Managing Marketing: The importance of media agency contracts

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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.

David Angell is Head of Media and General Manager at TrinityP3 and has just started his own podcast called Media Angle where he interviews media influencers on all the media angles. But here he talks with Darren about the role and importance of robust, relevant and rigorous media contracts to ensure transparency, value delivery and performance.

David-Angell-Podcast

You can listen to the podcast here:

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Transcription:

Darren:

Welcome to Managing Marketing and today we’ve got David Angell, general manager of Australia New Zealand and head of media at TrinityP3 in the office in Sydney. Welcome David.

David:

Thank you Darren, nice to be here as always.

Darren:

What do they say, welcome to the emerald city? For those Melbourne folk who make the trek north.

David:

Yes, I don’t do it enough quite frankly, but it is good to be here for sure.

Darren:

One of the issues that has been talked about a lot in media is contracts, you know those huge documents, 100s of pages long with very small type that usually get slid across the desk from the client to the agency to read through and sign. Do you remember contracts, David?

David:

Yes, I do remember contracts and it’s funny you should describe them like that because in my experience many contracts in this particular industry are actually pushed the opposite way from the agency to the client and they contain very few pages and very few clauses in actual fact that make them truly effective or enforceable.

It’s one of the things that as the transparency debate rumbles on, this industry has really struggled with because a lot of things do begin at the contract.

Darren:

That’s an interesting perspective because I have mainly seen the big heavy ones and maybe that’s because I’m dealing with banks and telcos. They seem to have clauses after clauses.

I remember one particular bank; it was 146 pages long and there was a section called the SLA—service level agreement—just one small part of this and I started reading through it and it said things like the agency will return phone calls within two hours, and the KPI was 99.9%.

And I pointed that out to the procurement person; who is measuring and timing how quickly the agency calls and what happens if the client calls the agency at 10 o’clock at night? Do they have to call before midnight if that’s the particular case?

David:

I think we’re talking about balance here. I agree with you. In some sectors where regulation and procurement is strong; banking and finance (and I’ve had my own experience with banking and finance clients)—absolutely.

In other sectors, and I’ll give you a personal example, a particular FMCG marketer who I’ve worked with for a number of years—no names.

Darren:

No names—because we’ve got a whole filing cabinet of non-disclosure and confidentiality agreements.

David:

Absolutely right, we’re not naming names here and this was in my time at agency land, the contract was 5 or 6 years out of date, it had the wrong names and terms in it, it had been gathering dust in a drawer.

But I think the interesting thing is whether the contract is 150 pages long or 3 pages long, if it fundamentally isn’t enforceable or doesn’t lend itself to a mutually beneficial agreement between the parties, it’s not an appropriate agreement. So, the 99% of calls is completely inappropriate—how would you ever measure that?

Darren:

I think the point is that contracts get a very bad rap as far as advertising, marketing and media don’t they? It’s almost because of either the huge ridiculous contract or the two-pager—one of the Hollywood moguls said that a verbal contract isn’t worth the paper it’s written on.

Whether it’s one or the other, people (and I mean marketers as well as agencies) often see contracts simply as another hurdle that has to be overcome on their way to doing business together rather than a much broader opportunity don’t they? Would you think that’s fair?

David:

I absolutely agree. I think certainly in any kind of search and selection process or winning a piece of business a lot of agencies are appointed without a contract having been signed.

And then the contract goes off to legal and goes through various iterations between the organisation’s and agency’s legal teams whilst the marketing teams and the agency’s service teams just get on and don’t pay much attention to the contract.

And that’s obviously quite flawed.

I think the contract is an incredibly important document and if the contract is correctly put together it offers protection, opportunity, cost rationale and everything else that enables an agency to deliver best value for a client.

Darren:

I think the other thing you hear a lot of lawyers say is it’s important to have a good contract especially when something goes wrong, which to me is quite a negative view. In fact, contracts can be a much more valuable document if they actually define expectations on both sides.

Rather than just be here’s what you have to do; if they’re more like here’s what we expect from each other and then they can become documents that define the relationship.

David:

I think contracts can absolutely be constructive. They don’t have to be destructive or negative in tone.

