Transparency in agency relationships is a growing issue.

Pivotal analyst Brian Wieser downgraded ratings on the four major agency holding companies on Monday, warning that the growing noise over agency kickbacks has caused him to “reassess some of our views on long-term holding company growth.” In a note to investors, he added that since marketers are only just now starting to learn about the issue, he recommends that investors either “move to the sidelines or exit the sector for the time being.”

Kickbacks, which aren’t a new phenomenon, are when media companies give agencies money to guarantee certain ad buys will keep coming in — even if those buys aren’t necessarily the most efficient ones. Often, those discounts earned by that spend isn’t returned to the client — even though contracts mandate that they do. Lowered fees that squeeze agency bottom lines have exacerbated the issue.

But what is transparency, anyway? Our latest WTF tries to make sense of it all.

What is it?
Bill Duggan, group executive vice president at the ANA, puts it simply: “I think it’s a clear understanding of how a client’s money is being spent. And how that money is impacting the activity of its agency partners.”

That raises more question than it answers, because “just knowing” about how the process works may be transparent enough for some clients, and not transparent enough for others.

Rob Reifenheiser, managing director, North America at Essence, said transparency is “disclosing the cost that is paid for media for clients you represent. After all, you’re in the marketplace spending that money.”

Why is it so important now?
The growing furor over agency rebates began when former Mediacom chief Jon Mandel said at an ANA conference that agencies are completely non-transparent about what goes on behind the scenes with clients. An Advertising Age cover story about kickbacks featuring interviews with a number of high-level execs further investigated the practice, and found that it was very much real.

An ANA and Forrester study last year found that clients were increasingly concerned about new tools that facilitate media buying, and whether they obscure understanding of the process. Almost half of the respondents surveyed were concerned about the transparency of their buys. And more than half noted “a high level of concern over the possibility that agencies may receive a rebate from the media sellers.”

More broadly, the programmatic space is creating a “black box” pricing model that lumps together cost of media, cost of staff and cost of systems. When it’s boxed together, clients don’t the cost of each element. Put simply, there are margins on top of the media, and those are margins some agencies aren’t transparent about.

But this goes on elsewhere?
Media rebates — and a lot of the other “non-transparent” business practices — are a fact of life in other parts of the world. In the U.S., they’re supposedly not happening, although most agency executives say of course they are.

I don’t really see the problem. How does this hurt clients?
It’s not really transparency that’s the issue, but the issue of bias. Say you have a media plan, and have to choose between two vendors. With one vendor, the agency is close to hitting a supposed tier that will kick back a big rebate. That’s where bias comes into play. You may recommend something that isn’t the best thing for your plan, but gets you the rebate. Are you going to tell the client, or not?

What if you tell the client that you’re not going to tell them?
Now you’re talking. WPP is an interesting case in this debate. Despite its Mediacom agency directly being indicted in the AdAge report, Wieser said that that holding company is the most “immunized” because it has historically been very “transparent about being non-transparent” about its practices. “I applaud that perspective,” said Duggan. “That they publicly came out and say that.”

That immunity probably stems from the fact that WPP is the only agency that tells you its gross revenue as well as its revenues coming from media trading — so clients know that there is a difference. GroupM has also said openly that in the United States, rebates and hidden revenue are not a part of its vendor relationships. Wieser, in his note, agreed, and said that other holding companies not making the disclosures between their gross revenues and revenues netted of media trading is “unfortunate.”

“I think it’s an interesting position to take,” said Keri Bruce, associate at Reed Smith LLP that works with the entertainment and media industry group. “But there may be WPP clients who think that is not enough.”

A media executive who chose not to be named said WPP’s approach isn’t illegal, but is still interesting. “If you really march up the line and tell the CEO of the advertiser that the agency isn’t being transparent about the cost, the CEOs will balk,” this executive said. “But they’re being upfront that they’re not being transparent. It’s completely legal. But only until more advertisers wise up.”

Do clients really care?
It depends. People familiar with the matter said that they have heard some clients say they’re ok with agencies getting a rebate — it’s like a “bonus” — as long as they’re open about the fact that they’re getting that rebate. But the more and more clients that pull programmatic buying in-house show that in some cases, digitally-savvy clients prefer to just take their agencies out of the equation.

How could this play out?
“Clients are going to want to go back and strengthen their audit provisions,” said Bruce, who said that most agency agreements she has overseen have audit provisions that say if rebates happen, they have to go to the client. “If the allegations are true, then I ask if advertisers have been doing the audits properly.”

The outcome, ultimately, depends on the advertiser. “This has allegedly been happening for a long time,” said Bruce. “Each advertiser will have to take a position.”

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