Media Forum: Will Interpublic inspire reform?

Is the rest of the industry set to follow IPG in repaying discounts?

The Interpublic Group's senior executives are true heroes, who, chastened in no small part by financial scares at their own company, have decided not just to turn over a new leaf but to reform the whole basis of trading in the ad industry - ridding it once and for all of its mean hypocrisies and shady practices.

Either that - or they are complete plonkers. And it's not hard to find those at rival agencies who tend to the latter over the former. There's a good deal of frustration out there about IPG. Because, of course, the holding company has now decided that it is going to hand back to clients extra discounts it has earned from media owners dating back to 2000.

This begs one or two questions. Are these extra discounts enjoyed by all large media buyers? And what is the legal status of these monies - for instance, are other agencies now duty bound to hand back some cash?

These aren't new questions - and agency veterans insist they are easily answered. Such payments, they will tell you wearily, are a fundamental mechanism of media trading right across the globe - and when a big multinational client appoints a big media buying network, it does so in the knowledge that it's the agency's size (and therefore access to bigger discounts) that enable it to deliver the keenest of keen prices.

And that's all that matters - the contract an agency has with a client and whether the terms of that contract are honoured. Everything else is the agency's business.

Unfortunately, however, that line may no longer be tenable. In the wake of the Enron and WorldCom scandals a few years back, US companies (both advertisers and agencies) have become addicted to utterly transparent and holier-than-though business practices. So, should we see IPG's unilateral action as a tipping point? Is the agency-advertiser relationship about to be changed utterly?

Oliver Cleaver, the European media director of Kimberly-Clark, says most people know media agencies make money this way. He states: "Some clients get some back, others don't. The point, though, is that if you took away the source of those revenues, agencies would have to double or triple what they currently charge us or they would go out of business. We kind of don't mind the sorts of things that go on if we are getting the best people for a reasonable amount of money.

"The fundamental point here is that we don't pay media agencies enough - and sometimes in fact they are not really being paid at all. In an ideal world we would pay them in the way that financial consultants are paid - not like plumbers."

That won't happen overnight though - and it would be a brave advertiser who moved first on this. Martin Sambrook, a global account director at Media Audits, says that, in general, clients believe they are entitled to a share in volume discounts.

He explains: "Clients expect that all rebates due from their own volume will be fully rebated and, in addition, that they share in any additional rebate at least pro rata to their contribution to the agency volume. This latter part is the grey area and clients that push the hardest are more likely to improve their rebate. In an age of three to four global buying groups, the issue will continue to be the most important area of irritation between agency and client."

And Ian Twinn, the director of public affairs at ISBA, is also reluctant to jump to conclusions and he says that ISBA tends to refrain from being over-prescriptive. He adds: "I don't think that this (extra discount) issue will hold any surprises for the majority of television advertisers - but advertisers as a group support the principle of transparency and I'm sure it is something we will continue to discuss."

But Simon Mathews, a partner at Rise Communications, suspects the industry will now be forced to undertake a radical review of its business procedures.

He concludes: "The truth is that most of the practices we are talking about are routine and legal and from a media company point of view are a considerable net contributor to profit levels. If you turned them off overnight without giving something in return, the implications for media businesses in the UK would be frightening. There are guidelines about margin levels at agencies and if clients are serious about endorsing those guidelines then there have to be new conversations about methods and levels of remuneration."

NO - Oliver Cleaver, European media director, Kimberly-Clark

"My instinct is that the business will continue the way it has. Media agencies will compete aggressively with each other in public, which will put pressure on them to increase their revenues in private. I'd love the business to be more transparent but it's a question of who is prepared to break ranks first."

MAYBE - Martin Sambrook, global account director, Media Audits

"From the advertiser point of view I am sure a lot of eyebrows were raised at the declaration coming out of IPG ... But let's get some perspective on this. Most advertisers are fully aware of the rebate labyrinth, which means they have a partial awareness of what they might get out of it."

MAYBE - Ian Twinn, director of public affairs, ISBA

"I think the business community in general is embracing more transparency in the context of Sarbanes-Oxley. But I don't think that anyone is in a position to impose one form of structure or another on advertisers and agencies. We like in a sophisticated world and you can't make simplistic judgements."

YES - Simon Mathews, partner, Rise Communications

"This will stimulate a debate about what practices are entirely reasonable and those that are not. It will also focus everyone to be realistic about remuneration levels. I think there's now a mutual responsibility on both sides of the industry to resolve these issues."

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