The results of an ANA probe on agency rebates have come back, and while details of those results have yet to be made public as of this writing, I’ve been in the business long enough to know what the report will say when details reach the general advertising community.
Are you managing agencies right now? Not sure what protections exist to keep them from lining their pockets with your working media dollars? Read on.
It’s long been held that much of the value of a home alarm system is wrapped up in the deterrent value of the signs on the lawn and on the windows. Burglars look for easy targets, and in many cases, simple deterrents can encourage them to move down the street to a less challenging target. While the solutions I’m suggesting aren’t a cure-all – after all, we don’t know what’s in the ANA report yet – they do represent first steps you can take in order to help protect your working media budgets.
Ensure Proper Contract Language
A good contract with an agency should contain two important rights for the advertiser. While I’m not a lawyer, I’ve negotiated my share of contracts from both the perspective of the agency and of the advertiser. In order to deter improper financial chicanery behind the scenes, your legal department should reserve two important rights:
Right #1 – The right to have volume discounts revert to the advertiser
Contract language should make it clear that if any volume discounts exist, whether they be specific to the advertiser or the result of multi-client discounts offered by vendors, they must revert to the advertiser. Note that this doesn’t cover merely frequency or volume discounts as they pertain to your business, but your fair share of any discounts negotiated across clients as well. This should also cover bonus activity earned as the result of any buys. If any suspicious activity is uncovered later, this will help place them in fraud territory, rather than “a simple misunderstanding.”
Right #2 – The right to audit the agency’s books
As an advertiser, you should have the right to audit any monies moving in or out of the agency that are used to pay vendors working on your business. While it’s true that some vendors may be complicit in providing backup documentation that doesn’t match with what the agency actually paid for your media buys, the right to audit helps you by making agencies and vendors think twice about rebates or other undisclosed arrangements, since agencies will have trouble accounting for them without some behind-the-scenes juggling. Like the volume discounts clause, it puts a stake in the ground, making any potential fraud allegations that much easier to prove in the future.
Re-Examine Agency Compensation
If you’re currently paying your agency on a commission basis, it’s time to re-examine that notion. I’ve often said that if you’re holding a hammer, every problem begins to look like a nail. It’s why agencies that are compensation solely on commission tend to give biased advice to their clients. Whenever there’s a business problem, the commission-compensated agency recommends more media spending, because it’s in its financial interests to do so.
Commission-based compensation opens an agency to a number of different avenues for earning undisclosed margins. An agency can ask a media vendor to prepare billing documentation at whatever commission rate it says, for instance. If you’re compensating your agency based on time and materials, however, this becomes more difficult.
Exercise Your Rights
If you have the right to audit an agency, do so on a regular basis. If expertise does not exist currently in-house, consider a media auditing firm. These firms are usually staffed by people who have spent significant time in the media buying business and they know what to look for and what to request from your agency. An added bonus is that they may also turn up funds or unrealized added value due to the advertiser that may have been overlooked.
In hiring an auditing firm, be sure they’re not also in contention for the business should you not be pleased with what they find. That’s a conflict of interest. You need an honest assessment here.
If you’re wondering whether a large agency might be earning undisclosed margins based on a holding company relationship, such an arrangement might be difficult to ferret out. Some advertisers find it easier and more productive to steer clear of holding company relationships and simply hire an independent agency. Disclosure: I work for and am part owner of an independent media agency.
It’s long been thought that larger agencies are better than smaller agencies at negotiating for preferred pricing with media vendors, due to their spending power. However, I more often find the opposite to be true. Vendors are often hesitant to offer steep discounts to agencies that are part of conglomerate, knowing that rates they extend to one agency will need to be extended to its sister agencies.
These simple fixes are first steps toward making sure your working media budget works for you and for your brand. When details of the ANA probe are made public, you’ll hear from us again to recommend some more advanced and pointed techniques.