Agency Holding Companies

“Trust without inquiry is a compass pointing toward deception.”

The advertising industry was founded based upon the trust between stakeholders in what was once a compact supply chain. Much has changed since the early twentieth century as the industry has evolved into a complex, rapidly changing business sector that has significantly diminished the level of trust among advertisers and their partners.

In our experience there are a handful of factors related to this metamorphosis that have created financial risks for advertisers:

1. Holding Companies Have Come to Dominate the Agency Landscape – Since eschewing the full-service agency model in favor of multiple specialist agency partners, holding companies have greatly expanded their portfolios through acquisition to include dozens of agency brands, data companies and technology firms. Publicly held, these organizations’ primary responsibility is to their shareholders, not the clients that they serve. The transition from full-service agency partners has impacted advertisers as well, causing their agency networks to expand often beyond their marketing teams’ ability to effectively manage each of those relationships.
2. The Advertising Supply Chain Has Dramatically Expanded – The number of intermediaries that provide service to and or transact portions of the creative and media services funded by advertisers has grown significantly. Importantly, each of these intermediaries, with their own financial self-interest, takes a cut of an advertiser’s investment to compensate for their services. This has reduced “working” ad dollars and dramatically limited advertiser transparency into the disposition of their ad funds at each phase of the advertising investment cycle.
3. The Principal Agent Model Has Been Breached – Long the basis of Client/ Agency relationships, advertisers historically could take comfort in the recommendations and actions of their agency partners knowing that they had their interests at heart. The basic tenet of this model is that the agent is obligated to make decisions and take actions that are always in the best interest of the principal which, in turn, achieves the highest possible degree of accountability and trust. However, a conflict has arisen with the advent of principal-based media buying and non-disclosed transactions between agencies and their related entities, whereby advertisers can no longer rely on agencies always having their best interests at heart. In a recent Forbes article on misaligned client/ agency financial interests, Arielle Garcia, former Chief Privacy and Responsibility Officer at UM Worldwide summed it up well: “Advertisers can’t trust their media agency partners to always act in their best interests at the moment when the agency’s best and economic interests diverge.”
4. The Estimated Billing Process is Outdated and Ineffective – Billing advertisers in advance of service delivery and or media activity based on estimated costs in the hope that third-party vendors will be paid on-time and that those estimated billings will be promptly and accurately reconciled to actual expenses do not serve the interests of advertisers. Presently, agency “final/reconciled billing” does not include copies of associated third-party invoicing and many agencies often do not reconcile costs until 120 to 180 days after a job/ campaign closes, and in some outlier cases, not at all. This severely limits advertiser visibility into what happens to their funds once they pay an agency invoice. Consider a recent study by OAREX for MediaPost which found that nearly 50% of digital media invoices were paid late and that over 20% were underpaid. According to OAREX, while causal data was limited, their analysis showed that “the demand-side overall is keeping its cash close to its vest.” If an advertiser is paying its agency within 30 – 45 days from the receipt of an invoice, what is causing the problem? Which demand side entity(s) is hanging on to the advertiser’s cash?

There is an obvious, cost-effective method to address these risks… agency contract compliance and financial management audits. Notably, most client/ agency contracts afford advertisers this right and require agencies to fully support their billings to the client. These reviews encompass all transactional data between client and agency and the agency and all affiliates and third-party vendors, providing comprehensive feedback on the age-old question; “Did we get what we paid for?”

These projects are conducted with the support of agency finance personnel and do not interfere with the day-to-day activities of the advertiser’s marketing team and agency staff responsible for service delivery. The costs are miniscule relative to the learning and financial benefits gleaned from such reviews. And the trust earned from these audits can go a long way toward eliminating uncertainty and building relationships.

As it has been said, “When you trust someone blindly, it only proves that you are actually blind.”