Tom Denford
By Tom Denford
Sep 20, 2012 7:52:56 PM

The Great Rebate Debate (Via ANA And AdAge)

 

In July the Association of National Advertisers (ANA) published findings of a study on rebates in the US media market. This has prompted a fair amount of hot debate (including a few cold denials) over the last couple of months. We thought it might be helpful to sort the wheat from the chaff in this debate, get to the real issue and give marketers some clear advice to consider for 2013. The first thing to address here is that this is nothing new, rebates have been present in the US market for some time but now the intensity is heightened because the scale is significant and therefore potential for misuse is greater. Back in March we championing this as the big topic of debate for clients in 2012 (especially in the US).

The fact that such volume bonuses exist at all (in all their forms) should not be the worry. What should concern clients is the level of transparency the agency is prepared to offer. Some agencies are increasingly operating as media owners themselves and the ‘bonus’ income this can generate may in some cases begin to exceed the agency’s fee. Clearly this could potentially start to influence the agency’s advice, perhaps away from what would be in the client’s best interests.

It may be surprising that so few players in the industry seem to be alarmed by this. That is perhaps due to the fact that so many large operators actually enjoy the status quo; bulk buying media in advance for rock bottom rates is still a pretty good business.

Major media owners like it because they sell more inventory in advance and can better guarantee their income. Some of the bigger advertisers like it because they get to negotiate better rebate returns and discounts with their agencies. The bigger agencies in turn love it because they control 85% of the market, access better terms and have to employ fewer people to negotiate deals, which improves their margins all down the line.

So who are the losers? If you are P&G, Coca-Cola or Unilever then you can probably sleep easy. It is the long-tail of medium budget clients, (spending between $50-500m annually in media in the US) who may face a greater risk. It is likely that they end up getting far worse terms relative to their scale. The challenge for these clients (who, let's remember, actually make up the majority of the market) is to take control of their media management, improve their contracts and modernise their terms. The media agency business is evolving so quickly (in all countries not just the US) that even contracts created in 2010 could already be considered out of date because of the significant changes in things like holding company trading leverage, the brokerage of media inventory and digital trading desks.

The traditional media audit does not properly address rebates. 

Sadly, much of the media procurement process and the metrics of traditional media auditing are no longer adequate to pick up these subtle losses of value for medium-sized clients.

If you are a marketer or procurement leader responsible for your agency relationships or contracts then we advise you to consider your current level of transparency, and then be better informed to make a commitment on some corrective action if needed.

Hopefully, your contract is well-worded to demand full transparency (at holding group level) and you are paying the agency fairly and in a more transparent way.  If so then you have a far greater chance of getting neutrality in decision making and you will undoubtedly receive a greater delivery of media value.

However you may be like the majority of media clients and still be paying your media agency by commission (a % of the media budget) and do not have 100% watertight language in the contract regarding the management and return of rebates. If so, then you are susceptible to the agency being biased by rebate and bonus incentives and not being straight about the media value delivery. The further away you are from the top 10 clients of that agency, then perhaps the more amplified this might be.

The solution is a bigger carrot rather than a bigger stick.

More auditing is not the solution, we need a cure not more diagnosis. Instead, any client who sits outside of the top 30 spending media clients in that market needs to undertake a process of reviewing their contract with the agency on two aspects:

The agency's policy on transparency - you need your agency contract to be explicit about who owns the rebates, how they are to be paid back (and when) and also what checks can be put in place to monitor this. In July, the ANA suggested to its procurement members, to undertake a periodic audit, although we don't believe that more auditing necessarily addresses the problem.

Secondly, you should review and update the agency's scope of work andreview the way you pay them. Demanding greater transparency means that their income will drop significantly, perhaps by half. You therefore need to account for that shortfall in some way otherwise you'll pretty quickly find yourself without an agency.

It sounds like a daunting overhaul and a surefire way to be struck-off the agency Christmas card list. However while you are reviewing the contract with the agency use the opportunity to review the remuneration model at the same time. Just by asking the right questions and having the initial meeting will indicate to the agency you are a savvy client who knows what they are entitled to. You may actually find a few more Christmas cards in your inbox come December.