The world’s four largest agency holding companies generated over $47 billion in annual revenue. Each of these organizations owns dozens of agency brands, specialty service firms and media procurement, marketplace and or platform providers.
Part of the success of the agency holding companies in fueling organic revenue growth in recent years has been their ability to involve these specialist firms on their branded agency client businesses.
The use of affiliates is certainly advantageous for the holding companies and can be beneficial for clients seeking to have a coordinated, comprehensive marketing communications program administered by a lead agency.
While there may be efficiencies that accrue to advertisers, unchecked there is an equal likelihood that they may be paying a premium for the use of agency related parties. Why? Because affiliate goods and services are often proffered without client knowledge or consent and may not have been competitively bid to determine value relative to marketplace alternatives. Further, affiliate remuneration is often blind to advertisers and can take the form of non-transparent, unauthorized mark-ups applied in addition to the fees and or commissions paid to the lead agency.
Many client/ agency agreements have specific guidelines for agencies seeking to involve related parties (whether the guidelines are followed), others don’t even address this important area.
The best approach for engaging affiliate companies is “full disclosure.” This includes having the agency notify the advertiser in writing of the opportunity to deploy theses resources on their business, specifying the nature, scope and cost of the work or product to be accessed and being clear on how the affiliate(s) is to be compensated.
In actual practice, advertisers often have no visibility into the involvement of agency related parties on their business. This is not an approach that we would advocate because it can undermine the agency’s fiduciary responsibility to its clients. Further, when advertisers learn of some of these arrangements it can lead to an erosion of trust and or confidence in the agency’s intentions and their responsibility to provide unbiased advice that is in the best interest of its clients. As it has been said: “a single lie discovered is enough to create doubt in every truth expressed” and no agency should want to raise the specter of doubt with any client.
Sound contract language regarding the agency “supplier group,” the process for involving related parties, their obligations under the agreement and the attendant level of compensation can go a long way in mitigating these concerns. This creates the opportunity for a proverbial “win-win” situation where both advertiser and agency can truly benefit from this practice.