Agency Conflicts of Interest are a Larger Issue than Transparency
The entire industry has been abuzz with discussions on transparency. This is still a huge issue, but there is something larger lurking below– conflicts of interest. Essentially, …
The entire industry has been abuzz with discussions on transparency. This is still a huge issue, but there is something larger lurking below– conflicts of interest. Essentially, conflicts of interest mean that clients can’t be completely certain they are being recommended the right media.
Transparency is a major issue that comes in many flavors. There are the traditional kickbacks received by buying agencies, which are prevalent internationally, but– while still present– are less common in the US. Some media agencies also provide ‘services at a premium’ to media vendors, allowing them to make unusually large margins from projects they do for the very same people from whom they buy media. Another widespread practice in every country, including the US, is for agencies to make large margins on non-transparent principal buys on their programmatic platforms or through their ‘inventory’ or ‘capital’ buying programs; this normally occurs when a client has ‘opted-in’ to non-transparent buys executed by agencies acting as principal’.”
Transparency is a fundamental topic, but a larger and more pernicious issue is conflict of interest. When a client opts-in to non-transparent buys with the promise of lower media rates, a lot of things happen in the background. Agencies are now in a position to recommend a specific media buy where they will make a profit, instead of another buy where they may make a lower margin or no margin at all.” In other words, even if the agency acts in the best interest of the client, and possibly against its own interests, they have placed themselves in a potential conflict of interest.
Another major concern is the prospect for agencies to co-mingle regular client media buys that are done as “an agent for a disclosed principal” with media buys done by agencies as “principal” for resale to clients at a profit. This situation would unfold as follows: A holding company is negotiating a large buy for a client or multiple clients with a media vendor. Suppose for a moment that clients are placing $200 million in media with the vendor. Concurrently, the agency could be negotiating $50 million as principal for resale to clients through their inventory or capital programs. It would not be unimaginable for the agency to apply the clout of the entire $250 million to get an OK deal for the client buy and get the best possible pricing for their own buy for resale at a profit. The potential conflict of interest would involve a transfer of value from the client’s buy to the agency’s buy. Furthermore, no paper trail would be left behind if this was done by a simple insinuation across the negotiating table.
Trendsetters: Cortex Media’s Manuel Reyes Asserts that Agency Conflicts of Interest are a Larger Issue than Transparency
“The entire industry has been abuzz with discussions on transparency. This is still a huge issue, but there is something larger lurking below– conflicts of interest,” says Manuel Reyes, CEO of Cortex Media, a leading media auditing and consulting firm working with top tier advertisers in the US and internationally. Essentially, conflicts of interest mean that clients can’t be completely certain they are being recommended the right media.
He explains: “Transparency is a major issue that comes in many flavors. There are the traditional kickbacks received by buying agencies, which are prevalent internationally, but– while still present– are less common in the US. Some media agencies also provide ‘services at a premium’ to media vendors, allowing them to make unusually large margins from projects they do for the very same people from whom they buy media. Another widespread practice in every country, including the US, is for agencies to make large margins on non-transparent principal buys on their programmatic platforms or through their ‘inventory’ or ‘capital’ buying programs; this normally occurs when a client has ‘opted-in’ to non-transparent buys executed by agencies acting as principal’.”
Transparency is a fundamental topic, but, in Manuel’s opinion, a larger and more pernicious issue is conflict of interest. Here is how it comes into play for media agency/client relationships: “When a client opts-in to non-transparent buys with the promise of lower media rates, a lot of things happen in the background” says Reyes. “Agencies are now in a position to recommend a specific media buy where they will make a profit, instead of another buy where they may make a lower margin or no margin at all.” In other words, even if the agency acts in the best interest of the client, and possibThe entire industry has been abuzz with discussions on transparency. This is still a huge issue, but there is something larger lurking below–ly against its own interests, they have placed themselves in a potential conflict of interest.
Another major concern is the prospect for agencies to co-mingle client media buys when acting as “an agent for a disclosed principal” by using the agency’s own “principal” purchases for resale to clients at a profit. According to Reyes, the situation would unfold as follows: “A holding company is negotiating a large buy for a client or multiple clients with a media vendor. Suppose for a moment that clients are placing $200 million in media with the vendor. Concurrently, the agency could be negotiating a $50 as principal for resale to clients through their inventory or capital programs. It would not be unimaginable for the agency to apply the clout of the entire $250 Million to get an OK deal for the client buy and get the best possible pricing for their own buy for resale at a profit.” The potential conflict of interest would involve a transfer of value from the client’s buy to the agency’s buy. Furthermore, no paper trail would be left behind if this was done by a simple insinuation across the negotiating table.
Manuel Reyes recognizes that agencies have been under tremendous pressure from advertisers to reduce their fees/commissions and extend payment terms. He adds, “They have been forced to find other ways to make money to stay in business. We are all guilty of creating the current environment.”
Improving contract terms and active contract maintenance, including media performance and financial compliance audits remains the best practice today, but are not foolproof. “We need to have a hard look at how we are working today” says Reyes. “Agencies have stated that they are positioning themselves as media vendors and not agents. If so, advertiser practices also need to change. The industry is ripe for a major change to introduce separation of duties between planning and buying if this continues.”
Manuel Reyes is the founder of Cortex Media and has been providing media auditing and consulting services to top-tier advertisers in North America, Latin America, and Europe since 2001. Before that, he was Chief Executive of Starcom Latin America. He also led MediaVest’s Latin America and US Hispanic divisions. Over the last 25 years, Manuel has held management positions at several agencies, advertisers, and media companies.
Cortex Media helps create a media value advantage for marketers. The company is recognized globally as a resource for balanced and independent viewpoints on key advertising media topics in US and worldwide– from Media Performance Optimization to Digital Media Cost Benchmarking and Review to Financial Compliance and Transparency to Agency Management and Evaluation.