Protection is just one part of a contractual agreement and if the performance measures are right and correctly measured and are designed in such a way that the output is essentially value based as opposed to anything else then a contract can be a really useful document, a really useful guide for an agency/client relationship.

Darren:

So, getting the right contract in place is clearly something that’s important. But equally important would be keeping it up to date wouldn’t it?

David:

When clients ask me about reviewing the contract terms; does this mean should we go to pitch every year? No, not at all. The whole idea is that you regularly review contract terms so that a relationship stays fresh, commensurate and appropriate and has the right things attached to it because agency/client relationships are constantly evolving.

It’s the nature of the beast.

Darren:

What you just said is exactly the mentality that people have; if we’re going to review the contract do we have to go to pitch? It’s almost like contracts are something you do as part of the pitch and then forget about it.

David:

It’s an absolute cornerstone of an agreement; we all know it as business people, right? And as personal individuals you wouldn’t enter into an agreement without having a contract in place. But the contract has to be up to date.

I think sometimes agencies won’t go there because they worry if they bring up contract renewal it will lead to a pitch, which fundamentally works against them. And it works against that relationship. It’s very healthy to look at contractual terms and build something into a contract that allows that review to happen.

Darren:

So, if you have a regular review process that’s not related to a pitch it actually just becomes part of doing business together.

David:

Yeah, absolutely. And things get tailored. I think organisations are often worried that it will lead inevitably towards cost increase but that’s just one lever.

If the scope has changed, which it almost certainly will, from year to year in one form or another then there may need to be things adjusted. But that’s a graphic equaliser of adjustments. It’s not either the cost goes up or down.

Darren:

Tear up the contract and let’s start again—it’s not that at all.

David:

Correct. People might have left positions, the FTE structure might need to change, there might be new non-retained services that have been used and may need to come into a retainer.

The amount of campaigns might have changed, the number of outputs might have changed, and it just doesn’t make much sense to keep that static if so much change is happening because it’s not really sustainable.

Darren:

And the change you’re talking about there seems to be the sort of internal change of what the client needs from the agency. But there’s also the much broader industry changes that are going on. Technology, as we know, is driving huge changes in the media supply chain.

And the reason I bring it up is that I had a client who said, ‘we renewed our contract five years ago’ and I’m going ‘gee, a lots happened in five years, hasn’t it?’

David:

Absolutely. It’s a common phrase that marketing can be seen as like the Wild West by procurement and legal people and it’s for that kind of reason. In five years technology and the use of data has fundamentally changed. Just those two examples, from a corporate governance perspective, are huge.

And yet for some reason a lot of marketing agency relationships do not have up to date measures in place to ensure that things like this are covered off properly.

Darren:

Do you think it’s the mentality that contracts are written in stone. It’s like either Moses’ tablets from the Mount or the tombstone put on the grave of the relationship; oh, it’s so important that we’ve written all these terms and conditions and been signed off by all these people that it can’t possibly change.

David:

Yeah, it does feel like a bit of a birth or death thing; you do it at the start or the end and not anything in the middle. And it just doesn’t fundamentally account for evolution in that relationship. That evolution can come from the client side, as you say.

But it can also come from the agency making different recommendations, adapting to trend, offering different services, evolving their own business model. Trends in remuneration change certainly in the media, creative, and advertising area with regard to what content needs to be produced and how often, and what are the implications on the media buyer as a result of that.

Things like that are in constant flux. We all love to say change is constant. Well if the contract is set in stone it’s obviously not keeping up to speed with the change.

Darren:

It does become a tombstone or milestone along the line of history doesn’t it?

David:

It does, and I also think there’s probably a lack of balance in some ways and we’re focusing a bit on the challenges here.

Darren:

Oh, we’ll get to the positives.

David:

Marketing agencies are filled with very bright people and they’re also very busy and sometimes it’s just a case of having the due diligence to actually make the time to sit down and look at this stuff.

I think sometimes these relationships can become very professionally intense and very personal. You’re working with individuals at another organisation in a very professionally intimate way in some cases and that can get in the way of having the conversations about things like contracts, which feels like a much more official thing.

