Managing Marketing: good agency contracts and good contractual practice

Managing Marketing is a podcast hosted by TrinityP3 Founder and Global CEO, Darren Woolley. Each podcast is a conversation with a thought-leader, professional or practitioner of marketing and communications on the issues, insights and opportunities in the marketing management category. Ideal for marketers, advertisers, media and commercial communications professionals.

Douglas Wood, Partner at Reed Smith LLC explores with Darren the world of the client / agency contract and particularly what is best practice, how the internet is impacting on intellectual property rights, contracting with holding companies and the challenges of trying to develop a global or regional master servant agreement that is actually enforceable across multiple jurisdictions.

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You can listen to the podcast here:

Transcription:

Darren:

Welcome to Managing Marketing and we’re still in the U.S. at the ANA Advertising Financial Management Conference.  But this time I have a great opportunity of talking with Douglas Wood who is a partner at Reed Smith LLP, welcome Doug!

Douglas:

Thanks a lot, lovely to be here.

Darren:

I’ve been coming to the conference for eight years and one of the things I’ve always looked forward to is your presentations over the years, because there’s a lot of talk around the legal aspects of advertising and marketing and the complexity that’s come into that.

This year, there seems to be a particular focus on contracts, especially now that ISBA have launched their own contract in the U.S. for media.  But I’m wondering, just to go back to some basics, what makes a good contract?  What should people be trying to achieve or look for in a contract to make it a great contract?

The supersized contract

Douglas:

In my view it’s to not look under every single rock when you’re drafting because that’s what has resulted in today’s contract of 60/70 pages long. They have all sorts of things that really have nothing to do with the relationship directly.

They take you away from what the focus ought to be. You know, what is going to be delivered? What is it going to cost? What are the accounting issues going to be? What are the audit issues going to be?

There’s maybe a dozen issues that are important in any kind of a contract. If people would focus more on those and not get so focused on the boiler plate and so much of the stuff that is never going to be looked at again, it would be a much simpler process.

Instead, they get bogged down in the irrelevancies and then when they do focus on something that’s really important like the audit right or whatever it is, it’s just a sense of fatigue, a sense of distrust, a sense of, “This is getting too complicated”, so we end up having a lot more tension in contract negotiations than we need to.

When I started in this business forty years ago, an agency/client agreement was three pages long. It was a letter. It said, “Hey, you’re my agency. You’re going to do my creative and I’m going to pay you this and then let’s have a nice life”.

Today, you can’t find one that’s less than forty or fifty pages long and quite often they’re never signed because they are negotiated for years and years. I’m literally right now working with a large advertiser on the third term of their agency/client agreement and none of them have ever been signed.

Darren:

Right.

Douglas:

They’ve been negotiating it now for almost seven years.

Darren:

That’s unbelievable. The worst thing is, they get signed and they get filed and nobody bothers to even refer to what was agreed in the first place until it all goes horribly wrong.

Douglas:

Well that’s the expression, “You don’t need the contract unless something goes wrong”.

That is about the most idiotic statement you can hear. The contract is your map. It’s basically to say, “I’m going to leave Florida today and I’m not going to look at a map and I’m going to get to New York and if I don’t get to New York then I’ll look at the map”.

You have to work with it during the course of the relationship otherwise what’s the point?

Darren:

Why do it in the first place?

Douglas:

Why do it in the first place?

Darren:

Yeah.

Douglas:

It is an expression you hear from people with, “Don’t worry about it, just put it in the drawer and don’t worry about it”, that’s the one that I want to really worry about because that’s the relationship that’s not going to work.

Darren:

We had a situation with a client that noticed that the agency fee, production fees had dropped…

Douglas:

That’s a switch!

Darren:

They called us in and said, “What should we do?”. And I said, “Just sit tight and see if it increases again”. And sure enough, three months later, the fee went back up to what it was and we said, “Right, now we’ll get involved”, so we went back to what it was, not what it should be.

