We've been seeing big improvements in the last few years in the terms advertisers have agreed with their media agencies, achieving improved transparency, access and behaviours. We expect that trend to continue, even as ad spend takes time to recover from the economic shock caused by COVID-19, and it could be a useful opportunity for advertisers to reassess what they expect from their media agencies.
New appointments may be on hold for the moment while attention is focused elsewhere but once something like normality is restored, we recommend focusing on five key principles in agreements with agencies. We know, from our varied experiences over the last years advising advertisers and media owners, that this should help advertisers secure improvements from their agencies.
Transparency is at the core of a trustworthy and high-achieving agency relationship. We aim to embed transparency throughout the agreement, including in the following areas:
The transparency obligations have to be backed up by robust and comprehensive audit rights. There needs to be audit access across the agency group and service providers. Achieving that may be assisted by contracting with an entity 'higher up' the corporate structure than an individual trading company, so that the parent company can provide guarantees of access across the group. As with the transparency obligations, the audit right needs to encompass all agency entities which touch spend or provide services. The auditor needs to be able to see all documents, trading records, third party cost information, contracts leading to and with media owners and, via intermediaries, documents relating to the receipt of income and the full chain of pricing for programmatic media.
We are seeing that media owners are recognising the importance advertisers place on transparency and audit so are requiring disclosure of deals to the agencies' clients, which should support advertisers' requirements that agencies don't agree to terms which prevent audit access.
Advertisers have to be alert to avoid exclusions from access and restrictions on their choices of auditor. They should also try to ensure that the purposes of audits can be broad and avoid audits being carved up into different categories, with different auditors doing different aspects, running the risk that things fall into the gaps.
Once income has been transparently and comprehensively reported to the advertiser, the advertiser needs to ensure that everything is passed back and done so in a form appropriate to the income received. That way, the fee becomes the only source of revenue the agency can retain. There needs to be a broad definition of income which picks up value wherever it arrives into the agency group. It should include all value received by the agency group in relation to media placements, beyond rebates and free space and into a range of technology, affiliate, reselling and product margins. If profit is received by the trading company and any other entity in the agency group (as widely defined), it should be passed through.
To assist with checking the income has been passed through accurately, the advertiser should be obtaining information on the actual prices of media, the sources of income and the circumstances in which the agency is entitled to benefit from it. Advertisers should try to avoid income being earned by the agency aside from the fee (eg income from vendors and agency margins charged on tools). Finally, the advertiser may need to decide whether discounted/free space is to be returned as income or to be delivered in pricing commitments.
Advertisers should try to include robust legal standards which underpin the commercial behaviours they would expect to see. For example, it should be made clear that, although the agency will be acting legally as principal at law (at least in the UK and across Europe, albeit not in the US), it will not be entitled to act on its own behalf. We seek the imposition of fiduciary and good faith duties on agencies. There should also be obligations to maximise value for the advertiser and to demonstrate how the media placements have achieved the best available value for money.
Advertisers need to know that their spend is achieving the best result possible and that agency behaviours are geared around achieving that result. Buying decisions need to be driven by what is best for the client and not for the agency. Advertisers, for example, should seek assurances that their media plans are not influenced by non-disclosed margins, benefits or income, or arrangements with media owners. To that end, advertisers should also ensure that agencies avoid conflicts of interest. These include, for example, agencies not being able to set media plans on a media-neutral basis, recommending placements/media owners for reasons other than the advertiser's best interests, and provision or receipt of services provided at a premium and arrangements which lead to the generation of undisclosed income.
Achieving these standards is of course assisted by the comprehensive income disclosure and pass-through obligations mentioned elsewhere. Agencies should be required to demonstrate why suppliers have been selected as being the objectively best-placed supplier rather than because of circumstances which benefit the agency. That will include, for example, reporting on ownership of, cross-directorships in, and other interests in suppliers. It will also require disclosure of use by the agency of linked, related and/or group companies in delivering the services and media placements, including a requirement that those arrangements do not involve receipt of undisclosed income.
These are five key principles for advertisers to follow in their media agency agreements, but there are a number of other important legal and commercial issues which need to be considered to achieve a gold standard agency agreement. They include:
If some or all of these issues are secured in agreements with agencies, then advertisers will have set the relationship on a very solid foundation to the benefit of all involved.
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Unpacking the special considerations for advertising and marketing during the COVID-19 pandemic.
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Options to vary or terminate existing sponsorship agreements and draft future ones in the context of COVID-19.
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