And sometimes it does take the intervention of a compliance/ legal/ procurement team at either end to actually put a check on that core relationship and say this does need to be looked at.

Darren:

I remember getting some great advice from a lawyer we worked with who said contracts should be in two parts; the first part is all of the terms and conditions, the most basic agreement of what you expect from each other (honesty, integrity, security) all of the legal things you can actually define in a contract that really don’t change.

But then it should all refer to the schedule or appendices—all the bits that do change. It’s almost like the two chapters; the Old Testament and the New Testament. The Old Testament is literally set in stone but the 2nd half (all of the appendices or schedules) are the things that can change because they need to change otherwise the whole contract gets thrown out.

David:

Absolutely. There’s a baseline of generic terms that you’ll find in pretty much any contract but with these particular types of agency client relationships there are a whole range of other things. It could be schedules or appendices or anything else that is absolutely not static.

Darren:

We’ve had two lawyers on Managing Marketing, one in the U.S. and one in Australia talking about the differences between a principle/agent relationship, which is where the term advertising agency came from, and a sub-contractor or contractor relationship. And it has a particular importance for media doesn’t it?

David:

It does in that a lot of the advertising client’s money flows through a media agency and out to other 3rd parties. In an agency/principle relationship the agency has a degree of fiduciary responsibility to act in the best interest of its client whereas in an independent contractor agreement there isn’t the same rigour around that opens the agency to be able to indulge in opaque business practices or practices that are not necessarily in the best interest of its client.

My experience has been that most clients actually do not want to enter into a principle/agency agreement when this has come up. They prefer the independent contractor relationship because it offers more flexibility to them in terms of termination and other things and also how the agency is representing them.

It’s a double-edged sword. I’m not a lawyer but it is certainly recognised as best practice in a media/agency contract that the agency should be recognised as such in that relationship, but a lot of organisations don’t yet subscribe to that.

Darren:

Well the reason they’re called agencies is that they entered into agency agreements for the media owners originally. They acted as agents, not of the advertiser, but of the media owner. And they were virtually selling or placing media buyers on behalf of the owners.

You can imagine the William Hurst’s and the like were selling advertising space in newspapers; they didn’t want to deal with 100,000 little advertisers worried about whether they could pay their bills. So, they got their rich mates to set up advertising agencies which guaranteed that they would get paid.

And they would take the risk and in return they would get a 10% commission. That’s the original agent agreement. Fast forward to today and we’ve still got agency relationships, apart from advertising which has become a bit blurred. We’ve still got real estate agents; news agents and all of these people act as agent and principle relationships.

If you sell your house they take a percentage of the sale as the agent, but they have to be fully disclosed in everything they do. Financial agents have to disclose any 3rd party, under law, because that’s the way they work.

It’s quite different though for advertising agencies because if they’re a 3rd party independent contractor there is no legal responsibility for providing that level of disclosure is there?

David:

No and as I say that opens the agency and advertiser to opaque practices whether that’s in media trading or anywhere else. And that’s been one of the fundamental challenges around the transparency debate that’s been happening for a couple of years now.

Darren:

You mentioned before that advertisers are the ones that seem to prefer the agent be independent contractors.

David:

It’s just been my personal experience having worked with a number of organisations on these kinds of things. And I think it comes from their own legal and compliance teams who perhaps don’t have a full understanding of how agencies actually operate.

Darren:

I’ve been told by a lawyer (it’s not legal advice) that it’s because as independent 3rd parties they wear all the responsibility. That if a deal goes bad they end up wearing the cost whereas the principle agent (because they’re acting as an agent for the principle) the principle has a responsibility.

So even if the deal goes bad the principle is the one that wears the cost. It’s a bit like mitigating risk by making the agency wear all the cost.

David:

And this is why I was talking about two-way flexibility and that’s fundamental to it. Certainly, agencies prefer not to enter into that kind of agreement either. Both seem to prefer independent contractor relationships, whereas from a pure responsibility and a transparency point of view it would be much better to go principle and agent.

Darren:

Talking to people like Mark Code at PHD—where he objects is being taken from an agent/principle relationship to a contractor but then being told and you have to declare all your margins and hand them over to us.

