Articles

Keep Your Eyes on the Small Print of Agency Contracts

Vivek Radia, Managing Director, North America

Changes in the nature of client–agency relationships should be well understood. Vivek Radia, President North America of FirmDecisions, explains what to look out for.

Advertisers often tell us media agencies are offering them new ways of buying media. These approaches come with apparent advantages, such as advanced targeting techniques and cost savings, but also distinct disadvantages, including waived rights to audit. As clients are being asked to trade better media buying opportunities for transparency, the bigger shift involves the relationship between the agency and the advertiser. Previously a media agency acted on an advertiser’s behalf in buying media. Now, agencies increasingly act as principal where they act on their own behalf in selling media to advertisers.

As new trading practices emerge, advertisers should require clarity from their agencies as to how these practices may change in their contractual relationships. They should work hard to ensure they understand the implications of their new contracts, the true cost of the media they are buying, and the quality of the media transacted. It’s time for clarity to replace confusion and for what are sometimes sharp practices to be revealed for what they really are.

Giving up audit rights is a case in point. While it’s true that some agencies ask their clients to
do this explicitly and in a manner that requires proper approval, others simply use passive email
approval to effect the change, and there are others yet who simply effect it and hope they won’t get
caught. Advertisers and agencies alike are best protected by such changes being explicit and receiving
full approval from an advertiser, not skirting a review process.

Consider the case of an ad purchased directly from a genuine, external vendor at the cost of $50,000. The agency may offer the client a similar space for $45,000, and yet that fee may exclude additional costs that are essential to programmatic media. Those additional charges include privacy compliance charges, content curation charges for dynamic ad builders (software that allows an online display ad to instantly tailor the creative elements and message it shows the ad’s consumer) plus data fees related to targeting and ad serving costs.

What’s more, programmatic buying may require an advertiser to waive audit rights related to audience
and quality metrics. So, advertisers have been left wondering if their ads are actually seen by real people. These additional elements can end up making ads less effective and more expensive than expected and promised in the headline cost. Advertisers may conclude, after careful consideration, that programmatic buying may still be worthwhile. Our suggestion is simply that all relevant considerations be weighed and properly evaluated when it comes to the true cost of programmatic.

Advertisers should be particularly keen to protect their rights when it comes to verification of media audiences and quality metrics. Advertisers should make sure – at a contractual level – that their agencies factor in all relevant components of the buy as the media is traded and a healthier amount of
transparency related to viewability, non- human traffic, and other quality metrics are agreed.

Although media buying companies are still referred to as ‘agencies,’ the truth is – for many markets –
they haven’t been the advertisers’ agent for some time now. In part due to the rise of monolithic, publicly traded holding companies who now own a range of firms managing media transactions, there has been a correlated escalation in intra-company dealings which add complexity and may result in new and sometimes questionable remuneration tactics.

A case in point is the following illustrative transactional sequence: Media buying groups buy media into group company A (as principal) and then resell it to group company B (at a mark-up). Company B then sells it to the advertiser with the mark-up hidden and often taxed with a supplemental buying charge.

For advertisers who lack proper contractual audit rights, this turbo- charging effect on holding company profits is achieved in a non-transparent manner for the clients they are serving. An agency – in its technical and legal definition – is permitted to acquire property on behalf of the client as if the client were present and acting in person. It has become clear that – in practice – media buying companies have evolved and moved away from the concept of an agency relationship so clients need to prepare themselves with proper audit rights to understand how their interests are being served in today’s multifaceted media trading environment.

The complexity of today’s media trading environment has grown exponentially, and the constant state of flux shows no signs of slowing down. If advertisers can work with their agencies to understand all elements of this new trading environment, this will help to reestablish some of the trust that has eroded between clients and agencies in recent times.