FirmDecisions is the largest independent global marketing compliance specialist. We provide financial transparency in the client-agency relationship to the world’s biggest advertisers.
Michael Karg, Group CEO, Ebiquity
Ebiquity’s Group CEO Michael Karg explains why the recent K2 study and guidelines from the U.S. Association of National Advertisers (ANA) mark a potential turning point for the advertising industry worldwide.
It is estimated that the advertising industry contributes around 20 percent to U.S. GDP, with annual media spend now in excess of $200bn. Increased complexity in the media landscape, particularly in digital, has made the market significantly less transparent.
Concerns over a lack of transparency have been voiced with increasing frequency in recent years. This culminated in former Mediacom CEO Jon Mandel telling the ANA’s spring 2015 conference that media agencies were not living up to their fiduciary duties to clients and that rebates and kickbacks were widespread in the U.S. industry.
The ANA then commissioned K2 Intelligence – an independent, industry-leading, investigative, compliance, and cyber defense services firm – to conduct a study into transparency in the U.S. media industry. Published in June of this year, the K2 study found compelling evidence that non-transparent practices were pervasive among the sample of media industry representatives they interviewed. This matters greatly to advertisers because it limits visibility into how marketing spend is allocated and the effectiveness of marketing investments. This comes at a time when shareholders, regulators, and boards that govern corporate America are all demanding increased levels of accountability. I wrote about the implications of the K2 study in the last issue of Response.
As a follow-up to the K2 study, the ANA commissioned Ebiquity and FirmDecisions to develop tangible recommendations for advertisers to achieve greater transparency and accountability in the U.S. media industry. This report was published in the middle of July.
We believe that the current ANA media transparency initiative marks a potential turning point for the industry. It provides advertisers with the knowledge and the practical tools they need to reassert control over their advertising spend and, in so doing, to define how they want to engage with the various players along the value chain. The K2 study and the ANA recommendations go way beyond rebates, including such practices as ‘opt-in’ agreements and their impact on media planning and strategy. What’s more, the recommendations are highly relevant for advertisers the world over, not just in the U.S.
Our joint report for the ANA is called Media Transparency: Prescriptions, Principles, and Processes for Advertisers. In the report, we identified five areas where we believe advertisers should focus their energies: internal governance, the management and ownership of data, contract management, audit rights, and a code of conduct. I’ll now look at each of these in more detail.
Advertisers need to put the right level of governance in place so that they can answer shareholders’ and regulators’ demands for increased corporate accountability.
Internal governance and oversight need to be in proportion to media spend, not the agency fees. Currently, more than 20 global corporations – most of them headquartered in the U.S. – spend over $1bn every year, and many more spend hundreds of millions of dollars annually. Marketers should consider improving internal governance and who, of their CFO, CEO, and Audit Committee of the Board, should be involved in the approval process of the media agency contract.
What’s more, governance is not a one-time event, but an ongoing process that needs to be reviewed and improved continuously. Advertisers should enforce their contractual rights by implementing internal systems and processes to ensure strict accountability, compliance, and governance.
Management and ownership of data
To stay competitive in the digital media ecosystem, it is incredibly important to be able to deliver ever-more personalized messages, services, and products. Brands need to learn constantly about their customers to deliver better experiences, and this requires access to and mastery of the vast quantities of data generated in the process of engaging with consumers. It is through data, therefore, that brands can seize market opportunity. As a result of inadequate contracts with participants across this ecosystem, advertisers’ access to some of this data may be restricted, potentially limiting their ability to fully understand their customers’ journeys and deliver a more personalized service. This is to advertisers’ distinct competitive disadvantage.
Advertisers should have clarity and full access to all data being created on their behalf. What’s more, they should take ownership of this data and exert their control over media planning and how technology is used on their behalf.
The contract is the defining basis for the relationship between an advertiser and its media partners. This is especially true of the contracts between an advertiser and its media agency of record, as this is where most spend is typically managed. But the same applies for all contracts an advertiser holds across the increasingly complex media ecosystem, including multiple adtech and martech vendors.