It’s almost like having your cake and eating it too because you’re saying I want you to wear all the risk, stick your neck out and potentially get it chopped off if these deals go bad but by the way we also want you to declare all of your kickbacks, margins and things and pay them back to us as rebates.

David:

I think that’s very fair—there’s a lot in that. We talked at the start about how a contract should be mutually beneficial and commensurate for both parties and absolutely whilst there has been so much furore about agency transparency that is a two-way street. A contract has to be fair and reasonable to both parties and Mark absolutely has a point.

In any business negotiation you want the best of both worlds, but these aren’t project-based or short-term relationships; these are relationships that last for years and are built on a degree of professional trust and openness. The contract is a critical part of that.

Darren:

But it also involves transactioning millions, tens of millions, hundreds of millions and on a global basis billions of dollars. Do you have life insurance and the like?

David:

I do.

Darren:

Imagine having a deal with your insurance person where they’re recommending insurance or investment products to you where they don’t have to declare the kickbacks or commissions they’re getting. Would you be going, ‘I wonder if they’re recommending the best deal for me or the best deal for them’.

David:

Absolutely. Multiply that by a million and you’ve got the issue that marketers have with agencies. Contractually the only way to fix that is to adopt the structure we’ve been talking about.

Darren:

Principle/agent?

David:

Principle/agent but the organisations often do want to have their cake and eat it too. I think that often extends into other areas of contracts. As you say, agencies spend millions and millions of dollars and yet sometimes have to sign contracts with 90, 120-day payment terms. Even for a big agency organisation that creates significant cash flow issues.

Balance is everything and I think all too often the organisation does want to have its cake and eat it too and it’s just not feasible.

Darren:

One of the things that cracks me up is that a lot of these contract negotiations really are bully tactics. And I raised that recently at the Ethics Alliance (part of the Ethics Centre). I said, ‘it’s interesting that the bigger the company the more they’re able to bully their supplier on contracts like terms’.

And a lawyer in the meeting said, ‘oh no it even happens to us and we’re a big company’ (one of the big law firms) and I said, ‘but your clients bigger aren’t they?’ and he said ‘yes’.

A client recently said to me ‘we still pay through the media agency for Facebook and Google because they won’t accept the 90-day payment terms, but our agency will. And I said, ‘that’s interesting because Facebook and Google would be significantly larger in capital size than you wouldn’t they?’ ‘Yeah’ and I went, ‘bullying!’

David:

It’s a fine line isn’t it? You’ve got to get the best for your organisation in a contract or negotiation of any kind but the have your cake and eat it too mentality does not lend itself to agencies responding in kind with a more open and transparent way of doing business.

If organisations are getting worked up about agencies not being transparent well there is a corresponding action they have to take to engender that behaviour and part of that is contractual.

Darren:

Do you think contracts can actually create trust or do you think trust comes from working through the contract?

David:

I think trust is developed over time obviously in a relationship, but trust has to be built on the right foundation. There would be lots of clauses in a contract that you would hope would never have to be enforced but at the same time you certainly need that foundation at the start of a relationship in order to build trust with confidence because trust requires confidence in the relationship.

Darren:

There have been a few industry examples of contracts, especially for media. I think the most public was ISBAR in the U.K. who came out with a media contract template. Have you seen that?

David:

Yes, I have and the AAAA over here have a very similar one, adapted from the ANA in the States and ISBA in the U.K. The complaint certainly with the first iteration of the ISBA contract was that the agencies weren’t even consulted. They complained about that in terms of the way the contract was constructed.

I think the 2nd iteration has involved agencies to a greater extent. They are strong documents but it’s unwise to adopt a one-size fits all mentality with regards to how individual organisations want or even need to operate with their agencies.

When I’m doing that kind of work with clients at Trinity P3 we use those kinds of documents selectively rather than as a complete enforcer because not everything in there will be appropriate for everyone.

Darren:

I think they’re a good boilerplate as a starting point. It can give you some basics, but every client’s media requirements are going to be slightly different. There’ll be something basic things that are right.

I think it’s probably better, as you said earlier, just to have a regular review process so that you can start from something and then over time evolve it so that it brings mutual benefit.

