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Be careful what you wish for

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Concerns are rising among advertisers over the increasing complexity and exoticism of operating and trading practices at media agencies. Media agencies have always trodden a fine line between neutrality and self-interest, in their hybrid role as investment advisers and commercial traders. But as they vie for the pivotal role in brand communications management, they appear to be putting this status in jeopardy as they continue on their path of self-imposed metamorphosis from buyer to vendor. This article explores the new dynamic emerging between client and agency.

For every action, there is an equal and opposite reaction

Although most media markets operate variable pricing models, most advertisers want certainty of the prices they pay. Under pressure to control costs and make savings, the response of many clients has been to negotiate improved buying rates with minimum downsides and long-term stability. Agencies naturally want to play ball, but in offering this degree of trading certainty they need to mitigate their own downside risk as well. To square this circle, agencies have started to use their own funds to secure discounted media inventory on their own account and then sell it on to their clients. This is called “inventory” or “proprietary” media, and it is on the rise. Many advertisers will agree to include inventory media to improve competitiveness, so it appears destined to become a larger part of the trading mix. But there is a knock-on effect.  A media owner has to balance its books after all: to offset the proprietary discount here, they will look to increase the rates they charge elsewhere. Inventory media could effectively inflate the prices paid by clients for “standard” inventory. By creating variable price points for its customers, an agency is becoming more like a vendor.

There’s buying the plan and there’s planning the buy

For many years in the UK agencies have acted as principals for their clients, operating and managing complex share deals with media partners.  A key role within an agency (“the allocator”) is to ensure that campaign spend is distributed in line with group-negotiated share deals.  The allocator polices the planners and prevents “rogue” clients from putting undue strain on agency deals. In many respects the agency’s buyers are choosing inventory from the menu pre-selected by the allocator. Once again, this situation has emerged in response to clients wanting the certainty of improved performance, but managing inventory on this industrial scale means the majority of media plans are far from being neutral. In a digitised world where outcomes can be more easily attributed to inventory placed at high speed, the allocator’s role is replaced by automation. But clients worry that they do not have sight of the algorithms deployed to select inventory within private exchanges. By allocating the inventory it holds, an agency is behaving like a vendor.

One door closes, another door opens

Commercial transparency – specifically undisclosed margins in programmatic trading – is without doubt the “issue du jour” for clients seeking the certainty of supply chain visibility. Recent industry initiatives such as the ISBA model media contract have responded to concerns and are attempting to close down the opportunities for intermediaries to profiteer from systemic opacity. Whereas the assumption is that everyone wants transparency, the reality is that some clients are prepared to sacrifice transparency to receive more attractive commercial terms from their agency. To meet these needs, it seems inevitable that agencies will develop two types of contractual arrangement: the option of “non-disclosed” and “fully-disclosed” terms. Agencies will design contractual models which keep their options open and keep their clients happy, but it is fair for clients to debate whether it is sustainable for an agent to operate a bi-polar business policy better suited to a vendor.

 

In summary, as clients have become more demanding, their agencies have responded by managing their risk more carefully and creatively. This isn’t going to change, because clients are not going to become less demanding. If buyers are becoming more like vendors, their clients will become more like buyers and will adopt the behaviours of traders. Clients will keep their supplier choice broad, they will develop strong negotiation skills, and many will tender for alternatives more often.

All industries must evolve, and change can be unsettling. Perhaps we just need a bit of time to get used to it. Perhaps a more radical overhaul in the natural order is around the corner. Whatever the longer term prognosis, clients and agencies must engage right now in a more active dialogue, mutual re-education, a new deal on transparency, and a re-calibration of their relationship.

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