Consolidation of advertising spend has been a predominant lever used by marketers to reduce overall engagement costs with advertising agencies by promising higher volumes. This has indirectly lead to holding companies acquiring smaller agencies with specialised services in various categories such as production, digital, POSM, sponsorship, and PR to ensure that they are able to consolidate services for buyers across markets.
Network agencies, while being a part of holding groups, are emerging as market leaders and winning all the major buyer accounts across various industries. Independent production houses, due to strong headwinds are being forced to maintain coordial relationship with these market leaders to ensure that smaller business volumes are redirected inwards. It has been observed that on several occassions, network agencies have interfered in quotations being presented by independent production houses during the bidding process with prospective buyers.
This whitepaper discusses the challenges faces by smaller independent production houses to win major buyer accounts. It throws light on how production bid rigging is a major challenge encountered by independent production houses and buyers alike, potential areas of impact in the value chain and how buyers could reduce the chances of being adversely impacted by these undercurrents in the advertising industry.
- One-stop shop approach
- Advertising agencies were having their primary focus on providing creative services to buyers and other tactical activities such as production, media planning and buying were outsourced to specialist 3rd party vendors through their agency partner
- However, due to shrinking advertising budgets, buyers have explored alternate engagement models to cut down on the overall advertising cost
- Shift to decoupling approach
- Production decoupling was widely adopted as an alternative solution since buyers could benefit from an estimated potential cost savings of 5 – 10 percent by directly engaging with third party vendors and avoiding the extra mark-ups paid to creative agencies
- However, with increasing emphasis for consolidation of spend at a central level, buyers viewed this as an opportunity to consolidate a significant portion of their budgets with holding groups across categories for their respective focus markets and drive cost savings through volume based discounts or business assurances
- Traction in the advertising industry by supply market leaders
- To mitigate this shift in buying patterns from their buyers, holding groups started to focus on expanding their internal service capability across various advertising categories to ensure that they are able to garner a better share of buyers’ advertising budgets.
- Network agencies not only expanded their presence in matured markets, but also increased their footprints in emerging markets such as Asia, Latin America, Middle East and Africa which were viewed as growing markets by most of the Fortune 500 buyers.
- Expansion of service offerings to mitigate competition
- Network agencies by expanding their in-house facilities in service areas such as production, post-production, merchandising, digital and sponsorship through increased investments in talented workforce and technology had created a threat to independent agencies adversely impacting on business volumes with key buyers across industries
- Apart from this, network agencies are also coercing independent production houses to quote higher bids to cut them off the bidding process and thereby from the value chain. Industry associations such as ANA, K2 Intelligence have spotted issues of network agencies rigging bids submitted by independent production houses which has created a concern in the advertising space
Case in Point
Investigation by Department of Justice on production bid rigging
Rebacca Meiklejohn, an antitrust attorney appointed by the US Government is investigating an on-going issue involving leading network agencies that are oppressing independent production houses to submit overpriced bids in order to eliminate competition in final bidding stages of high value contracts with top marketers in the industry.
Key findings of the case
- In the U.S. alone, value of production and post-production of commercials is close to $5 billion out of which a majority of the high volume accounts are handled by top holding groups
- Post-production houses were pressurized to inflate bids and create paper trials that lead to advertisers choosing the in-house facility of holding groups which were priced much lower
- Production companies have not reacted to this illegal bidding process since they view advertising agencies as their profit-centric customers rather than the marketers investing on the campaign
Justice Department has also suspected a layer of controversy in the industry wherein an estimate of $529 billion is fabricated between major parties, based on reports submitted by K2 intelligence.
Open Letter to Campaign Live
- In UK, 84 production houses have raised their concern by publishing an open letter with Campaign Live in January 2017 expressing their disinterest to be a part of the corrupt system of bidding
- This open letter was signed by top production houses in UK which include Rattling Stick, RSA Films, Outsider, Stink, Blink, and Smuggler
Challenges for marketers
What can marketers do?
Engage a production consultant
- Involvement of an external expert will help buyers to have unbiased engagement process with enhanced visibility on actual cost of production services in the industry
- They would also help identify best fit production houses based on the project pipeline and ensure that detailed capability assessment and negotiation is carried out based on the industry benchmarked prices
- In this scenario, agencies will have lesser control over the marketer’s decisions and will be forced to provide detailed documents and periodic ongoing reports which are monitored closely by the production consultant before the execution process
Reduce involvement of agency of record in budget process
- The buyer should create an restricted production budget which is not shared with their agency of record, to ensure that the fabricated bids are not submitted
- The RFI process should be conducted in confidence by the buyer, so that network groups are not aware of the production house; this offsets the chances of bid rigging
Revisit existing contracts and establish tighter agreements
- Annual contract renewal in the advertising production is a suitable alternative to ensure that the agencies are continuously monitored on costing for various production requirements
- Regular checks on the ability of in-house production team of the buyer in terms of technology upgrade, knowledge of in-house team, capacity of work handled, effort estimation assessment, KPI evaluation based on quality and cost effectiveness, etc. will provide the buyer a platform to tighten the contract established with the agency and ensure they are making the right sourcing decision
Evaluate the agency bid in detail
- This is a critical step as this helps marketers to ensure that the agency is providing genuine bids and is not being suppressed by unfair competition from independent production houses
- If an agency proposes their buyers to work with in-house teams, then buyers should ensure proper scrutiny of the bid and compare the quotations submitted by the same agency previously along with multiple bids produced by other players in the industry to validate the prices quoted in detail
What can independent agencies do?
Ring side view
- Along with the focus on consolidation of global advertising spend, buyers should focus more on the selection of the right agency partners for various advertising requirements including production to ensure effective budget allocation
- Involving a specialist consultant in sourcing decisions would help buyers gather an unbiased opinion and identify the right agency partners and negotiate to explore better cost saving opportunities
- Due to legal steps being taken by the Justice Department, network agencies will focus more on providing transparent quotes. This can help win high valued buyer business and establish a better relation with both the buyer and the agency partner
- This will create a fair competition in the advertising space and provide higher opportunities to the specialist independent production houses