We went in and we looked at the contract and we said, “Hang on, the last three months you’ve actually been billing to the contract. What happens outside of that?”And what had happened is the Production Manager of the agency that had been there for years, had gone on long service leave, and the new person had actually bothered to get the contract, referred to it so that they knew how to bill the client and the fees had dropped because the contract actually didn’t allow for certain things to be billed.

When they left and the old Production Manager came back, the fee went back up. So then we had a whole thing, we got some auditors in to work out what needed to be rebated. But that’s where contracts are essential in working out what’s going to be charged.

Douglas:

Sure, yeah.

Darren:

It’s interesting because the world has become a lot more complex. Is that why contracts have become so much more complex?

Douglas:

I think so. It does require some serious focus in terms of drafting contracts because the outlets for content are becoming so varied today and there are such different kinds of platforms.

You have the traditional platforms to all sorts of digital platforms to mobile platforms to you know, different kinds of site issues that they’re contributing content through native advertising, at events and the idea of sponsorship and exposure of your brand in the marketplace has so many new outlets today so it’s extremely complex.

A lot of them are very opaque in the way they operate. No one really quite understands today exactly how programmatic works or exactly what a trading desk is doing or some of the other things that are out there.

The new folks really don’t have the time to understand it completely because they’ve got lots of other things they’re doing so they just trust people.

There is a lot of trust that is now turning into distrust unfortunately because some things have been revealed in the past few months that indicate that proper accounting may not have been done on some of the costs involved with this, in the relationship between the agent and the advertiser.

So we’re seeing that complexity was necessary in contracts to address this and now I think the next trend will be to go back to simplicity in this instance by creating a much more robust requirement of transparency so that rather than trying to understand what you’re doing behind the closed door, you’re going to open up the door and I’m going to look and see what it is you’re doing.

Opening the Kimono

Darren:

What’s that saying, open the kimono.

Douglas:

Open the kimono, exactly!

Darren:

It could be a very ugly view.

Douglas:

Well if you think about this, it’s really deja vu all over again. If you remember back when the Saatchi’s first came to the United States and they bought Ted Bates and they bought Compton and they bought some other agencies and everybody woke up to the amount of money that agencies were making.

It was a 15% commission deal, they never got a separate invoice, the media basically paid the agency so it was fine until all of a sudden they were making enormous amounts of money and Bob Jacobi allegedly left Ted Bates back 30 years ago or more, with a hundred million dollars. That’s what was said in the press.

So the advertising community went crazy and that was the beginning of the end of the commission structure, and therefore then the beginning of agencies trying to find other ways to make their money.

What was a very simple thing that could exist on three pages evolved over time into 50/60 page contracts because of all of the pressures on the agencies to make money and then the pressures on the advertisers to reduce cost and so it’s become a very, very complex system.

Darren:

A lot of client businesses and categories have become incredibly complex because I know we looked at a bank contract and it was a hundred pages with the agency in its own right, but buried in there was the privacy provision which said, “Click on this link here”, and we went to that link and there was another hundred pages on privacy.

Douglas:

Regulatory compliance.

Darren:

Yeah, regulatory compliance. The requirements of sustainability compliance, diversity compliance and these were another fifty to a hundred pages in their own right which just meant that if you printed it all out, a small forest in Brazil would disappear.

Just sign it

Douglas:

Well you know, there’s an expression in law, “You honour in its breach”, and big highly regulated industries like financial institutions and pharmaceutical companies are notorious for this.

They have all these federal regulations put upon them and they don’t have any choice, they can’t modify them. They are what the law requires them to do so they put in a footnote that you’ve got to comply with this and then put in a link, whatever it is, and nobody really ever reads them.

If you’re a supplier, there’s no way in many times that you could possibly comply with them. You don’t have the resources to invest into full compliance with some of these sustainability issues, some of these diversity issues.

Not that you’re not a good environmentalist, that you’re not a good employer, but these things are incredibly complex and smaller businesses, particularly for independent agencies, they don’t have the wherewithal to even begin to think about complying with it.

