It was with great interest that I read an article in The Wall Street Journal (Dec 6 2016) detailing how the US Department of Justice is investigating advertising agencies in the US for manipulating the tender process especially for the production of TV commercials.
The concept of the agency acting as the production company is not a new one and has been an effective way to produce television commercials in the past. What is of concern is the way the agency and their holding companies manipulate the bidding process to circumvent the competitive process and maximise the profits from their clients.
This has been a global problem for almost a quarter of a century, and I am amazed that it has taken the Americans so long to wake up to the fact.
The historical context
When the rivers of gold stopped flowing in the advertising industry in the late 1980’s, the agencies looked for ways to bolster their now diminishing incomes. So like any threatened industry they turned on their minions, the production houses.
This is not when the manipulation of the bidding process began, it has been going on for years, but this is when the agencies realised that they could open their own production company and steer work there their own way, after all they are the head of the food chain when it comes to the production of TV commercials.
That was the way the management saw the situation, the creative teams were outraged that management would tell them which production company to use, although through the agency producer they had been manipulating the bidding process for years so that their choice of director / production house would get the gig.
The real push for agencies to start (and steer their work to) their own production companies came from the holding companies in the mid to late 1990’s and by the millennium most agencies aligned to the major holding companies had an agency production facility with a directive that at least 30% of the agencies TVC production turnover had to be channeled through the agency production facility.
As agencies were cutting staff and down sizing office space the creative teams had no alternative but to do as their masters bid, or they soon would join the ranks of those pursuing other opportunities.
Now these agency production houses were not on the surface linked to the agency. They masqueraded as independent production houses so that they could have the status of a third party supplier and hide behind the non-auditable SPAA contract and use all the “get out of jail free” T&Cs that this contract contains.
How to manipulate the bid
How do agencies manipulate the bidding process when it comes to television commercial production?
It’s pretty easy to do this, what the agency does is withhold information from the bidders they do not want to win. Things like the target budget for instance, and if the production house asks, they are usually told, there is no budget cap and they should quote to create the best possible job.
The production house that the agency wants to win the bid are told the target budget and are also fed extra information like insights from recent research, who the target demographic are and other key requirements of the client.
Lo and behold when the favoured director writes his or her treatment it is peppered with these insights and observations as if they are that director’s own insights.
It is this fundamental rigour when it comes to procuring services on behalf of the clients that creates these opportunities for the agency and their holding company to hijack the process to increase both revenue and profit from their clients.
The use of Check Quotes
As The Wall Street Journal points out some agencies ask their regular suppliers for a “Check Quote” and even tell the supplier what price they would like the estimate to come in at.
The production house producers are afraid to reject these requests as they think (and rightly so) that they will fall into disfavour with the agency and not be considered for any other productions.
Also it is quite easy for a production house producer to create these “Check Quotes” with little or no effort. Typically a check quote can be created in 10 to 15 minutes with some simple cut and paste strokes on the keyboard.
We have been making advertisers aware of the practices of “Check Quotes” since 2006 when we first wrote about it here. And again in 2012 when we recommended that advertisers ensure their agency brings this procurement rigour to their television production process here.
One of the main indicators of a Check Quote is the absence of an accompanying director’s treatment. Typically the director does not want to waste his or her time on a treatment when they know they will not get the job anyway.
The agency usually overcomes this by getting the producer to quote such a high price that the estimate does not even make it into the first round for consideration and the fact that there is no director’s treatment, it gets lost in the fog of email threads that go on for 4 or 5 pages, presentations and meetings.
So when the agency controls the competing bid’s costs it is easy for them to manipulate the client into accepting the agency’s recommendation. Agency producers have been engaging in bid manipulation for years so when the holding company directs them to manipulate the bids in favour of the holding company’s production house it’s a “no brainer”
There is a solution
Unfortunately the advertising and film production industry have always been treated with suspicion and it would seem from the Wall Street Journal article and my own experiences that this suspicion is well founded.
So how does an advertiser overcome the corrupt and illegal practices within the industry? And (don’t get me started) there is far more going on than just simple tender manipulation.
My simple advice to any advertiser that commissions TVCs is to employ an Advertiser’s Producer.
The agency has a producer looking after their (financial) interests and the production company has a producer looking after their (financial) interests. The source of the capital that keeps these two entities in business does not have an in house or independent knowable person looking after their own advertising spend.
This is dishonesty just waiting to happen.
If any of you out there have any stories to tell I would love to hear them.
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