Ease of access, streamlined delivery, cost-efficiency and enhanced profitability are all viable bi-products of vertical integration. There is no arguing that businesses can realize value by minimizing their own costs, while simultaneously influencing market rates and their competitors’ costs.
But what if that business is an advertising agency? Viewed through the eyes of an agency holding company and its shareowners, vertical integration is quite intriguing. On the other hand, from the perspective of the clients they serve, the concept raises some moral and fiduciary concerns that should be addressed in the context of a client-agency agreement.
Some would argue that it is never appropriate for an agency to become a reseller of goods and or services. Others might suggest that as long as it allows the agency to deliver better-than-market values or efficiencies, why not, the client is the beneficiary. Where one stands on the issue is no longer material. Why? The proverbial “train has left the station” as agency holding companies have continued to rely on vertical integration strategies as an important means of driving agency revenues and profits.
From a client perspective, the phrase; Caveat Emptor or Buyer Beware comes to mind. When an advertiser hires a full-service advertising agency, media, digital or creative services shop or a specialty agency, they do so with the implied understanding that the agency will always act in the client’s best interest. Is this a realistic expectation for agency holding companies whose acquisition strategies have directly fed vertical integration strategies that often generate significant below-the-line revenue opportunities?
Unfortunately, too often there is a lack of transparency regarding how an agency holding company deploys certain services, their ownership position in those resources and or the nature of the remuneration they receive from “owned” or independent sellers. It’s been our experience, that transparency is the fundamental issue when it comes to advertisers’ rights and agencies’ fiduciary responsibilities. What has been divulged can be discussed. In turn, these discussions can form the basis for negotiating terms of use and responsibilities that can then be laid out in the client-agency agreement, providing the requisite levels of transparency and control to protect both parties. In the words of the German philosopher Friedrich Nietzsche, who wrote critical texts on morality:
“There are no facts, only interpretations.”
Surprisingly, too few contracts address the reality of agency brand and holding company inter-connectedness or the mode and level of compensation derived from the reselling of goods and services. At a minimum, the following protections should be built into a letter-of-agreement:
- Advertiser “right to audit” clause
- Extension of contract terms and obligations beyond the agency brand to include the holding company and its subsidiaries along with wholly and or jointly owned entities
- Clear language regarding agency remuneration, sources, amounts and limits
- Assertion of advertiser rights to its pro-rata share of any and all discounts, rebates or incentives earned by the agency on the advertiser’s behalf
- Require agency to fully-disclose any commitments made to parent/sibling agency resources or to sellers offering agency incentives beyond commission
- Assertion of intent with regard to the agency’s obligation to competitively bid all creative, production and or media services
- Require agency to fully-disclose when services covered as part of a retainer or commission structure are sub-contracted to a parent/sibling agency or third-party. To protect an advertiser from paying an agency for services it is not performing or is only partially performing, clear contract language needs to be established to address the circumstances that either reduce agency remuneration or reallocate unearned funds to other areas.
It is important to bear in mind the extent to which agencies have extended their supply chain “reach” with their vertical integration efforts. These include ownership in: in-house studios, barter firms, broadcast production companies, ad exchanges, ad networks, media rep firms, staffing firms, original content production companies, and the like.
From an advertiser’s perspective, the goal is to establish contractual responsibilities and controls that will shape agency behaviors and performance in a manner that insures a level of objectivity and resource investment desired by the client. Simple. Right? Not so much. In the words of M.C. Escher one of the most renowned graphic artists of the twentieth-century:
“Are you really sure that a floor can’t also be a ceiling?”
Interested in learning more about the benefits of compliance auditing as a means of improving transparency into your marketing investment and control over the stewardship of those funds? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on the topic.