The Brand/Agency relationship is on the verge of changing, especially when it comes how they bill. Historically, advertising agencies have been compensated based on the number of billable employee hours spent on developing and executing the campaign.
One problem with compensation based on billable hours is that it can foster a feeling of mistrust between the two parties. Brands have always had a difficult time verifying the accuracy of the billable hours that the ad agency reports to them.
In addition, an ANA report earlier this year showed that some media rebates that were sent to ad agencies never made it to the clients that they were meant for.
Jon Mandel, the former CEO of WPP media agency MediaCom, stood on stage recently and alleged agency kickbacks are still “widespread” and cited them as one of the reasons he left the industry.
“Have you ever wondered why fees to agencies have gone down and yet the declared profits to these agencies are up?” Mandel said at the time. Later, he told Australian trade publication Mumbrella: “It was like somebody had died in the room.” The interview was headlined: “Is this the most hated man in advertising?”
In a conference call with journalists and analysts, K2 executive managing director Richard Planksy outlined some of the main findings from the report.
K2 interviewed 150 sources of which 117 were directly involved in the media buying process. Of those, 59 reported direct experience with non-transparent business practices, while some reported multiple experiences.
Plansky said K2 found “substantial evidence” of non-transparent activity, including:
- 41 sources reported direct knowledge of rebate deals occurring in the US market. 34 of those sources indicated they were not disclosed to marketers, they were not returned to marketers, or they had been demanded of media owners from agencies.
- K2 said it also had documents including email threads and contracts between media suppliers and agencies that show evidence of this.
- There was evidence that senior executives at media agencies and holding companies were aware of and mandated contracts for rebates and non-transparent practices, suggesting they were a “regular course of business,” Plansky said.
- Those rebates fetched between anywhere of 1.67% to approximately 20% of aggregate media spending, depending on the deal, K2 found. Planksy said there was also evidence of deals where the percentage returned would increase as spend increased.
The big six advertising agency holding companies responded to the speech by repeatedly outright denying they take kickbacks or rebates in the US.
Digital advertising, with all the measurement metrics it provides, has the ability to actually measure the effectiveness of an advertising campaign, which allows the brand to determine the level of success of a campaign. With the capability to easily measure a campaigns success, the brand/agency relationships are starting to move towards a performance-based compensation mindset.
As agency compensation starts to be hinged on performance, it is likely that brands will start to receive more focused, better developed campaigns, essentially increasing its ROI.