As Firestorm Grows Around Media Kickbacks, the Industry Launches a New Task Force

4A's and ANA vow to investigate marketers' concerns

It has been called (by 4A's President Nancy Hill, specifically) the ad industry's "elephant in the room."

The issue? Allegations of media agencies pocketing discounts on volume media buys and not sharing the "kickbacks" with clients.

Well, now the elephant is finally getting the scrutiny many feel it deserves.

The 4A's and the Association of National Advertisers today formed a joint task force to examine the accusations, and the 10-person group represents a who's who in the media field.

Members include the heads of holding company media divisions like WPP's GroupM, Omnicom's Omnicom Media Group and Publicis Groupe's Starcom MediaVest Group, along with marketing leaders from Unilever, Procter & Gamble, L'Oréal, and Subway. Rounding out the panel are 4A's President Hill, ANA CEO Bob Liodice and Horizon Media CEO Bill Koenigsberg, who's also chairman of the 4A's board.

The group will start meeting next month with the goal of identifying "material issues" related to media transparency and "address them with constructive dialogue and pragmatic course of action." Recommendations are expected later this year.

The idea of agencies profitting from volume-buy discounts is nothing new. In fact, the practice is common in certain regions of the world, including Asia and Latin America, where marketers generally are aware of it. The U.S., however, is a different story: ad holding companies maintain that they don't pocket any discounts here.

Still, broader anxiety and distrust between agencies and marketers have given this issue legs ever since consultant and former media agency CEO Jon Mandel reignited the topic during a presentation at an ANA conference last month.

Mandel asserted that media kickbacks are widespread and that, despite assertions to the contrary, media agencies aren't being transparent about them.

Of course, Mandel, who works for brand marketers, has a vested interest in pointing out problems with agencies. In short, marketers may hire him to investigate the practices of their shops. Still, transparency has long been a concern of marketers in their dealings with agencies, and merely suggesting that agencies aren't being open with their clients was enough to set off a firestorm that continues a month later.

Three weeks after Mandel's accusations, Hill made her "elephant in the room" comment at the 4A's Transformation Conference in Texas. At the time, she said the 4A's was already talking to the ANA about the topic and "we will continue to have those conversations to work toward what I hope will be some really good guidelines for everyone to think about."

She further encouraged "everybody to have those conversations—agencies and clients—about the trust you need to have in each other because it's very important in what we do."

Since then, media commentators have fanned the flames, and analysts have questioned the extent of the practice of pocketing volume discounts, with one, Brian Wiener of Pivotal Research, going so far as to downgrade his outlook on some holding companies on the premise that losing such discounts would impact their profitability.

And as the companies reported on their first-quarter results this week, other analysts questioned their CEOs about the practice. The bosses, however, maintain that their agencies don't operate this way in the U.S. and that in markets where they do collect discounts, they're transparent about it with clients.

In Interpublic Group's earnings call this morning, for example, CEO Michael Roth told analysts that his company addressed the issue 10 years ago in its drive to comply with then new federal standards for financial reporting that arose out of the Sarbanes-Oxley law of 2002.

"We embarked on a full transparency program within IPG to make sure that there's transparency and that any rebates will be properly reflected in our contracts and given to our clients," Roth said.

He added that in markets outside the U.S. where there are rebates, "our contracts are clear that those rebates belong to our clients (or specify) how we're instructed to treat those rebates."

Hill believes much is riding on the success of the task force, which she said must "ensure that the long-standing partnership between clients and agencies is grounded in trust and understanding."

Liodice simply feels that "transparency concerns—real and perceived—need to be addressed and mitigated." Now, conceivably, they have the stakeholders in place to get that done.