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How much transparency should clients expect?

June 22, 2017

 

The whole issue around client/agency transparency seems a little opaque.

 

There appears to be an almost blanket expectation of total disclosure by marketing services suppliers to their clients, and that this should be considered normal, reasonable and fair. But as is the case in all good debates, we should first define our terms. What is transparency?

 

The common expectation among advertisers is that transparency means the open disclosure by the agency of pretty detailed information about how they charge for what, be it their own fees or third-party costs. The limits of this definition are determined only by:

  • the agency’s willingness to disclose per se

  • their obligations to their company and employees under the data protection act

  • Sarbanes Oxley compliance

 

…or the bloody-minded determination of the client’s procurement department – whichever is the prevailing force. However, such an arbitrarily variable definition serves little purpose to us.

 

So what should transparency mean and to what should it be applied?

 

In the first instance, I think there is an important distinction to be made between ‘transparency’ and ‘disclosure’. I believe transparency should be the openness of one party’s intention, their objective in forming the relationship in the first place, what the obligations are of the seller to the buyer and vice versa, what the scope of the relationship is, what the scope of work is, whether there are any conflicts of interest, and about which aspects of the financial relationship there should be degrees of disclosure. Which leads us to the second point:

 

What information should a marketing agency disclose?

 

For example, on the one hand it is completely understandable that a client would expect to pay for their media no more than their agency paid the media owners on their client’s behalf (assuming their agency is being separately and fairly remunerated for their planning and buying services). In fact, assuming any agency is being fairly remunerated for their own efforts, and assuming third-party costs are being repaid by their clients within reasonable timescales, then why wouldn’t third party costs just be passed through with complete disclosure?

 

Part of the problem is that media agencies have evolved into media brokers that dominate the market, and sometimes their “normal” fees have, over time, evolved into an abnormally low rate because many such agencies also benefitted from rebates from media owners. Anomalies, such as the7stars, provide total disclosure of their media costs because a) they buy media client-by-client don’t bulk buy media based on annual forecasts (and this doesn’t seem to affect their buying performance) and b) because without any hidden income streams they have to charge more for their services – which some advertisers find unpalatable.

 

The media transparency ‘scandals’ are not that different from the evolution creative agencies’ revenue streams went through. Once upon a time there were rebates and revenues to agencies from production houses, printers, post production companies, studios, artwork studios etc. Then, slowly but surely, one rock after another was overturned by procurement. But the result of that transparency of revenue is that agencies are now far less profitable than they used to be. This, in turn, has had longer-term consequences for agencies’ ability to invest, support their employer brands, and get the talent upon which they depend. Their financial decline has also diminished their stability in the event of a significant client loss. That is by no means to suggest that advertisers should just pay what is asked of them, but it is to propose that there is a balance.

 

By stemming these revenue generators to creative agencies, some clients became a lower priority – much like a restaurant customer who tips badly won’t get the best table and service, and the restaurant makes less money – just on a much larger scale. While the conventions of eating out are clear, however, these agency revenue streams were mostly covert.

 

But what is the objective of disclosure by any definition? It is not in and of itself a benefit. Surely, the only benefit of it is in establishing trust? So, if instead we first approached the objective of trust, aside from transparency and disclosure, what builds trust between a client and an agency?

 

The first thing that builds trust is to ensure that whatever endeavour two or more parties are undertaking together is in their mutual interest. If one party were to benefit and the other were to be harmed by their endeavour, trust would be vanishingly small. So, in the context of this question, what signals are clients giving their agencies that they have a vested interest in their general wellbeing?

 

The answer according to most of the agency circuit is “very little”. More and more demands for disclosure, tougher negotiations and greater demands for savings seems to suggest that many clients have little concern over the financial wellbeing of their agencies. Kingston Smith reported agency profits to be at their lowest levels ever. And this is not least because many of those negotiating for the client are personally incentivised to reduce fees or “save” money and have little or no accountability for the consequences.

 

A former colleague of mine, an art director, once worked on P&G many moons ago. He asked a client one day, casually, probably after they’d both had a drink or two too many:

 

“Why don’t you just shaft us? You know, you could really do us over if you wanted to, you’re such a big client of the agency.”

 

The client replied:

 

“Because we want you to like us, and to like working for us. We want to be important to your agency.”

 

Transparency in the form of maximum disclosure, is a feature, not a benefit for many of the cost centres where it is being demanded. And, not only is it not a benefit, but it could even be harming the value the client wishes to elicit from its agency.

 

Ask yourself this, if you were running any service business, what would make you assign your best people to less profitable accounts? Why would you give your best table to a restaurant customer that doesn’t tip? But with most clients putting their agencies under the cosh it creates the opportunity for some to improve their agency’s value just by taking a greater interest in their agency’s business success. I’d wager that if we had complete disclosure of how well the clients with the most effective campaigns pay their agencies, they’d be good tippers.

 

David Meikle

Author and Founder – How to Buy a Gorilla.

www.howtobuyagorilla.com

www.htbag.co.uk

 

 

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