The contract needs to define the precise nature of the advertiser/agency relationship, particularly when many media agencies have now blurred the lines and act as both agent and principal. Where the agency acts as principal and the advertiser is happy to agree to this status, the advertiser needs to take additional steps to prevent potential conflicts of interest. What’s more, a recent study by our contract compliance business, FirmDecisions, found that many advertiser-agency contracts actually remain unsigned – as many as 30 percent of more than 300 contracts reviewed by FirmDecisions in 2015 – and this requires special attention.
Many existing contracts predate the rise of digital advertising and, because the media landscape is in a constant state of change, contracts should be updated frequently. A single person or department – ideally the CFO or finance – needs to be the signatory across all media agreements and sub-agreements taken out on behalf of the advertiser. And all contracts should be reviewed and countersigned by the agency’s CFO, peer to peer. In the case of a large advertiser, this should be the CFO of the agency holding company.
FirmDecisions’ experience over the past 15 years suggests that, while many advertisers have the right to audit how their advertising dollars are spent on their behalf, in practice those rights may be less extensive than the advertisers believe them to be or advertisers are not fully enforcing those rights. This represents, in part, a failure of oversight by advertisers’ own corporate governance systems.
Insufficient or inadequate audit rights are potentially damaging to advertisers’ interests in two ways. First, they can prevent visibility into the effectiveness of their media investments. And second, they may stand in the way of advertisers answering the ever-louder demands for accountability from shareholders and regulators. Accordingly, it should be the advertiser and the advertiser alone who sets the scope of what may be audited. It should also be the advertiser’s sole decision as to which firm or type of business – including an advertiser’s own internal audit team – is appointed to undertake the audit. After all, it is the advertiser’s money that funds the entire media ecosystem. We would always recommend that an advertiser chooses a specialist with specific media expertise to conduct a contract compliance review, but the decision should rest entirely with the advertiser.
Code of conduct
In addition to committing to regularly reviewing and updating the contracts that define their relationships, advertisers and agencies should sign up to a code of conduct to guide their day-to-day behavior. The code of conduct should be upheld across all relationships and activities between both parties and be signed by them as an addendum to the contract. The agency of record needs to ensure that all the parties they manage across the ecosystem on behalf of the advertiser are also aware of and adhere to the code of conduct. This is why we believe that a code of conduct is required in addition to a regularly reviewed, fit-for-purpose contract. The code of conduct is designed to outline optimal and desired behaviors for all vendor teams in a tangible and practical way.
A brighter future
The advent of digital advertising has, so far, failed to deliver against its promises of increased transparency and accountability. This is not because transparency and accountability are impossible here, but because they have not been the guiding principles underpinning the development of the emerging media ecosystem. As this develops, the complexities are only going to increase, as data and technology driven advertising penetrates traditional media (e.g., programmatic moving into TV) and digital and mobile advertising spend rapidly increases.
We have now reached a potential turning point. The K2 study describes the shortcomings in current practice, and the joint ANA, Ebiquity, and FirmDecisions recommendations show the way forward. By addressing the areas of internal governance, the management and ownership of data, contract management, and audit rights – and by supporting these changes in a mutually binding code of conduct – advertisers and agencies have the opportunity to rebalance the industry. The time is now – in the U.S., in Europe, and right across the world. To prepare for the future, we need to set the foundations today to cope with an ever-more complex tomorrow.
In the months since the report was published, we have held a number of seminars and webinars with advertisers directly and in partnership with industry bodies including the World Federation of Advertisers and ISBA. The steps we believe advertisers should take for successful media management are detailed in this article [LINK] by Laetitia Zinetti, Ebiquity’s Managing Principal, Media Management.
At a glance
|Internal governance||Advertisers should implement strong, disciplined, internal processes to deliver contracts and ways of working which ensure strict accountability and rigorous process governance, and demand significant senior management involvement.|
|Management & ownership of data||Advertisers should take ownership of data and exert control over the media technologies used on their behalf.|
|Contract management||Advertisers should ensure that contracts with their media agencies contain robust provisions to deliver the level of transparency they desire.|
|Audit rights||Advertisers should have comprehensive audit rights which allow them to track contract compliance fully and measure media value delivery.|
|Code of conduct||Advertisers and media agencies should establish a culture of trust in their relationships via a specific code of conduct.|
 Economic Impact of Advertising in the United States, ANA, The Advertising Coalition and IHS Economics and Country Risk, March 2015 https://www.ana.net/content/show/id/37681
 eMarketer, Spring 2016