One WPP Adman Admits Agencies Still Profit From Clients' Volume Discounts

A WPP (WPPGY) media buyer in South Africa has admitted that his ad agency gets "agency volume bonification" deals -- which some people regard as kickbacks -- for placing ads.

The admission is a rare one: The last time AVBs surfaced publicly, the SEC forced Interpublic (IPG) and its McCann Erickson ad agency to restate their numbers and pay back hundreds of millions of dollars to clients who had overpaid for the ads they had bought. Two McCann executives were charged with fraudulent accounting. They settled, but IPG's stock was crushed, falling from the $30 range to under $10. It has never recovered: IPG currently sells for $11.56/share. IPG is still paying back money to clients whose money was diverted in those deals.

What these deals are and how they work
AVBs are a type of discount rebate. Media-buying agencies buy a huge volume of ads on TV stations, billboard networks and with other media providers. They can negotiate discounts or rebates for those bulk purchases. Most clients require that any discounts or rebates get returned to them -- after all, it's their dollars that earn the reduction.

AVBs, however, imply that the agency itself keeps some or all of the rebate as a reward for bundling their clients' buys together and spending so much money. That may be a violation of any client contract which requires that bills include all available rebates or discounts. If an agency keeps such rebates, it can count as an illegal kickback, the agency can end up overstating its revenues, or it can be sued by its clients. That, essentially, is what happened at IPG in the mid-2000s.

The admission came during a panel discussion at a trade conference attended by The Media magazine. It's worth quoting at length:

A number of reliable sources claimed that, when SABC [South African Broadcasting Corporation] would not agree to Andrew Kramer of GroupM's AVB proposal, its team was informed that this could affect their clients' advertising on the national broadcaster.

Kramer denies having these conversations with any of the traditional media, saying he has only had them with out-of-home, because they do this as a matter of course. "We would never say that if you don't do this, you won't get our business. But we are looking at how the media owner is positioned and who will give you the best deal in terms of pricing, volume deals and other angles. It is all about good, solid business practice.

"The media owner has a choice to take on our business, it is not about threats but terms, and trying to get the best terms for our clients and us," says Kramer. "We are answerable to our stakeholders, clients and shareholders and, if they are not happy, then we have a problem. But we are not answerable to our competitors. And media owners who are not happy with our terms have the choice to go elsewhere."

Kramer says GroupM's deals are totally transparent as it is SOX [the U.S. Sarbanes Oxley Act] audited, in accordance with the US Public Company and Accounting Reform and Investor Protection Act that came into being after the Enron and other corporate and accounting scandals. "Our reputation is everything, and AVBs are just a service we offer. We don't bully or force people into anything; if we did, we wouldn't keep our clients."

The rest of the article states that discussion over AVB deals is common in South Africa, with both Aegis (AEGSF) and WPP's GroupM media buying groups pushing for them. The controversy in South Africa is that the standard AVB discount is about 16.5 percent. Clients are apparently aware of this, and have been demanding a greater and greater share of the take. In turn, agencies have attempted to get larger AVBs from media vendors to maintain their margins.

GroupM has a bit of a history here. In 2008, GroupM CEO Irwin Gotlieb attempted to persuade U.S. clients that agency volume deals were a good idea because they drove down the cost of media generally. As you can see from the lengthy correction atop this BusinessWeek story about Gotlieb, GroupM was apparently unhappy with the issue being aired in public. And the U.K.'s media competition regulator, Ofcom, is due to end a probe of TV buying in Britain, where WPP is one of the major players. Ofcom's report is expected in the fall.

There are two other factors that ought to make WPP's lawyers sweat. The IPG accounting scandal also began in the Africa region; and the SEC specifically mentioned "agency volume bonification" when it filed against IPG, McCann CFO Salvatore LaGreca and Brian Watson, McCann's COO for Europe, the Middle East and Africa.

Related:

• How Ad Agencies Divert Clients' Money to Their Own Bottom Lines
• Printing Money: Secret Transcripts Reveal How Grey Group Juggled Clients' Cash
• Client Hell! BNET's Guide to the Advertising Underworld