Long troubled by the concept of ad agencies as media re-sellers, it has been my belief that the agency trading desk model and the resulting media arbitrage mode of compensation employed by most trading desk operations is one of the key drivers of advertiser transparency concerns with regard to digital media.
To be completely candid, our bias is that any activity in which ad agencies are engaged, that challenges the notion of a principal-agent relationship between advertiser and agency, is detrimental to establishing meaningful trust and mutual respect. Non-transparent agency revenue sources such as media arbitrage, AVBs and the awarding of jobs to related parties, without the appropriate level of due diligence or client awareness create a serious schism when it comes to marketing accountability. As importantly, they often form the basis for “me first” behavior on the part of agencies, which is not in the best interest of those clients that have entrusted them to act as their fiduciary partners with the goal of optimizing the advertisers return-on-marketing-investment (ROMI).
When it comes to digital media, there are too many competing forces focused on selfish financial interests, rather than those of the advertiser. Publishers, ad networks, exchanges, demand side platforms and agencies all seeking to optimize their share of an advertiser’s digital media investment.
Consider WPP’s recent second-quarter 2015 earning release in which the organization announced a first-half revenue gain of 6.8% and a profit increase of 51.7%. What was most telling was the following statement, within the release indicating that “net sales growth, which excludes inventory, purchased and resold to clients directly, was 5.2%.” So while media reselling makes up a relatively small portion of the agency holding company’s revenue base, it obviously contributes significantly to agency profitability. To WPP’s credit, it is the only agency holding company which breaks out organic net sales growth.
During the spring of 2014, the Association of National Advertisers (ANA) raised concerns on behalf of its members with regard to the lack of media transparency and cited issues related to “programmatic digital buying and agency trading desks” in particular. Supporting the ANA’s perspective was information from the World Federation of Advertisers (WFA) and DataXu, which suggested that “only 55¢ of every media dollar in programmatic digital buying ends up with publishers,” with the rest going to “agencies, trading desks, demand-side platforms and ad networks.”
Unfortunately, the odds are stacked against advertisers in this equation. Further, absent a principal-agent relationship to govern the interactions between advertisers and advertising agencies, one can legitimately ask; “Who is looking out for the advertiser’s interests?”
Perhaps the simplest way of shifting the balance of power is to better align the roles and responsibilities of advertisers and agencies. This process should begin with a review of the media scope of services and the resulting agency remuneration system. Secondly, as part of this process, we believe that advertisers should seek to eliminate media arbitrage as a source of agency trading desk revenues. Why? To return to a fiduciary standard, where a principal-agent relationship is the hard and fast rule.
To be fair, clients will need to consider a compensation schema, which offsets, at least in part, the revenue currently being generated by their agency partners under the current system. Such an approach could very well incorporate incentives tied to performance based criteria including but not limited to; inventory quality, CPM rate optimization, timeliness of digital buys and programmatic creative development and frequency cap/ curve management to reward extraordinary agency performance.
Revising compensation is perhaps the quickest and most effective means available to revitalize advertiser confidence in their digital agency partners and in removing any agency qualms with regard to fully disclosing comprehensive digital media buy details to advertisers. Executed in combination with contract language dealing with the disclosure and disposition of other potential non-transparent revenue sources, such as rebates, AVBs and volume discounts and advertisers will have eliminated a couple of key items that have caused some within the client organization to question the loyalty of their agency partners.
“Where the battle rages, there the loyalty of the soldier is proved.” ~ Martin Luther