REUTERS/Paulo WhitakerSome US ad agencies are making secret settlements to clients to avoid being fully audited by them, sources tell Business Insider. The payments come after the industry was accused of keeping millions in media rebates that should have gone to clients. The settlement sums are in the millions of dollars and have taken the form of cash or significant fee reductions. Multiple agencies have denied involvement.
Media-buying agencies in the US are paying their clients secret multi-million dollar settlements rather than show them all of their contracts and service agreements with media owners.
Multiple sources with knowledge of the matter suggested there have been at least 20 cases where either a settlement has been paid or where there are ongoing negotiations about a settlement payment.
The settlement amounts have ranged from the low single-digit millions of dollars to more than $10 million — but below the materiality threshold at which agency holding companies would have to disclose them in their annual reports. Some of these settlements have been in cash, while some have taken the form of an agreement to significantly discount the client's fees the following year.This practice is not pervasive across the US ad-buying industry, but multiple, competitive agency groups have been drawing up settlement agreements
Settlements have been paid out by a range of media-buying agencies and have not been isolated to a specific holding company. That isn't to say that the practice is pervasive across the industry — and not every holding company has been involved, according to our sources — but rather that settlements agreements have been by different, unrelated, competitor advertising groups.
Both parties — the marketer and the agency — usually sign NDAs (non-disclosure agreements) as part of the terms of the settlement, preventing either company from revealing publicly it took place. The sources asked we did not reveal the names of the agencies and clients involved, due to these NDAs.
This new type of settlement payout appears to be a direct response to the release of the high-profile Association of National Advertisers (ANA) report into media-buying practices in the US last summer. The report claimed rebates and other non-transparent business practices were "pervasive" in the US media ad buying ecosystem.
The major advertising agency holding groups denied wrongdoing and criticized the methodology of the report shortly after it was released, arguing that the anonymous nature of the interviews conducted and the fact that it named no individual bad actors or agencies had the potential to damage the reputation of the entire industry.
Regardless, the report, which advised marketers to take a closer look at their agency relationships and contracts, sparked a wave of big-name marketers commissioning third-party auditing companies to examine their media-buying agencies.Some agencies are paying clients in the form of cash or significantly capped fees, rather than disclose all their contracts
Media-buying companies are employed by advertisers to secure them the most strategic and best value-for-money advertising slots.
When companies appoint auditors to look at their media agency relationships, they are looking for reassurance that they are getting what they paid for when it comes to their advertising spend and that the agency has been compliant with their contract. Sometimes, audits result in overpayments being returned to the company, or contracts being renegotiated.
Audits within the industry are normal, but this time around, marketers have been using the findings of the report — plus a contract template provided by the ANA — as leverage to get more detail about the types of agreements their agencies have in place with media owners.
As a result, many marketers have been asking more specific questions about media — particularly digital media — that agencies buy upfront in advance and sell back to clients and also for evidence of any agreements agencies have in place with media owners to receive credits — either in the form of cash rebates, free inventory, or other discounts — when their spending (usually across a range of clients) reaches a certain threshold.
They have also been asking for information on whether their advertising budgets have been spent on media properties in which the agency owns a stake.
But some agencies have been reticent to hand over such information, even if required to do so by the audits rights sections of their contract. Instead, they have negotiated to pay their clients settlements — either in the form of cash or agreeing to significantly cap their fees — rather than disclose those contracts and master services agreements.
In the majority of these cases, the contracts between the media agency and client have then been redrawn, with more specific wording around the type of media the marketer agrees can be bought in a non-transparent way.Taking a settlement can be in the interest of the marketer too
Buying media in a non-transparent way is not a nefarious activity, so long as the marketer is aware and agrees to it upfront. Some agencies argue that when they take a "principal position" in buying media upfront — i.e. by using their own money to buy the media and then selling it at a markup to their clients — they are taking on the risk that they might not eventually sell those ad slots back at-cost or at a profit. And, they argue, they add value through their investments in data and technology that justify selling the media space back at a higher cost than it was bought at.
Put it another way: if you buy a car and choose the performance brakes option, you know that the dealership is making an additional profit from the upsell. But it's unlikely you'd ever demand the dealer disclose how much they paid for the brakes. As long as you feel the brakes are performing well, you're happy with the purchase.
Opting to take a settlement is often in the best interests of an advertiser too — and they are particularly appealing to their procurement and financial departments, happy to see any savings or clawbacks of cost.
A settlement also prevents ruining a relationship by taking the matter to court to force the agency to disclose all their contracts. Litigation is costly and distracting, and could run the risk of exposing the marketer as not being fully aware of how their company's budget was being spent under their watch. It is the marketer's responsibility to ensure their company is getting the most value for money from its advertising spend.
The ANA and The 4A's, the trade body that represents US advertising agencies, declined to comment.
Business Insider also contacted the six major holding agencies for their comments on this article. Here are their responses:
"As a rule GroupM, does not comment on contractual matters; however, we can confirm that we are not involved in the practices described."
"Integrity and trust continue to be cornerstones of how we approach relationships with our clients. We continue to comply on client audits as standard agency-client operating procedure, including any audits that have commenced since the ANA practices were announced. We have approached them with deep collaboration with our clients and these audits have resulted satisfactorily with positive conclusion. There has been neither need nor instance of non-disclosure settlements as part of an audit or client discussion."
"We do not engage in and are also not aware of such practices. IPG upholds the highest standards of transparency in our media practices, which is key to our decisions not to accept rebates in the U.S. and not to buy 'inventory media.' This long-standing position has been a differentiator for our company."
Declined to comment.
Declined to comment.
Declined to comment.