Transparency 2.0

The controversial issue of transparency between brand marketers and their advertising agencies appears to be at, or very near, a tipping point — but the journey has been slow and torturous.

At the heart of the long-simmering dispute has been the extreme lack of transparency around media buying and the nature of the relationship between agencies and the brands they (are supposed to) serve. This was detailed at length in the ANA/K2 Intelligence report released two years ago. But transparency is just a symptom, says attorney Douglas Wood, a partner in Reed Smith LLP and the leader of the firm’s advertising and marketing law practice. “The real issue is trust, because the law can only do so much,” he says.

At a certain point, contracts designed to enforce transparent practices on agencies serving clients can become “overbearing,” says Wood, who is also the ANA’s general counsel. When that happens, he says the contract “doesn’t help build a relationship, it’s actually destructive to relationships. That’s not an outcome anyone wants, but the less you trust someone, the more you need to rely on the contract to provide a substitute for trust.”

Where things stand two years after the ANA/K2 report on media transparency.

Anudit Vikram, SVP of audience solutions at Dun & Bradstreet, says that the clash over transparency is “a proxy for a mismatch in expectations between the agencies and the brands.” With the proliferation of programmatic buying and advances in the way advertisers can measure the efficacy of media spend, there is an increasing feeling on the marketer side that brands no longer need agencies the same way they did in the past, he believes.

For example, programmatic methods allow much smaller teams to execute campaigns across a large number of inventory sources. And as brands have gained the ability to measure with a deep level of granularity, their expectations around finely managing return-on-ad-spend have increased considerably. “Put these two together, and you find yourself in a situation where the traditional media agency business model is at odds with a marketer’s expectation of the value the agency is providing,” Vikram says. One offshoot of this impasse is that many brands have brought their programmatic media buying capabilities in-house.
 
A Permanent Change In Brand-Agency Relationships

The long and the short of it is that the nature of the relationship between brands and agencies is undergoing permanent change, and transparency is a key driver of that change.

“The reality of the world today is different than what it was, and I think the whole definition of trust is going to be changed,” says Robert Tas, an associate partner in the New York office of McKinsey & Company and co-author of a recent report on transparency. “The new reality of the world we are seeing is trust but verify. You have to have the discipline, the protocols, and the tools to do that. I think that’s smart business in marketing, just like it is in any other type of business.”

The McKinsey report cites advertiser concerns about the lack of agency transparency primarily in three areas: media rebates, programmatic fees, and data and technology sharing and ownership. It proposes that marketing organizations that do a good job of tackling the issue of media rebates (also known as agency volume bonuses, or AVBs) stand to recover millions of dollars that can be redirected toward growth. Resolving this issue can also lead to improved relationships and greater trust between brands and agencies, and the report lays out a four-step process to achieve greater transparency:

•     Build accountability by engaging leaders on both the brand and agency sides, ideally at the C-suite level.
•     Embed transparency in contracts and pay fair compensation to agencies.
•     Institute an annual governance process.
•     Bring in the right auditors when needed.

A Framework to Address Transparency Issues

The McKinsey proposal embodies many of the principles contained in “Media Transparency: Prescriptions, Principles, and Processes for Advertisers,” a report created by the ANA and Ebiquity/FirmDecisions in July 2016. It includes a framework to help advertisers and agencies address transparency issues identified in the K2 Intelligence study. The ANA also developed a contract template in conjunction with Reed Smith for advertisers to use in developing their own agency agreements. An updated version of that template is currently in the works.

“Overall, the transparency requirements in the template require disclosure of any commingling (of media inventory buys) or conflicts (around ‘value pots’ or AVBs),” Wood says. “The key is well-structured audits by experts who understand the financial schemes.” He adds that a contract can only go so far, and how it is administered is critically important. “Unfortunately, too many contracts are relegated to a drawer and rarely audited,” Wood finds.

The authors of the McKinsey report conclude that even though hundreds of media accounts have been reviewed, many contracts have been rewritten, and there has been an upswell in audits in recent years, transparency remains a troubling issue — especially in the area of rebates and other types of non-transparent payments that agencies receive from media firms, a practice that remains common.

At the same time, the report points out that while it’s difficult to prove causality, revenues at most of the major advertising agency holding companies have been flat or declining since 2016 (the year the ANA/K2 Intelligence report was released), and as of early this year share prices for four of the leading holding companies had experienced double-digit declines since mid-2016. Wood notes that there have also been “massive management changes” at some of those holding companies.

 On a Path Toward Critical Mass

The march toward greater transparency between advertisers and agencies is following an incremental path, but at some point, probably in the not-too-distant future, it will reach critical mass. The likelihood of that outcome has been obscured by some recent coverage in the advertising trade press, which asserted that while progress has been made in the area of transparency over the last three years, there’s still more work to be done.

In a sidebar to coverage of the McKinsey report, an unnamed executive involved with the ANA study is quoted as saying “it feels like we’re back to business as usual in the industry.” It’s also true that much more remains to be done. However, the overall tone of the report does not support a business-as-usual outcome.

