Agency-Vendor Ties Get Murky

Life can be tough in the agency business. Clients consistently expect greater results for smaller fees, which has placed increased pressure on the typical agency business model. As a result, both holding companies and individual agencies themselves are seeking new ways to boost their incomes, not all of which are in line with traditional agency roles.

Many holding companies have opted to take financial positions in the vendors they do business with, for example. They charge advertisers once at the agency level, but they also stand to see upside at the vendor-level, too, through their investments.

Agencies increasingly find themselves in the position of evaluating vendors for client business when their holding companies have a stake in one of them. Those types of relationships raise questions around whether or not vendors and media owners are being selected based on the interests of the clients, or those of the agency. This week, for instance, brought news that GroupM had settled on Buddy Media as its preferred vendor for social media management services. GroupM parent company WPP has invested in Buddy Media. (GroupM says the designation was made purely on the merits.) WPP has a raft of investments in technology businesses that do business with its agencies.

Where there are no direct financial ties, tech companies have constructed mechanisms through which revenue or value can be easily passed back to agency groups based on how much client money is spent. Cash rebates remain illegal in the U.S., despite the fact they drive much of the advertising business elsewhere in the world. As a result, and as one former agency executive noted, vendors are constantly looking for ways to circumvent the system and to tempt agencies.

“We are now seeing new crafty ways for media owners to do what’s been done elsewhere for a while,” this executive said. “There are a number of forms of benefits between the media owners and the agencies. Rarely, if ever, is it cash. It’s always inventory, access, first opportunities, research, consulting fees, advisory positions and similar.”

For example, multiple current and former agency executives interviewed for this story, most of whom asked to remain anonymous, described relationships that Google has with major holding companies that relate to the use of its various advertising products. Money changes hands under the labels of consultancy, research or management-services fees, they said, but is directly related to the amount they spend on its exchange and whether or not they make use of its technology products, such as those offered by Invite. “It’s a commission on spend,” one executive said.

A Google spokesperson acknowledged that these types of relationships exist, stating, “Like others in the industry, we work with many advertising agencies and marketers to help them develop and invest in new advertising technologies and formats, including technological assistance, measurement, creative development, research funding and co-marketing.”

Google’s own ad policy also outlines the fact that it puts financial incentives in place: “Google offers incentives to accelerate the adoption of and investment in Google’s advertising programs. … Advertisers and those who place advertising with Google on their behalf may receive financial incentives, including but not limited to credits to help fund their campaigns.”

Volume discounts are nothing new, but they raise questions about the interests of agencies versus those of their clients. After all, this is the clients’ money. If an agency sees greater financial upside to working with certain vendors in terms of credits, discounts, research funds or other means, it’s incentivized to do so. These benefits are not always passed directly back to clients and often end up — one way or another — benefiting agency or holding companies’ bottom lines.

The situation complicates further when agencies have a direct financial interest in the vendors they’re buying from. According to Rob Norman, CEO of WPP’s media-spending arm GroupM, the holding company is currently evaluating an investment in video ad firm Videology, with which it has been long rumored to have financial ties. “Discussions are ongoing,” Norman said, but he denied the agency currently has an investment in the business.

Multiple industry sources claim GroupM is incentivized to buy from Videology, though, thanks to options or warrants the company has issued to it. In that case, it already has a financial interest in the company’s success. When asked about the warrants specifically, Norman declined to comment.

Norman added that GroupM’s buyers are not mandated or pressured to purchase from companies WPP has stakes in, and that less than 15 percent of its video spend currently goes through Videology. It currently owns a stake in Say Media, for example, thanks to an investment it made when the firm was VideoEgg in 2007. Say operates a video ad network.

Elsewhere, WPP also has a financial stake in social media marketing management firm Buddy Media, and this week announced plans to roll its products out across all of its agencies. Norman said that decision was made exclusively on the merits of the Buddy Media product, but it’s hard to see how it could have gone any other way given the existing financial stake WPP had. It would have looked exceedingly odd if GroupM chose competitor Vitrue, for example, which was recently acquired by Oracle.

In addition to investments and “incentives,” agencies are also creating other, more subtle methods of extracting revenues from media owners. For example, Publicis Groupe’s Vivaki research initiative “The Pool” is funded exclusively by the media owners that participate in the program. Essentially, Publicis is passing the cost of research and innovation on to vendors, which are happy to stump up the cash in the hope that they’ll see some ad budget in return.

According to one former Publicis employee, that type of “pay to play” arrangement is the only way agencies can afford to innovate, as clients continue to squeeze their margins. “With the agency business model today, it’s one of the only ways they can afford to do this sort of stuff. Clients aren’t going to pay for it, and that’s the conundrum.”

The question, though, is whether the vendors that decide to foot that bill are seeing the favor repaid in media spend. The answer is probably yes, the source said. “Even though the agency is not guaranteeing any spend, there probably will be. It’s not an explicit shakedown; it’s more of an implicit one.” In addition, Vivaki gets to mark up the research work itself and also retains the intellectual property to any of the technology or innovations The Pool results in, which it can ultimately monetize again through things like licensing and serving fees.

But, ultimately, as the relationship between agencies and vendors becomes increasingly murky, it’s up to the clients to decide if they’re comfortable with the activities of their partners. The advertising and technology worlds have collided. It’s only natural for agencies to develop ties in the tech world, which should benefit clients in the long run. These ties ultimately feed the need for transparency. GroupM was very public with its decision to give Buddy Media preferred status, for instance.

Issues arise, though, when agency relationships and deals remain undisclosed to clients. It’s no secret that agencies and vendors like to arrange mutually beneficial terms for their deals, either through incentives, discounts or other means. In the end, it’s the clients who  will dictate what is OK and what isn’t. After all, it’s their money.