Client Hell! BNET's Guide to the Advertising Underworld

Last Updated May 18, 2011 11:23 AM EDT

In most businesses, advertising is an afterthought -- strategy, finance, sales and distribution come first. That means the advertising money chain -- through ad agencies, commercial TV producers, photographers, printers, Web service providers and media vendors -- often gets overlooked. As long as sales seem to be going up and total costs aren't out of line, marketing vice presidents frequently don't look too closely at what's happening to their money.

They should.

Sure, you know what bill-padding is. But what about "agency volume bonification"? The answer is right here. Never heard of "prop trading"? Look no further. We've compiled our coverage into a single resource -- bookmark this page! -- that covers as many scams, schemes, shenanigans and straight-up crimes in advertising as we can think of. We'll keep this updated as new cases emerge (so ignore the date at the top). We hope this page helps clients spot questionable billing practices, and agency execs avoid legal and ethical trapdoors.

Welcome to Client Hell, where nothing is what it seems. If your agency has you feeling like Dante in the Inferno, let BNET be your Virgil ... a guide to the Underworld of Advertising:

Kickbacks and bid-rigging
Client contracts often require that certain expenses -- anything above $25,000 for instance -- be put out to bid so that the cheapest or best bidder wins. Historically, some agencies have found ways to control this process to benefit themselves. Two executives at Grey Group were convicted in such a scheme. Taking bribes to award contracts, or arranging bidding contests that aren't fair, are crimes in the U.S.

Bill padding
This one is the oldest trick in the book: Do some work for the client and then charge more than it's worth. The confusing part comes when you try to separate a legitimate markup from outright fraud.
Corporate fraud and embezzlement
It's uncommon, but sometimes agencies simply attempt to cheat clients out of the money they're being paid, either by overcharging or charging for work not done.
Volume discount schemes
Volume discounts -- sometimes called volume overrides, volume rebates or "agency volume bonification" -- are common in Europe but have been used by agencies in New York also. The media buying agency GroupM once told BusinessWeek that it was hoping to persuade clients to allow them.

In a volume discount scheme, the ad agency pays various vendors for their services. Those vendors, hoping to curry favor, then return a percentage of the payments as a goodwill discount for the volume of service requested. The agency keeps the discount instead of returning it to the client, even though standard client contracts generally require agencies to bill at net or best price.

These can be hard to spot if an agency books the discounts as a separate revenue stream outside the client's account -- so they don't show up in audits. Examples include:

Lack of transparency in billing
The most common problem with agency billing and compensation is that it's murky or non-transparent. The advertising business has a long history of not being forthcoming about how, exactly, it generates its bills. Some examples:
Monopolistic behavior
As a rule, marketing vendors tend to be competitive and cutthroat. Barriers to entry are low and there are plenty of agencies to choose from. But every now and again one agency comes to dominate an advertising niche -- think Google and its control of search ads. Examples of rising prices and cooperative behavior in an environment where there ought to be vicious price competition include coupons and network TV:
In-house production schemes
There's nothing illegal about an ad agency hiring its own in-house TV production company to film a commercial ... as long as the client knows that the agency owns the company. In-house producers make competitive bidding difficult because, of course, the in-house bidder has more access to the agency executive controlling the bidding process:
Individual embezzlement
This isn't an advertising problem, it's a human problem: Sometimes individuals are just on the take:
Miscellaneous weirdness
Advertising by its nature is filled with surprises. Here's a grab-bag of schemes that fall outside the usual categories: All images from Paul Gustav Dore's illustrations of Dante's Inferno, except for the first one, which is by Flickr user Frenkieb, CC 2.0