Challenges facing CFOs in the benefit-driven advertising market

Challenges facing CFOs in the benefit-driven advertising market

The digital media ecosystem is getting increasingly complex and requires significant investment to stay competitive

The changing face of the media market

The last ten years have proved challenging for the media agency revenue model. Economic uncertainty following the global recession saw budget cuts that for many brands have been sustained.

The increasingly-complex digital media ecosystem has required agency investment in new trading technology to keep up with competitors, up with the market, and ahead of their clients.

Both procurement and finance departments in advertiser companies have led to a downward pressure on the fees that brands pay to agencies, particularly to cover staff overheads. Many bigger brands have also used global pitches to drive cost efficiencies in their agency relationships.

Sustained – and growing – agency profit

Yet despite these changes, profits at agency holding companies have remained robust. Five large agency networks dominate the market, and together they account for more than 90% of billings.

And although media agencies represent less than a quarter of holding company revenue, they still generate getting on for half of all holding company profits.

This will be hard to sustain, as media budget growth is under pressure and shrinking. Nevertheless, agency profits have risen even when overall income from fees has decreased. As any CFO might suspect, something’s not quite adding up.

The drive towards transparency

Three years ago, the U.S. Association of National Advertisers (ANA) published a ground-breaking research report into media trading. The ANA study produced the first evidence of non-transparent practices by media agencies in the U.S. advertising market. At the time, the FirmDecisions team worked with the ANA to produce a comprehensive set of recommendations designed to help advertisers take back control, reset the market, and drive transparency into all aspects of media trading.

This advice included baking transparency into the advertiser-agency relationships with explicit terms in revised and more open contracts. Specifically, the ANA advised that any bonuses or rebates agencies receive from media owners and publishers should be passed back, in full, to advertisers. This should be done in proportion to how much brands invest in media.

Yet despite this industry-backed drive to make media trading more transparent – and despite significant and sustained commentary in both specialist trade and financial media – it’s fair to say that we’ve not seen the improvements in transparency promised or expected in the wake of the ANA report. And one area in particular where we’ve not seen meaningful progress is in the return of rebates to advertisers.

Historically, these rebates were called Agency Volume Bonification or AVBs, and many brands had clauses added to their agency contracts requiring agencies to pass cash AVBs back to them. After all, the agencies only received them because advertisers were investing, so it’s only right that they should come back to the companies ultimately spending the money.

Same benefits, different terminology

As pressure on agency margins increase and as brands make their contracts more transparent and binding, agency holding companies are nevertheless still looking for new and inventive ways to generate incremental revenue from the media trading ecosystem that get around the tighter wording in their contracts.

In the case of AVBs, as media trading practices – particularly for digital media inventory – have become increasingly complex and so less transparent, some agencies have quite simply changed what they call rebates.

Today, media benefits are variously described as “value pots”, “free space”, “inventory media”, and “service level agreements”. As such, benefits are not necessarily passed back as cash anymore, but instead as assets including media space. Alternatively, they are negotiated as services that an agency may provide to the vendor, and therefore are not linked to the volume of media that the agency holding company may have purchased.

As these descriptors are often not included in the clauses of advertiser-agency contracts regarding bonuses and rebates, agency holding companies are in fact retaining benefits that should rightfully be returned to their clients. This is often done on the basis that “If the contract doesn’t say we can’t, then we can and will”.

The upshot is that advertisers are losing the money they would have historically earned; they’re not getting their fair share of any opaque benefits agencies are now negotiating. With agency holding companies monetising these benefits, advertisers should question the neutrality of advice they’re getting. This is because the strategies recommended by agencies may now be in the agencies’ and not the advertisers’ financial interests.

Time for action

The ANA report and recommendations give advertisers the framework and the guidance they need to secure the levels of transparency they desire in their media trading. For many this will be 100% transparency of every trade, but it’s up to each advertiser to choose what they feel happy with and then enshrine this in a clear, regularly-reviewed contract.

Whatever degree of transparency an advertiser wants on media trading, contracts are either transparent or they are not; it’s binary. If you choose to allow an agency partner to decide which documents you can see and which you can’t, you hand control to that partner. It is our experience that full contractual transparency is the only way to future-proof your contract – and your relationship – and so gain access to any unknown future benefits the agency may generate.

Although the media benefits transparency issue was highlighted in the US – supposedly a market where rebates didn’t exist –  it is in fact a global issue. What’s more it’s a an issue on which CFOs can play a central role – working in partnership with marketing procurement – to can help CMOs secure better value and return on their media investments. Crucially, this includes securing all media benefits to which they’re entitled, whatever terminology agencies use in their own contracts with media owners, platforms, and vendors.

 

This guest article was written by Stephen Broderick is Global CEO of FirmDecisions, the largest independent global marketing compliance specialist. 

 

 

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