Let me say this right up front - I don't think it's right for agencies to make money in ways that they try to hide from their clients. I don't condone that for even one micro-second.
However, if clients read that line and think "Yes, that's our money and we should get it all back" that's wrong too. There are fundamental reasons why a lot of these shady practices started, and to stop them you have to fix both sides of the equation.
Agencies are not unscrupulous villains exploiting innocent clients and stealing money from them - clients can be pretty villainous too.
As someone who spent 20 years in agencies and is now heavily involved in the programmatic buying industry, I wanted to try and offer a balanced perspective.
Many clients today ask agencies to guarantee costs. If the agency can't meet the guaranteed cost, it usually has to foot the bill for the difference. I've seen this happen before, on a client I won't name, the agency gave up their fee and paid a penalty of around 1.5 million USD in addition.
This is not at a 'total cost' level. Costs are broken down into great detail and the expectation is that the agency will meet EVERY number. If they go above, that's their problem, but if they go below, the client expects to make the saving.
That's fundamentally unfair and imbalanced. The reality is that when you're negotiating a large number of deals, some will come in above expectations, some will come in below. A client who's willing to treat the cost estimates as estimates and roll with the punches can expect transparency. A client who wants all the upside but none of the downside deserves a swift kick in the pants.
Some clients understand the realities of media deals. They set targets in collaboration with the agency and offer support and resources to help them in negotiations. P&G media executives would participate in media negotiations if we asked them to, they would adopt the positions we sometimes advised them to in meetings, and when we occasionally blacklisted a channel or media vendor in order to play hardball with them, the P&G media guys backed us up with their colleagues in brand management. Almost every single negotiation I remember from that time ended up with gains that we did not expect, far better than any target we may have set ourselves.
In those situations, there may be a goal to reach, a target cost. However, success or failure is a shared outcome between the client and the agency. The agency gets paid a fair fee for making it's best effort, so it's interests as a business are protected.
This kind of client has the absolute right to know every detail of every media cost, and they usually do right from the start, because they were part of the process of signing the media deals.
The problem with this whole process today rests on three things:
1. People from purchasing who don't understand the dynamic nature of media pricing (yes they understand pricing but do they understand how ratings / impressions fluctuate? A widget is always a widget except when it's a media widget) and try to enforce commodity pricing models on this industry
2. Media auditors who get paid for poking holes in what an agency has done - and that's always an easy task, isn't it? The money that gets spent on fees for these guys would be far better used as an incentive payment for an agency.
3. The unwillingness of agency management to say no to any business or to have difficult conversations with their clients. This is driven by the unnecessary public listing of agencies leading to unrealistic financial goals and pressures, and it's not helped by the fact that most senior people in agencies now are paper pushing bureaucrats who wouldn't recognise a consumer insight or a creative idea if they ever saw one. More on that in an earlier post here.
While on that topic, let me make a somewhat unrelated point.
Marketing is not a core business - it's an ant in relation to the rest of human endeavour.
Advertising is the bum of the ant - the piece that comes in the rear after the vanguard decisions about product, pricing and distribution are made.
Media is still (unfortunately) a dimple on the bum of the ant - the bit that gets decided (usually) last.
Media auditors are an addendum to the media agency business - scavengers living off a tiny percentage of that revenue model - so in my book, they're a pimple on a dimple on the bum of an ant.
Let's stop losing ourselves in the intricacies of this business and remember a few things:
1. A saving of 10% of ad-spend is usually less than 1% of a company's overall cost - there are far better areas to focus on cost reduction which are more impactful for every hour of purchasing effort spent.
2. Rather than commoditising media and expecting CPT or CPM guarantees it would be better for clients to focus on outcomes. Work with agencies to jointly negotiate deals that are not just looking at cost but also evaluate the effectiveness of the media buy.
3. Recognise that agencies need to make some money too - when they make an honest effort for a client, they deserve to make back their costs and a reasonable margin, even if the outcome wasn't as good as expected. If you chose an agency badly, that's not just the agency's fault.
Making media auditors the policemen is a very bad idea - because they're not neutral. A media auditor who says "Your agency is doing a bang-up job, don't change a thing" will soon be out of business. A media auditor who points out problems, areas for improvement and offers more consulting hours to diagnose the problem does much better. A media auditor who rings alarm bells and calls a pitch does best of all.
So, in summary:
1. You want transparency? Fine, then don't ask for price guarantees (conversely, you want a guaranteed price? Then don't ask for transparency and plan on changing your media agency every year). Participate in the media buying process, be invested in the outcome, be a partner, not a pain in the ass.
2. Stop wasting money on media auditors - use the money to reward your poor, hard-working agency for their efforts.
3. Stop acting surprised when people produce voluminous reports to say "agencies are keeping money from their clients". Of course they are, did you not know that already? Of course it's bad, but you contributed to the pressures that made that happen. Now think about what you can do to make it better.
Of course, agencies are far from blameless in this whole thing. Pitching business at rates they can't really attain, undercutting each other and enabling the greed of client purchasing departments... you made your own bed boys and girls, you contributed to this situation too. It's not that hard to change it - it starts with trying to have a real relationship with your client - tell them about your business and what it would take to be truly transparent with them. Say no to pitches which are all about filling up numbers in an excel spreadsheet (giving enemas to very small flies, in my book).
That's what it boils down to, ultimately - creating a real partnership. Partners don't exploit each other, threaten each other with breaking the partnership for small problems or quietly do things behind their partner's backs, hoping not to get caught.
(First published on Linked In in June 2015)