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Five Things You Need to Know About Ad Agency Kickbacks
The Association of National Advertisers (ANA) recently released a 58-page report on kickbacks happening in the ad industry. The report claims US ad agencies unethically padded their profits with secret rebate schemes, and that's just the tip of the iceberg.
Now that we've had some time to digest the findings, here are five key takeaways for marketers.
1. Ad agency kickbacks have always been around
Kickbacks have been going on for centuries, and no industry is immune. Most are innocuous; however, when they cross the line into criminal territory, the ramifications can be severe.
Typically, the media buying process starts off legitimate. But it's the latter half that gets murky, potentially crossing the line into criminal territory. An ad agency crosses the legal line when it is paid from incentives by the vendor who supplies the media.
Incentives can include discounts, consulting fees, and volume deals. To achieve those incentives, ad agencies recommend or implement media that is off-strategy to their clients.
Often, clients have no clue of that fact because ad agencies aren't being transparent in their actions.
2. Agency kickbacks will burn you
Jon Mandel, former CEO of WPP media agency MediaCom, admitted rampant use of agency kickbacks is the real reason he left industry. He also warned agencies that use shady practices to make hidden margins that they are playing with fire.
In 2005, Ogilvy & Mather's chief Shona Seifert and CFO Tom Early were charged with overbilling the White House anti-drug account. Seifert was sentenced to 18 months, and Early to 14 months in federal prison. And that's just one of many prominent cases.
Now, it looks like history is set to repeat itself.
3. Ad executives knew what they were doing
After a 2012 report went disregarded, the ANA hired two firms—K2 Intelligence and Ebiquity— in 2015 to investigate media rebates and transparency. The report is the culmination of seven months' worth of investigation. Initially, it was anticipated the report would address two major questions:
- Did US ad agencies accept rebates from the media?
- If they did, were those agencies transparent about disclosing them to their clients?
But what the report found was even more explosive than originally anticipated.
On June 7, the ANA released its full K2 Report, sending shockwaves through the industry. The study revealed several non-transparent practices and also cash rebates to agencies.
The data was collected by K2 Intelligence, which requested interviews with 281 sources. Of the 281, they were able to conduct 143 interviews with 150 individual sources. All the participants' identities remain confidential.
Of the 150 sources, 117 were directly involved in media buying. A total of 59 of those 117 had direct experience with non-transparent practices, and 34 included rebates. K2 also discovered executives were well-aware, utilizing a variety of deceptive practices.
4. Ad agencies employed many deceptive practices
The focus was all about the money. Moreover, the lengths to which ad agencies would go to make a dollar were eye-opening.
For many agencies, common practices included...
- Media markups. As agency holding groups were buying media ahead of time, they would sell the media back to clients with a 30-90% markup. The agency pocketed the difference.
- Advance buys. Many agencies utilize the tactic of purchasing digital media in advance of an advertiser's need for media. Purchasing in advance typically garnered an additional discount from the media supplier, increasing revenue and margins for the agency.
- Programmatic media transactions. An agency would use an ATD to acquire media, transfer the same media to another entity within the Agency Holding Company, and transfer it yet again to another entity within the Agency Holding. Not surprisingly, with each transfer, the agency would take another markup.
- Barter deals. One scenario involved a media supplier striking a deal with a barter company (agency). The barter company agreed to buy $1 million of media, helping the media supplier with revenue for the quarter. Then the barter company received a discounted rate for a larger purchase of media to the tune of $5 million for the next quarter.
5. The industry will be feeling the ripple effect for the foreseeable future
One senior media executive at a large brand states some clients may start asking to see the contracts that agencies have with their media vendors. There's also the possibility a brand could sue the agency if found in breach of contract. And some ad execs could even be looking at jail time.
Regardless, the repercussions will continue to be felt as the industry continues to clean up the mess.