Is the current media agency model our very own House of Cards?

Simon RutherfordThis week has seen the Mediacom EY audit and revelations around it dominate national and trade press headlines. Slingshot CEO Simon Rutherford takes a step back and asks how sustainable is the current media agency dynamic? 

Whilst the lovers of the hit TV series House of Cards have been enjoying series three of the Netflix drama that focuses on the murky world of Washington politics for a few weeks now, the media industry patiently awaited for the Mediacom EY audit to see where the transparency in media agencies debate would take us in 2015.

Now that it’s out there are many subtexts to the story, which I’ll leave for others to continue to speculate on. However, now that “the toothpaste is out of the tube”, the “lollies are out of the jar” and “the lid is off of the can of worms”, I’d like to focus the conversation on the sustainability of our industry, value banks, and hopefully offer some sage advice.

Whilst you would hope that it has, I’m not quite sure the magnitude of what has just happened has fully sunk in for a few people.

This issue isn’t just about basic levels of transparency and compliance required in running a media agency business in 2015, and the duty you owe to your clients to be transparent in your dealings with them, there’s a bigger issue of sustainability at play for the industry.

The Mediacom audit in my view is filling in the cracks on what is a broken model, and there are a number of parties who have had a role to play in it… media agencies, clients, and media owners have all contributed to this mess.

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It’s been like a train crash that everyone could see would happen, some just sat by and watched, others participated using the now infamous Lance Armstrong defence “but everyone’s doing it”.

Well, no they’re not! Nor should they.

There were those amongst us that made a polarising stand, some of you may recall I raised this very issue almost three years ago in an AdNews article… my views haven’t changed. It wasn’t sustainable then, and it isn’t sustainable now.

At the time I was prompted to write the article because I almost lost a very important pitch due to another agency’s costs being so low. The client said whilst we were clearly the better agency in terms of our services and competitive on rate, the difference in costs was a “chasm”.

Given we had shaved our profit margins and our overheads to be super competitive for the pitch, the only way there could have been a “chasm” was if the other agency was making money in other ways to enable them to run that business at that price. Thankfully, the client made a decision that was good for us, good for them and also good for the industry.

I asked people “to decide what business they’re in. Are they champions for smart thinking, creating an industry to be proud of and getting paid fairly for ideas and services, or are they cynics in the media money laundering business sucking the lifeblood out of the industry?” Strong words or perhaps prophetic.

The compliance, post reporting, etc is just the tip of the iceberg. Now it’s gone too far, it can’t be swept under the carpet and those agencies operating in this manner will need to either change their business models fast (if they haven’t already) at great expense, risk extinction or hope that they can cosy up to clients who don’t really care whether they are transparent or not, as long as they are the cheapest.

One of the most worrying areas is still the value bank, which now officially exists according to the audit. Are value banks really that valuable or are they a House of Cards waiting to further bring the industry down?

The concept of a value bank is geared around volume deals with media owners in exchange for market share of that volume, done at a group or agency level. The issue then surrounds how that value is then administered and distributed to what clients? In addition, in the absence of any strategy (as the deals are usually done up front) how valuable is a bunch of free or heavily discounted media inventory that potentially forces channel choice into areas that suit the agency more than the client?

Those clients that think they are getting huge value by being part of the buying group might be surprised to know that the so called value banks are also being used in new business. Rather than having realistic conversations with clients about the costs of servicing their business with quality people to deliver a quality product, service fees are still being reduced to unsustainable levels accompanied by promises of value to secure business and get volume in the door.

So existing clients (and particularly the smaller clients) are funding agency wins on new bigger clients. But when the music stops, the agency cannot keep them all happy. Not only that, but senior members of the agency that put these deals in place then leave more junior staff to implement them, putting all kinds of pressure on team members who just shouldn’t have that kind of pressure placed on them, whilst working long hours in understaffed teams.

Most of those client/agency marriages later end in tears and that client either moves on to the next dysfunctional relationship or renegotiates their arrangement some years later when they realise that it wasn’t all it was cracked up to be.

Meanwhile, whilst not innocent bystanders, the media owners in a desperate dash for all available cash are either bullied into or willingly provide extra commissions or rates well below market so that the agency can get to their promises. Then in many cases they get forced to do the agency’s thinking for them, often with an ordinary brief and lack of direction.

In speaking with media owners, most of them are scared to buck the trend for fear of being punished financially.Does this sound sustainable or desirable to anyone?

So what could a more transparent media world look like?

Imagine a world where:

  • Media owners said no to secret commissions and value banks, sticking to the standard 10% commission. Instead they only negotiated extra value and discounts (beyond the base group volume discounts) at a client by client level, so that it was clear that those clients were getting the value allocated to them.
  • Or they moved away from commissions altogether, leaving agencies to simply agree a fair fee for service between themselves and a client.
  • Agencies ceased to devalue their services in pitch situations, instead winning pitches on ideas that had a significant impact on a client’s business, versus getting them hooked on cheaper fees and the value bank drug.
  • Where agency leaders instead of trying to deflect responsibility, actually took responsibility for their actions and the actions of their agency rather than blaming their failings on their junior staff.
  • Clients were prepared to pay more for quality media agency services provided those services are delivered transparently.
  • Client procurement departments were rewarded and bonused on finding the best agency fit, the tenure of a media agency supplier relationship, avoiding costly pitches and not unduly wasting internal and external resources, rather than the insignificant amount of money they currently save each time they screw an agency down during a pitch process.

Like any service industry, you get what you pay for (a point Mumbrella’s Alex Hayes made yesterday). If cheap is your biggest motivator then you will most likely get an ordinary product. If you don’t value your product or service then don’t expect others to.

There are plenty of legitimate and transparent ways for agencies to make a living that are sustainable and that can add significant value to a client’s business. Now is the time to change, before it’s too late.

Otherwise, if the recent report in The Australian is correct, the self-regulation we enjoy as an industry may be taken away from us if the ACCC gets involved, which I suspect is where it will end up.

Perhaps that would be a good thing to finally clean up the industry.

Simon Rutherford is CEO at communications strategy agency Slingshot

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