So the advice a lawyer will give is, you’ve just got to honour in its breach, “Sign the deal”. And they know you’re breaching but no one’s going to do anything about it because nobody can really comply with this.

It’s an anomaly in the business that there are many, many contracts that are signed like that that no one ever even reads. That’s why they have a link.

Darren:

Yeah, you almost don’t have to read it.

Douglas:

Don’t go to the links, stay away from the links.

Darren:

It’s a bit like those website terms and conditions that say, “By accepting this”, you know?

Douglas:

I can laugh because I do it too! You go to the website and say, “Accept” and a second thing comes up and says, “Are you sure you accept?” and you say, “Yeah, sure”, and you never read them. They could be saying, “You’re giving away your first born and now I have a lien on your house”.

For sure, “I accept”.

Darren:

No worries, just try claiming on it.

Douglas:

Just give me my content. I want my content. I will agree to anything for my content.

Darren:

I’m always worried though, when they give you the option to have it emailed to you because then I go, “Okay, there’s going to be pages and pages and pages, I don’t want the email option”.

Then there’s the additional complexity of holding companies and them owning multiple companies within ownership of the holding company and clients are contracting one part but actually getting services from multiple parts and I’ve often seen and I mentioned it earlier to you before we started talking about this related bodies corporate and trying to bind everyone to that contract.

Does that actually work?

Distrust in Media Buying

Douglas:

It can. I mean, you’re going to see a lot more pressure to do that, particularly in the media buying side of things. There’s a very high level of distrust in media buying right now between the advertising media buying companies.

What you have is what’s known as oligopoly. You have a relatively small number of five or six holding companies that control about 80% of the global media buying. So there’s not a lot of alternatives for the advertisers, the global advertisers to go to and what the media buying companies do which is perfectly legal, is they kind of act the same.

Conscious parallelisms is the technical term, and it means, just like gas prices, it’s not that the two gas stations across the street from each other both agreed on the price of gas, it’s just that they are waiting for one to do it and then the other one will do it too.

Darren:

It’s not cartel behaviour.

Douglas:

It’s just they all want to do the same thing. So there’s not a lot of options that the advertisers have among these companies but at the same time, based upon studies that have been done recently and efforts that are being made at the advertisers’ side, I think you’re going to see a huge change in that relationship.

There’s going to have to be unprecedented disclosure, unprecedented transparency because the failure, alleged failure I should say, of the media buying holding companies to pass on the credits, the incentives and kickbacks, all the stuff that they get, it’s far more probative than anybody thought it was.

It involves many, many billions of dollars that may have been perfectly handled, but no one really knows.

So there’s a sort of two-step process here. At the first wave of this transformation there will be a lot of questions as to, “Well what did you do Mr Advertiser? What did you do Mr Holding Company, Media Buying Agency?”. Once they get those answers then the determination will be made whether those answers indicate proper allocation of funds.

If the second question is answered in the negative, there’s going to be a seismic moment in this business. There’s going to be a lot of people that are going to have to account for an awful lot of money.

There’ll be regulators involved, there will be litigators involved, there will be all sorts of people involved and the question will be, if you can flash forward a year from now, either this will be fine because people will answer the questions correctly and honestly and the answers will be okay, or this industry will be dramatically different in a year from now than it is today.

I don’t know which way it’s going to go.

Darren:

It depends what’s under that kimono.

Douglas:

Yeah, exactly.  The studies that are about to come out and will be out by the time this podcast broadcasts, I think are going to, from every indication I have, show that there’s a lot of things that are not good under that kimono.

It doesn’t mean that they’re illegal or they’re improper, but they’re going to raise an awful lot of questions that are going to need to be answered.

Darren:

So there’s a thing about primates and that is, if you get two monkeys and they do a piece of work and you reward one with two bananas and the other doesn’t get any, they get sad first of all and dejected because they’ve missed out and then they get angry.

