were negotiated and sometimes signed by high-level agency executives, outlines the various “non-transparent practices” by agencies, based on “detailed source accounts from dozens of confidential, personal interviews as well as documentary evidence” such as contracts and emails.
The report, however, does not name any agency groups or media vendors specifically “due to the confidential nature of the assessment,” said K2. The firm cited 150 independent sources and “substantial evidence” from 41 sources who reported direct knowledge of rebate deals occurring in the U.S. market. Of those sources, 34 indicated rebates were not disclosed or returned to advertisers.
According to the ANA release, “five of the six major agency holding companies and their affiliated companies declined formal requests to make any of their current executives available to be interviewed.”
A source with direct knowledge of the situation said Interpublic Group of Companies was the holding company that did meet with the report’s authors.
The study found a range of instances in which paid rebates to agencies accounted for 1.67% to 20% of aggregate media spending depending on the deal, said Richard Plansky, executive managing director of K2 Intelligence, on a call to discuss the findings.
“From the beginning, this has been a study designed to shed light on certain non-transparent practices in the media-buying landscape — not an investigation or an audit,” said Mr. Plansky in a statement. “At the ANA’s insistence, this has never been about pointing a finger at any individual or company.”
Documentation cited in the report included emails between agency executives and media companies in which rebates were discussed in detail, according to an ANA release.
The report highlighted “non-transparent” practices, including agencies’ collection of cash rebates from media vendors to selling research services that don’t have much value as a way for media to send a check to an agency and get free media inventory credits. The firm also found instances in which agencies were incentivized by holding companies to direct client spend to media regardless of what was in the client’s best interest. For example, former senior-level agency employees reported that they felt pressure from senior-level people at the agency or holding companies to direct spend to suppliers in which the hold company or agency held an equity investment, according to Mr. Plansky.
Markups on media sold through principal transactions ranged from approximately 30% to 90%, and media buyers were sometimes pressured or incentivized by their agency holding companies to direct client spend to this media, regardless of whether such purchases were in the clients’ best interests, the firm found.
“Whether acting as agency or principal, vast changes in technology, the complex digital supply chain, and the proliferation of media outlets provided agencies with additional opportunities to increase their profit margins beyond agency fees,” said ANA CEO Bob Liodice in a statement. “This has led to disconcerting conflicts of interest and a lack of transparency.”
Even so, some of these non-transparent practices are apparently contract-compliant. According the ANA’s statement, the study revealed that, “in many cases, advertisers were unaware of details in their agency contracts that addressed the issue of transparency, particularly because some contracts had not been reviewed or updated in as long as 10 years.”
Determining the legality of the behavior was beyond the firm’s scope for this investigation, said Mr. Plansky during a Q&A session.
The advertiser trade association hired two companies, K2 Intelligence and Ebiquity, last fall to investigate agencies’ media-buying practices amid client concern following allegations that agencies were collecting undisclosed rebates from vendors. The ANA hired K2 to do a “fact-finding industry assessment,” and Ebiquity was tasked with providing a second report containing guidelines and recommendations. A full Ebiquity report will come in a week or so, said an ANA spokesman.
The 4A’s, a trade association for agencies, responded to the findings in a statement: “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. The immense shortcomings of the K2 report released today – anonymous, inconclusive, and one-sided – undercut the integrity of its findings. 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.”
“Without an opportunity for agencies to assess and address the veracity of information provided to K2, sweeping allegations will continue to drive attention-grabbing headlines; this does nothing to foster a productive conversation or to move our industry forward and could cause substantial economic damage to all media agencies,” the agency association continued. “Faced with a report that views media buying from the perspective of only one of the three parties to such transactions, agencies are hard-pressed to defend themselves, which could cause substantial economic damage to all media agencies.”
Publicis didn’t pull any punches in its response, saying that “the ANA has failed its members, advertisers, agencies and the entire industry by releasing a report that relies on allegations about situations involving unnamed companies and individuals to make broad, unsubstantiated and unverifiable assertions. Despite repeated urging by Publicis Groupe and others in the industry to include names and sources in its report, the document hides behind suspicions and anonymity rather than encouraging real accountability.”
Drama leading up to the big reveal
Late last week, no one outside the ANA had seen the report, but news broke on Thursday, first by the Wall Street Journal, revealing what the report would contain. Industry insiders expressed frustration, in conversations with Ad Age, about all holding companies potentially having to take the blame for a practice they attributed to only “a few bad actors.” Still, many industry experts insist that rebates are indeed rampant.
While the report would simply call the practices “non-transparent,” one executive had told Ad Age that the findings could trigger potential disclosures to the SEC.
“It’s going to give the agency industry another black eye and it’s going to further erode the trust that clients and agencies have,” the person said. “It is one more blow to the trust and transparency and candor that everybody assumes you should have with your agency.”
News of the ANA report prompted holding companies to issue public statements defending their practices, and ask for specific evidence on their own shops.
Attorneys for two major holding companies, WPP and Omnicom Group, on Friday sent the Association of National Advertisers letters asking the organization to back up their claims. Publicis Groupe later sent a letter, calling the ANA’s potential move to allege the collection of rebates without naming individual perpetrators an “unfair and unwarranted attack on the entire industry.”
The world’s two biggest marketers expressed support for the ANA’s efforts.
“Trust and transparency are critical to any relationship, so we take the ANA’s findings very seriously,” Luis Di Como, senior VP-global media, Unilever, said in a statement. “We support its work to ensure that as the media industry evolves these values remain a top priority. At Unilever, we are actively engaged with our agencies and the industry at large to exert greater control and responsibility around media transparency. We go to great lengths to make certain that our proprietary procedures and policies maximize our investments and fulfill contracts, in both the letter and spirit. We’re confident the right steps will be taken to strengthen our industry.”
Procter & Gamble said it appreciated the ANA’s diligence in studying media transparancy practices, “particularly as technology is bringing a significant transformation in the industry.”
“As a result of the study, it’s important that advertisers and agencies work together appropriately to deal with the changing media ecosystem,” a P&G spokeswoman said in a statement. “We appreciate the ANA’s diligence to study media transparency practices At P&G, we want and expect strong agency partnerships based on mutual trust, transparency and teamwork. 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. If we find irregularities, we will take remedial action.”
Source: AdAge June 7, 2016