David:

Don’t misunderstand me. I think those documents are great pieces of work and I understand what they’re trying to do. There are also explanatory notes that go with them, so you don’t necessarily have to take the entirety of the document. In intention those documents are great; they just can’t be uniformly applied to everyone.

One of the most interesting observations I’ve had in the last three and a half years is that it’s not necessarily that clients know whether their agency is transparent or not. They don’t even know the level of transparency that is available to them or which is appropriate for their own organisation.

And that’s almost the first step. It’s not as simple as is your agency transparent or not?

There are shades of grey within that and I found that some organisations want a completely different degree of transparency to others based on their circumstances, governance, and everything else. And that’s the way that these contracts should be tailored and then reviewed over time, as we’ve been discussing.

Darren:

My feeling, and I’d be interested in whether you agree, is that it’s also a bit of the way this whole process has evolved. There was the sudden reveal of ‘oh my god, there are rebates, and agencies are making money that we don’t know about. Aren’t the agencies bad?’

In actual fact, in most cases, they weren’t doing anything that was either illegal or in many cases against the contract. So, then it was like ‘we’ve got to close those loopholes with the contract and then enforce it with financial audits and benchmarking and media audits.’ It was almost like retribution and punishing the naughty agency.

David:

That has been whipped up in the media. Again, balance is really important. Some of the things in those contracts are really important to have and agencies habitually have not put them in.

However, clients have signed those contracts. And they have signed addendums to those contracts that allow the agency, in plain English, to trade in a particular way that is beneficial to the client in some ways e.g. cheap inventory but not beneficial from a transparency point of view.

There is a valid argument that would ask what would you have the agency do? At the end of the day they’re in business. They’ve come with a proposition. The client has accepted that proposition. It doesn’t necessarily mean that all agencies are evil suddenly as a result of discoveries made by the ANA.

The other thing I would say is that opaque practices are not just about media agencies; they exist throughout the entirety of the supply chain and it’s something that is a challenge for everyone.

But what the client needs to look at is; what do you want from your agency, is the agency actually delivering value, and how are you measuring that value, and do you have a contract that is commensurate with your requirements?

That is not the same as do you have the 146-page contract that says absolutely everything that you should have from the ISBA or ANA.

Darren:

The really good point that gets lost is that the whole media supply chain has existed from the day it was created on commissions. And all we’re really dealing with now is the fact that scale (because of the amounts of money being spent today) and technology has made it a lot more complex.

A lot more transactions are happening in real time, which makes it a lot harder to actually be able to get your head around what’s going on let alone try and audit or measure those behaviours.

David:

These things are incredibly hard to audit. And that’s why contractual evolution is required within reason to give both parties a degree of confidence that they can achieve what they need to achieve without feeling like they’re being ripped off.

But it’s certainly not as simple as the buck stops with the media agency. It’s just way more complicated than that and media agencies are investing a lot of money in tools and technology to try and prevent that sort of thing as well as anything else. It’s a nuance thing.

Darren:

So, David you’ve got a new podcast that you’re starting yourself; it’s called media angle, and you’re interviewing or chatting with people from media agencies, owners, and advertisers.

David:

Yeah, there has been a great deal of interest from people who want to talk to me about all sorts of topics, but the basic premise is I’m examining media from any number of angles. And there are lost more than just transparency for example.

So, I’m not just talking to CEOs of media agencies although there are some involved. I’m talking to procurement people, marketers, media owners and already the number of different perspectives and insights that come across from that have been really fascinating. I’m enjoying doing that and that will be available pretty soon.

Darren:

Media angle by David Angell is going to be available on Soundcloud and iTunes very soon. If you haven’t had a chance to listen to it make sure you check it out. It’s media from every angle. I like the idea.

David, thanks for joining us and having the conversation around contracts. Most people would think that a chat about contracts would be really boring but it’s actually quite interesting.

David:

I’ll leave it for the listener to decide but we’ve tried to make it as non-dry as possible so thanks very much.

Darren:

And what’s the worst contract you’ve ever seen?

Media trading terms and processes are rapidly changing, and you need to ensure your contract stays up to date with those practices. Find out more here

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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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