The recent controversy around buying irregularities at MediaCom Sydney left many convinced it was a one-off incident, and that we should all get back to business as usual.
This is exactly what the media agencies and their holding company owners would have you believe. They could even go so far as to reject any suggestion that this problem is more common than we think, because they have no interest in dealing with the underlying condition that caused this mess in the first place.
In saying that, this problem is not one that can be solved by media agencies alone. Everyone involved has had a part to play in creating this problem so everybody needs to share in the responsibility of making this right.
Who controls these local entities?
Let’s face it, AVBs and rebates are a worldwide practice. MediaCom Sydney is a regional entity of a global parent company and there are more than a few of these global parents in this industry. The global and regional hubs, where P&L from local markets feed into, control these local entities so it would be a fair assumption that revenue streams and P&L structures are standardised to some degree across the board.
That said, the cultures in local markets, along with the differing degrees of standard business practices and corporate governance, may be worthy of some consideration. There is the appearance of high levels of due diligence with some and nothing at all with others.
Nonetheless, this is still a global problem. However, if we were talking about China or India, how much would this problem resonate if media agencies carried on this way?
There have already been some US heavyweights talking about this, which no doubt alarmed the largest market in the western world. Talk was such that Pivotal Research, a leading investment advisor, has seen fit to downgrade this category because of this controversy.
Who regulates the Australian market?
Certainly, regulation in the Australian market is lacking. Since this situation has surfaced, media auditors have confessed their reliance on agencies for data. There has been denials of a problem from the self-funded industry groups that manage and control self-regulation. Then there are advertisers too afraid to say anything in case their limited control over the vast amounts of money invested in media is revealed.
Unfortunately, many markets are in the same boat across the region, providing an even more fertile environment for this type of behaviour.
If it wasn’t for the procurement process of systematically driving reductions into agency compensation agreements, then this would not have been an issue. This outdated compensation structure pays for the cost of service provision, instead of the true value the media investment delivers to the advertiser. This cost, which has successfully been reduced by procurement, no longer makes up for the increasing complexity of media agency operations.
The reduction in fees has seen media agencies cutting costs by becoming increasingly reliant on their lower cost junior staff members. A media agency is often a pressurised environment. Relying on junior staff members without sufficient training can lead to careless decisions and shoddy work practices.
It’s worth remembering this entire thing happened because a few post-analysis reports were fluffed up by some buyers. All the rest – the debate about kick-backs, AVBs, value backs and so on – has been brought about by the press blow-up and John Steedman’s decision to make some more admissions.
The impact of commoditising conventional media agency services
Because the commoditisation of conventional media agency services has driven down long-established revenue streams, media agencies have had to stay ahead of the curve by diversifying. In future-proofing any business, diversifying services is natural but the commoditisation of core services has, to some extent, forced their hand.
If you think I’m suggesting that had agencies been paid better from the outset, AVBs or arbitrage wouldn’t have happened, you’d be mistaken. I am simply stating that shaping a transparent, value-based service model has not been helped by commoditisation. At the root of all of the problems that have surfaced since the MediaCom issue, is this mounting lack of transparency.
Based on my own experience, there is an increase in the number of advertisers who exhibit a lack of basic understanding around how media agencies actually operate. All things considered, this is simply not a very good place for any of us to be in.
Media industry regulation
Globally, this is a multi-billion dollar industry that deserves an appropriate level of regulation. Establishing an independent and global audit and code of ethics, something like Sarbanes-Oxley compliance, may be a step in the right direction and provide a consistent and global approach to transparency and accountability.
Of course, this would need to be enforced and regulated by an entity not funded by media agencies. It would require the setup of a global and independently funded body that would drive and oversee it to make sure media agencies, their trading entities and advertisers, deliver the required level of accountability and transparency across markets and within categories.
Marketers would be required to undertake independent and meticulous financial audits of their media agencies. And by that, we don’t mean media rate audits, which are what the industry is currently passing off as audits.
The issue of agency compensation
There also needs to be a change in the way agencies are remunerated. Advertisers should take the focus off costs and reward, and remunerate their agencies for the value of delivered media. The value might be media that is procured on behalf of the advertiser, or more importantly, it could be the value delivered by the media itself such as revenue, market share or sales.
At the end of the day, media agency staff and their clients must improve their understanding of the media value chain and also receive training on how value is created, delivered and lost.
And for advertisers, it is not enough to expect media agencies to make these changes. In a lot of ways, media agencies have basically conformed to the cost demands of advertisers. In the process, they have progressively gained more value from media owners.
Is it such a big ask that an appropriate level of regulation be put in place? After all, this is a multi-billion dollar global industry.
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