And I think we’re seeing the same thing here.

People talk about transparency but what they really want to be assured of is that they’re not missing out on what someone else is getting or they’re being overcharged for what someone else is getting.

“I want to know everything that’s going on in your structure”

Douglas:

Well yeah, as you’ve heard me speak about before, it really comes down to a very simple, basic principle in law that goes back to when they used peppercorns instead of money and they were exchanging stuff.

If you are an agent for a disclosed principle, in other words, if you are entrusted with somebody else’s money to do a transaction for them on their behalf, you’re not entitled to anything out of that transaction, except what the other party’s agreed to pay.

So if in theory I’m a media buying company and I have a contract with an advertiser and my deal is that I’m getting a 5% commission and I’m now going to give you a hundred million dollars to go and do my media buy, you are not entitled to one cent above that 5% commission unless you have it in writing from me that you are entitled to keep it.

Now, okay, let’s assume that you’re looking for ways to manipulate that system and you’re the media buying company. You find ways of having those incentives returned to you by the media buying, by the media company, in ways that are not traceable.

In ways that, if I wanted to do an audit of you, I would not be able to find that the rebate, the incentive, the free time, the whatever it was, went somewhere else.

That suspicion that, that anger that exists in your analogy to the primates, that anger is now translating into saying to the holding companies, “I want to know everything that’s going on in your structure”.

Darren:

Yep.

Douglas:

I want to know if I hire XYZ Media Company that everything that they do with my money and every benefit they get from my money is being accounted back to me, not someplace else in your system.

Now it may or may not actually be happening that way, but it’s gotten to the anger point because your analogy is perfect. It’s basically like this, your two monkeys, one is advertiser A is one is advertiser B and advertiser A who’s not getting any bananas absolutely believes that advertiser B is getting a bunch.

Darren:

And that’s his banana.

Douglas:

And he’s angry, “That’s my banana, I want my banana”. So it’s really degraded into that and that’s the reason why I think the theme was so strong here at this conference, because of the revelations that have happened in the last year.

Last year, a gentleman named John Mandel, he was basically the whistle-blower if you want to call him that. If his allegations are true he’s a bonified whistle-blower and if his allegations aren’t true and this investigation that’s going on reveals some validity to it, then we’re going to have a very, very tough year for the media buying companies.

Darren:

Because the December before that, before he came to the U.S., in Australia media com was absolutely caught with their pants down.

Douglas:

Exactly.

Darren:

With a value bank and with the misappropriation of value to particular clients.

Douglas:

What amazed me when I saw that and read that, I remember saying to somebody else, this is how naive I am, I said, “Boy, that’s going to come here immediately. The folks are going to wake up to what happened in Australia and it’s going to happen in the United States”.

Nothing, zero, zip.

Darren:

Nothing.

Douglas:

It’s like you’re so far away we don’t know what you’re doing.

Darren:

Yeah, it’s irrelevant. I learnt that very quickly.

Douglas:

We didn’t even know you were a monkey. We didn’t know how many bananas you had.

Darren:

From the first time I came to the States, I learnt very quickly not to use the examples from Australia because it was irrelevant. It’s that land downunder. It’s mysterious and exotic and totally irrelevant to the U.S.

The fact that we watch all of your television, all of your movies, we could be counted the 51st or 52nd state of America, you know, because of that.

Look, so the holding companies, one of the other issues is being publicly listed companies, they’re reporting profits on a quarterly basis and one of the interesting things for me is the number of clients that phone me up at reporting time and go, “My agency’s holding company has just reported another record profit. Am I paying too much?”

I think this whole structure, this holding company, publicly listed structure is reinforcing to clients that they’re in business to make profit.

History repeating

Douglas:

Right, but you do get to a point where, when, like Martin Sorrell gave an announcement the other day, defending his hundred million dollar a year salary package.

Now if you are the present CEO of a major multi-billion-dollar advertiser, chances are, you’re not making a fraction of that in terms of your salary and he’s your supplier so that’s what happened back in Saatchi’s case.

