Close-Up: Live Issue - Do agencies need to be transparent?

As Interpublic pays Tesco £3m, James Hamilton asks if agencies should be more open with clients.

For a company that makes a profit of £74 every second, Tesco's rebate of £3 million from Interpublic represents little more than a busy Saturday morning's trading at the UK's biggest supermarket. But for the advertising industry, the implication that the client has effectively been overcharged by its agencies is nothing short of seismic.

Bulk discounts from media owners to their agencies are nothing new. It's the news that at least part of the £3 million rebate will be paid by Lowe (which, unquestionably, has done nothing illegal, nor anything unique) that is causing creative agencies to brace themselves for a tide of similar cases.

No matter that no crime has been committed, no culpability accepted nor rules broken. The message this repayment sends out to clients is stark: to all intents and purposes, it says that media and advertising agencies are excessively marking up the services performed by their suppliers and failing to pass on the bulk discounts that they receive.

"Some creative agencies are ripping off their clients, in some cases hugely," a source at a production agency says. "Sometimes it's deliberate ripping off. Other times, it's because they don't buy well, and they don't have any incentive to, because they're marking up what they spend."

"Clients nowadays are much more knowing and realistic about mark-up and bulk discounts," Tim Delaney, the chairman of Leagas Delaney, counters. "Some know it's part and parcel of remuneration, others take a very clinical view and want everything spelled out in the contract."

But are agencies doing anything wrong in charging a mark-up on the services their suppliers perform for them, or receiving discounts for bulk bookings?

If anyone should understand the concept of volume discount, it's Tesco.

And while it would argue it passes these savings back to customers in the form of competitive prices, profits of £74 a second say it could do more. The question is, to whom do these bulk discounts belong, and do clients pay their agencies enough to demand any rebates be returned to them?

"Agencies should earn their money in the most transparent way: through fees," Delaney asserts. "What we all want is a clean, well-remunerated system where agencies get paid properly for the work they do."

Nonetheless, agencies need to act quickly if they are to turn round their business model and start surviving on fees alone. Increasingly, clients are taking production into their own hands, forging their own relationships with production services companies such as Tag, Seven Worldwide and Vertis PRS, and cutting the advertising agency out of the equation.

To paraphrase David Ogilvy, advertisers need to ensure their agencies make a reasonable profit on their work. While a growing number of agencies make their profit through fees, there remains a significant number whose business models aren't geared to operate this way and for whom the mark-up on production, particularly reprographics, represents the difference between profitability and a loss-making venture. It's a situation many clients aren't prepared to weather much longer. As one procurement officer says: "Agencies had better grasp the nettle on this one, and grasp it bloody quickly."

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CLIENT - Jim Hytner, marketing director, Barclays

"Clients need to understand that those kick-back payments exist and either factor them in upfront or rule them out altogether. Agencies have a responsibility to be transparent about this. It's a very old-fashioned method of driving revenue and financing, and it could only happen in the media industry.

"It shouldn't happen, and in my experience with the agencies I've dealt with, it hasn't happened. Barclays has upfront transparency and a rigid system of governance and control that would frighten the living daylights out of any agencies wishing to play that game."

SUPPLIER - Steve Davis, chief executive, Advertising Producers' Association

"Post-production companies are willing to give bulk discounts. Obviously, they are not privy to agencies' arrangements with their clients, which, presumably, define whether bulk discounts belong to the client or are part of the agency's remuneration.

"I think the IPG case suggests the question has not always been clear in the agency/client contract. It is a wake-up call to advertisers and agencies to ensure they clearly agree where the benefit of bulk discount accrues.

"The issue needs to be addressed within the context of agency revenues being chipped away - fair, transparent rewards for all creative services is where we need to get to."

AGENCY - Robert Senior, managing partner, Fallon

"Clients should want their agencies to make a margin and it should be clear in the contract where that margin is to be made. It is an absolute false economy for clients to negotiate down to the point where the agency is struggling to make a margin.

"A motivated agency can hire good people and produce better work which, in turn, will produce a better result for the client.

"The concern is that the current climate is likely to breed a culture of guilty until proven innocent and a general distrust of advertising - that puts agencies on the back foot unfairly."

TRADE BODY - Hamish Pringle, director-general, IPA

"The simple answer is no, agencies do not need to be 'transparent': for example, confidentiality must be maintained on an individual's salary. However, agencies and clients do need to achieve clarity in their contractual relationships.

"Clients and agencies need to work together to reduce unnecessary costs - for example, in the pitching, briefing and production processes - and clients should focus on agency inputs, outputs and outcomes.

"There should also be clarity in remuneration, with agencies earning at least a 15 per cent margin on their income, whether it be comprised of fees,commissions, payment by results or other agreed sources."