“There is definitely progress being made in terms of advertisers doing the things that are within their control,” says Sarah Armstrong, a partner in McKinsey’s Atlanta office and a co-author of the report. She says many marketers are updating their contracts and conducting more media buy audits. “There are definitely steps being taken to put a more transparent relationship in place, but we also heard (from marketers) that they believe more can be done to put a more-sustainable governance process in place,” Armstrong says. “I really feel there is progress being made, based on my conversations with the advertiser community, but there is still work to be done.”

ANA CEO Bob Liodice says another indication of the continued progress being made toward greater transparency since the release of the ANA/K2 Intelligence report is the growing number of marketers who have taken back control of their media investments through tighter supervision of their agencies and by moving certain types of work in-house, especially programmatic, social media, and influencer marketing.

“In-housing was a key theme at the recent ANA Media Conference, and it was clearly identified as an accelerating trend among ANA members,” Liodice says. Additionally, a growing number of advertisers are rejecting non-transparent programmatic buying agreements, in which agencies resell procured inventory to clients at undisclosed prices. “At the ANA, we believe that all this, coupled with the weakened financial performance, lowered share prices, and management shakeups at major holding companies, amounts to solid proof that a great deal has changed in our industry since the release of the ANA/K2 Intelligence report two years ago,” Liodice says.

Beginnings of Change on the Agency Side?

The 4A’s did not respond to requests for comment for this article, but there are indications that a movement toward greater transparency is being embraced in at least some quarters on the agency side.

“We believe that total transparency is the only way to a truly long-lasting, mutually beneficial client-agency partnership,” says Kevin Kelly, president of Bigbuzz Marketing Group. “The situation is improving, and if we apply the ethos of ‘innovate, adapt, or die,’ the truly revolutionary agencies that are innovating in this space to create a better, mutually beneficial model will thrive. Less innovative agencies are dying off.”

Kelly believes that agencies must act as trusted partners to marketers at all times, and that the right agency partner will always place client interests and advancement first. “We must truly embrace the word partner, now more than ever,” he says. “At Bigbuzz Marketing Group, we refer to all our brands as client-partners. A real partnership that will stand the test of time will require radical transparency.”

Armstrong also sees movement in that direction on the agency side. “I think there’s an appreciation that the way the industry operated in the past is changing,” she says. “They recognize that they need to collaborate with their advertisers to reach a collective understanding of how they are going to work to make sure there is a transparent relationship in place. There definitely seems to be an appreciation of that need, and the conversations are taking place.”

A similar attitude may be emerging in the ad tech space, as well. “Starting last year, with the comments from Marc Pritchard of P&G, the ad tech industry has been put on notice that brands are expecting more,” says Jason Fairchild, co-founder and chief revenue officer at OpenX, a programmatic advertising technology company that provides the industry’s largest independent ad exchange. “For the first time, quality, clarity, and trust are becoming ‘must haves,’ and marketers are demanding more accountability.” Companies that can’t answer that call “won’t be around for much longer,” he predicts.

 Work Remains for Both Sides

To be sure, much work remains to be done on both sides of the transparency issue, but David Hahn, chief strategy officer at Integral Ad Science, believes some progress has been made already. He cites the successful efforts of agencies and marketers to adapt to the changing landscape in digital as one example.

“Sure, there is work to be done, but both parties have expertise which is valuable to a mutually beneficial outcome,” Hahn says. “For marketers, that means being more involved in the digital media-buying process and being clear about the KPIs they want to see. For agencies, it means knowing what’s expected and being willing to show clients, rather than tell them, that they’ve met those requirements.”

D&B’s Vikram agrees that work will have to be done on both sides if the advertiser-agency relationship is going to be restored to a good place. He believes agencies have value to offer beyond the processes that marketers are now bringing in-house in growing numbers. “However I also believe that the business models the agencies have been following need to change to make marketers more comfortable about what they are dealing with,” he says. “The discussion around transparency needs to shift to a discussion around the value delivered, and it is the agency that needs to drive that.”

Pritchard, ANA board chairman and the chief brand officer at Procter & Gamble, may have provided a peek at what the future holds in his keynote speech at the ANA Media Conference earlier this year. “This new level of transparency is shining the light on what’s next — marketers taking back control of our own destiny to accelerate mass disruption — transforming our industry from the wasteful mass marketing we’ve been mired in for nearly a century to mass one-to-one brand-building fueled by data and digital technology,” he said.

Pritchard recalled that just a year earlier marketers had faced the “inconvenient truth” that they were operating in a non-transparent media supply chain and then came together as an industry to insist that changes be made. Those changes included a single viewability standard; third-party, MRC-accredited measurement verification for audience reach; transparent agency contracts; TAG-certified fraud prevention; and stronger brand safety measures.

At P&G, the lessons learned led to a moment of clarity: “It was time for us to step up and take back control of our own destiny,” Pritchard said. To accomplish that, P&G is reinventing media, advertising, and agency partnerships. It’s already seeing impressive results, including a 20 percent reduction in media waste and a simultaneous 10 percent increase in media reach. “While there’s much more to do, we’re growing market share and sales across more brands and countries, with some now growing in double digits,” he said.

While transparency is just one part of P&G’s new success formula, that kind of proactive involvement in driving marketing outcomes needs to become the “new normal” for CMOs. Says McKinsey’s Tas: “The reality of the current ecosystem is that CMOs need to lean in (on transparency). This is a real part of their job description now; there are real dollars involved, and they have to take it seriously.”