When the advertiser saw guys like Jacobi and Chuck Pedlar selling their agencies and making tens of millions of dollars, they said, “Wait a minute, that’s a supplier. I must be overpaying his supplier”. So it’s de ja vu all over again.

This is an industry that repeats its mistakes time and time again. That’s what keeps me in business. If they ever actually stop repeating their mistakes, I will be selling pencils on the corner.

Darren:

Me too.

Douglas:

It’s hilarious, it really is.

Darren:

Now I want to move.

Douglas:

So this is chapter whatever it is of the book.

Darren:

Of your book, and you’ve written a few of them.

Douglas:

This one will be the last one I write.

Intellectual property in the internet era

Darren:

So I want to move on to intellectual property because it’s an area that gets raised a lot and the concept of who owns the intellectual property, most contracts say it’s transferred from the creator being the agency to the advertiser on payment, on the payment of fees.

But the internet’s changed the concept or at least challenged the concept of copyright and the like, hasn’t it?

Douglas:

Very much so. The way I analogise is we used to be focused on ownership, who owns something. Now, we’re focused on who can enforce something. And there’s huge impracticalities of enforcing what you clearly own. You own these rights but it becomes near impossible to enforce them on the internet.

It’s the Wack-A-Mole Game. If I see a piece of my content on the internet that someone’s using improperly, I can send them a notice and they pull it down and then somebody else pops it up.

Congress even enabled this. Unwittingly, congress enabled it with the Digital Millennium Copyright Act in the United States where people like YouTube and Google and other folks argued that, “Listen, we can’t censor everything that comes up on our site, there’s just not enough human beings to do that so you better give us a break and we’re not liable for any infringements as long as we take it down if a legitimate copywriter asks us to do that”.

Darren:

Yeah.

Douglas:

So that seems kind of logical. How can we ask Google or Facebook to be ultra-cops? On the other hand, taking them off that liability, allows for carte blanche for people to upload stuff and then you need to find them. You can’t find them.

Darren:

They’ll pop up everywhere.

Douglas:

Well it even gets worse. If your reputation gets out there as enforcing that, the internet community, the social media community revokes against you and they make it twice as bad, they get even crazier.

So it’s really changed from a world where we would systematically determine who owns something and then secure their rights and enforce their rights to a situation where you’re not even going to argue ownership.

You’re just going to try to figure out who’s out there that can enforce the rights of whoever the intellectual property owners are to stop that infringing use. It’s so rampant today, it’s completely changed the perspective of when you can or cannot actually do anything about it.

Darren:

I see why in the U.S. where so much of the value created by the U.S. economy is intellectual property based, the movie and television industry, the music industry, the software industry. These are the big economic drivers of your economy.

Douglas:

At the same time, the first sort of federal approval of infringement, the Digital Millennium Copyright Act as I explained it earlier, the latest is the FCC, the Federal Communication Commission wants to open the box.

It says it’s on the TV so then any provider of content whether it’s Google or Hulu or whoever it is that’s got nothing to do with the box, it has to do with streaming and internet access, is allowed to have that content for free. So that they can distribute more content to consumers because it’s a good thing for consumers.

Well someone needs to say in the process, “Who’s paying for that content?”

Darren:

That’s right.

Douglas:

I have to be able to get an ROI on my content and if you’re telling me that the moment I put it on cable vision and it goes to the box, bingo, now everybody else is going to pick it up, how am I supposed to follow that?

How am I supposed to be paid for that? You’re killing the goose that laid the golden egg, it’s no different to another example which is ad blocking.

Darren:

Yep.

Douglas:

The government thinks ad blocking is a wonderful thing.

Darren:

Because it’s good for the consumer.

Douglas:

Because it’s good for the consumer, right? Well, it’s also taking many millions of dollars out of the revenue stream to the point where some publications, some publishers like the Washington Post for one, if I go up to click on their teaser to go to an article, if I have an ad blocker on my computer it comes up and says, “You can’t see the article.

