Wednesday 28 September 2016

John McGee: Clients must wake up to the real value of advertising

With the issue of rebates raising its head again this week, it's time to reassess what media agencies bring to their clients' brands and business

John McGee

Published 28/08/2016 | 02:30

While media rebates have long been the topic of hushed conversations in the shadows, they have generally been accepted as an integral, though unpalatable, part of the day-to-day trading arrangements between a media agency and a media owner (Stock picture)
While media rebates have long been the topic of hushed conversations in the shadows, they have generally been accepted as an integral, though unpalatable, part of the day-to-day trading arrangements between a media agency and a media owner (Stock picture)

Jon Mandel has been described as the most hated man in advertising. In March 2015, the former CEO of the WPP-owned media agency Mediacom in the US, made a blistering address to a conference organised by the Association of National Advertisers (ANA) in Florida.

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By the time he had finished his speech, he had unleashed a veritable firestorm that would rock the American media buying industry to its very core and set the wheels in motion for a subsequent investigation and report by the ANA, which, to put it mildly, was damning of the entire industry.

Among other things, Mandel alleged that media agencies in America were profiting from rebates and so-called kickbacks, often unbeknownst to their clients, from media owners they did business with. Without naming names, he questioned the transparency of some the deals that were being struck and claimed that more often than not they were not in the best interest of clients.

While there was a lot of finger-pointing and tut-tutting followed by a fair degree of acrimony and denial within the industry, Mandel was only confirming publicly what many people within the industry had known for a very long time.

And of course, many clients knew about it: they just chose to turn a blind eye so they could drive down the margin agencies could take on their business. If they didn't know, then it's fair to say that they were remiss in their duties by not keeping on top of what has been going on in the industry for many years.

This side of the Atlantic, however, the reaction was a lot more muted. While media rebates have long been the topic of hushed conversations in the shadows, they have generally been accepted as an integral, though unpalatable, part of the day-to-day trading arrangements between a media agency and a media owner. Just don't talk about them too loudly.

Since Mandel let the cat out of the bag, the debate has been acquiring its own momentum in Ireland and the UK over the past few months. In December 2015, for example, the auditors of the Daily Mail & General Trust (DMGT) in the UK chose to disclose details of its "contract discount and rebate provisions" for the first time in its annual report.

According to the report, "DMG Media enters into agreements with advertising agencies and certain clients, which are subject to a minimum spend and typically include a commitment to deliver rebates to the agency or client based on the level of agency spend." In this case they amounted to £26.2m or 7pc of the £351m in advertising sales during the year.

If the cat was well and truly out the bag, then it also made an appearance in the headquarters of the Guardian Media Group, which, earlier this week, noted in its own annual report that "the group enters into agreements with advertising agencies, which are subject to a minimum spend and typically include a commitment to deliver rebates to the agency based on the level of agency spend over the contract period. These rebates can take the form of free advertising space, cash payments or both."

So there you have it: officially it's no longer the massive elephant in the room.

Now the industry needs to move on to having a mature discussion about how media agencies are properly remunerated by their clients in the same way as accountants, lawyers and other professional consultants are remunerated for theirs.

For a start, a business model that is partly predicated on deriving some of its income from a media industry that is already financially challenged is simply not sustainable over the longer term. It's just not good business.

The world in which media agencies operate, however, has become a lot more sophisticated than it was 10 years ago. To keep up with developments in technology and changing media consumption habits, media agencies have invested heavily in recent years in areas like digital, data and analytics, media planning, social, research and, of course, staff.

Unfortunately, this has not always been appreciated by clients and by the procurement departments that buy office stationery one day and advertising and media services the next. Better, faster and cheaper has been the rallying call of many advertisers over the past 10 years. But clients need to understand, if not appreciate, that media agencies also have a right to make a profit.

In the same way that media owners didn't do themselves any favours by not standing up more to media agencies over rebates, media agencies need to stand up to clients and clearly demonstrate the value exchange, the knowledge and expertise they bring to their businesses, their brands - and ultimately the bottom line.

Most of all, however, the very important message - that advertising needs to be perceived as an important investment that pays dividends, as opposed to an arbitrary cost - needs to be heard louder and much clearer.

We live in hope. And maybe Jon Mandel has done the industry a favour after all.

Sunday Indo Business

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