New Report Raises Questions About Ad Agency Contracts

July 7, 2016
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Business owners: Now is the time to review your ad agency contracts

New York and New Jersey businesses may want to review their existing ad agency contracts. A new report raises questions about whether agencies are recommending media purchases that may not necessarily be in the best interests of their clients on ad agency contracts. The report is from the Association of National Advertisers (ANA) and it found that the practice of accepting rebates from media companies may be pervasive among ad agencies.

What did the report say about ad agency contracts?

The ANA retained independent firm K2 Intelligence to conduct the report after concerns arose about media companies’ use of rebates to reward the ad agencies for purchasing a certain amount of advertising on behalf of their clients. The report confirms the prevalence of the practice, as well as other “non-transparent” practices. It suggests that agencies have provided incentives to direct client spending to certain media regardless of what may be in the client’s best interest. The evidence cited by the ANA showed a range of instances in which media suppliers paid rebates to agencies, or entities affiliated with those agencies, in amounts ranging from 1.67 percent to approximately 20 percent of aggregate media spending, depending upon the deal. “Whether acting as agency or principal, vast changes in technology, the complex digital supply chain, and the proliferation of media outlets provided agencies with additional opportunities to increase their profit margins beyond agency fees,” ANA CEO Bob Liodice said in a statement. “This has led to disconcerting conflicts of interest and a lack of transparency.” ANA states that the findings of the report are based on “detailed source accounts from dozens of confidential, personal interviews as well as documentary evidence,” including contracts and email correspondence between between ad agency executives and media companies. The report does not identify any of the companies that allegedly paid or accepted rebates.

Bottom line

While the kickbacks may raise conflict-of-interest concerns, they may not necessarily violate the ad agencies’ contracts with their clients. According to the ANA, its study found that “in many cases, advertisers were unaware of details in their agency contracts that addressed the issue of transparency, particularly because some contracts had not been reviewed or updated in as long as 10 years.” In defense of the industry, agency trade associations have questioned the veracity of the anonymous sources and maintained that a few bad apples may be giving ad agencies a bad name. Nonetheless, the evidence discussed in the report should be enough to prompt businesses to carefully review their contracts and raise any concerns with experienced counsel. In addition, of course, advertising agencies may also want to review the contracts and revise them so that they can fully disclose or otherwise address the issues raised. Are you still unsure what to look out for in ad agency contracts? Do you have any questions regarding the matter? Please contact me, Charles Yuen, with any questions or concerns.