One industry. Two very different business models

Opinion

Planning will always be more powerful if brilliant people can play with the full kit, rather than some pre-vetted bits that benefit the agency commercially, writes Chris Herbert-Lo.

For an industry fascinated by the K-shaped economy, we’ve overlooked the fact that the world we work in has become K-shaped too.

Advertisers may not be aware of it, but when looking for an agency to work with, they’re selecting from very different business approaches:

One way to buy media

It’s Monday morning. An advertiser has a media budget and has briefed its agency.

A strategist defines the approach most likely to achieve the client’s objectives and the role media needs to play. A planner translates that into a media plan, determining where, when and how to reach the right audiences most effectively.

Because the agency is paid by the advertiser for advice and execution, and rebates are returned to the client, and the conversation stays focused on the outcome for the advertiser.  

Another way to buy media

Now imagine the same Monday morning, same brief, same budget, but a different agency model. 

This time the planning teams involved have some other considerations to take into account. It might be hidden kickbacks or rebates on the verge of being realised, specific areas of a media plan where higher margins are hidden, or principal media the agency has effectively already purchased and needs to sell to an advertiser at a profit. 

Questions around the right use of budget for the advertiser are joined by other considerations; how much can the agency get from the budget?

Both agencies provide what looks like a similar service to the client, producing a media plan and, once approved, buying media for the advertiser.

In both cases, the advertiser may feel they have a good hold on how the agency operates and that there’s full transparency in their relationship. Both approaches allow a media agency to turn a profit from the services it offers.

But only the second approach is currently facing a court case against a former employee who is claiming unfair dismissal after raising concerns about improper kickbacks. 

And only the second approach allegedly led to a client audit finding $350m in rebates retained by the agency, versus $110m passed back to the client.

As a mere comms strategist, it’s hard to comprehend how WPP’s commercial practices might deliver such a discrepancy in rebate numbers, though I’d guess Sony’s auditors might have said the same thing given the claim that funds were “channelled through 47 intermediaries with no independent business activity”.  

The problem for planners

In terms of what a K-shaped industry means for strategy and planning, both agency models will have teams of brilliant, driven, creative, and analytical people working to deliver the best comms approach possible.

It’s just that, as I said over two years ago, planning will always be more powerful if those people can play with the full kit rather than some pre-vetted bits that are commercially beneficial to the agency. 

Worse still is the prospect that commercials could influence planning in ways that favour an agency over its clients. 

When incentives become algorithms

Looking ahead, automation could push agency models even further apart.

In a world where AI increasingly aids and makes decisions across the entire process of planning, buying, optimisation and measurement, the notion of 47 intermediaries may one day look like a walk in the park for auditors trying to unpick where the money is going. 

How much of a problem this is for advertisers will depend on what any AI tool is incentivised against, which brings us back to the commercial model of the business building and operating the product.

For a commercial approach that makes a large proportion of its money on the ‘sales’ of media (Omnicom now refers to itself as the world’s biggest marketing and sales company), the worry an advertiser might have is that AI is incentivised to sell the media an agency has in stock at the greatest margin possible.

But when an agency’s income depends on the quality of advice and the growth it delivers for its clients, its AI products should also be focused on enabling this. 

The danger to the industry is that two entirely different business models are viewed as offering the same product. Advertisers need much more clarity to understand whether those recommending the media are being paid to advise them or to sell to them.

Principal-based media: A modern Hobson’s choice for planners

Chris Herbert-Lo is head of strategy at the7stars. Read his new monthly column for The Media Leader on the first Tuesday of each month.