If you have an ad blocker, you’ve got to turn it off”.

Darren:

But that’s the implicit deal in that I’m giving you content.

Douglas:

It’s not the implicit deal, it’s the deal you said yes to when you unwittingly said, “Okay”. So in theory, when you put an ad blocker on your computer, you are breaching your personal contracts that you all said yes to, to all those publishers when you first went on to their site.

But are they going to go sue you for breach of contract? No. But the point being that there is a very worrisome attitude at the regulatory level that content owners are second rate. That they will somehow produce content and find out a way to do it and at the same time, give everything to consumers for free.

I remember years ago, one of the studio producers after Napster came out and there was this big controversy over music, he was asked, “Well what are you going to do when the same thing happens to the film industry?” And his response was, “I cannot beat free”.

Darren:

Yeah, that’s right.

Douglas:

So that’s the problem.

Darren:

Well, living in Australia, we have an English legal system and a western political system, but in the last twenty years, we’ve been re-positioned as part of Asia, and in China copyright actually means right to copy and everything is free.

All of their movies and TV and everything is streamed into homes free as part of the Communist government wanting to entertain the masses because if they’re sitting there watching their free movies, they’re not thinking about revolution.

Douglas:

Exactly. That’s not a bad idea here.

Darren:

I think it’s called Fox News and it’s created a revolution with Donald Trump at the head of it.

Douglas:

It’s just one never-ending soap opera now, but whatever.

Darren:

If we can move onto the next issue that I’m very keen to talk about, the U.S. based companies contribute or are responsible for 80% of the advertising budget decisions around the world.

So in Asia we often see global master services agreements which are very U.S. based and will often have clauses that are not supported by legislation in a particular market and yet they get signed because of course the agency wants to have the global client’s business in every market.

How do people come to terms with the differences between the markets?

Douglas:

As simplistic as this answer may seem, they don’t.

Darren:

Right

An incredibly forgiving industry

Douglas:

The thing that amazes me about this industry having been in it quite a while, it’s incredibly forgiving to mistakes by either side. Either to make good, is it an adjustment to price, it’s something that will make people happy again.

Darren:

No one’s running off to lawyer up.

Douglas:

Yeah, by way of analogy, if you bought a dishwasher and it kept breaking, what would you do? You would bring it back.

Darren:

Yes.

Douglas:

Yet this industry breaks all the time and people say, “Well okay, let’s do it again”. What was it, Einstein’s definition of insanity?

Darren:

Insanity doing the same thing over and over again.

Douglas:

In this industry you can! I love this industry because obviously it’s supported me and my family forever.

Darren:

It’s crazy.

Douglas:

It is a crazy industry that has got real characters and it’s fun to work with but they keep doing the same thing over and over again thinking there’s going to be a different result.

If you’re in this business long enough, you realise that you don’t get very many original questions. It’s going to happen in five years, it happened twenty years ago, it happened whenever. It never ceases to amaze me.

Darren:

Look, we’ve run out of time but I really appreciate you coming along and having a chat.

Douglas:

I’m going to remember monkeys and bananas from now on and I’m going to be looking at everybody, have many bananas does he have?

Darren:

Well, you know, we aren’t that different. We’ve lost the tail but we’re still angry if we don’t get our bananas.

Douglas:

If we don’t get our bananas we’re still angry. Well thanks a lot.

Darren:

Doug Wood, thank you very much.

Douglas:

Yeah, my pleasure.

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About Darren Woolley

Darren is considered a thought leader on all aspects of marketing management. A Problem Solver, Negotiator, Founder & Global CEO of TrinityP3 - Marketing Management Consultants, founding member of the Marketing FIRST Forum and Author. He is also a Past-Chair of the Australian Marketing Institute, Ex-Medical Scientist and Ex-Creative Director. And in his spare time he sleeps. Darren's Bio Here Email: darren@trinityp3.com

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