Boiling Down Rebategate, With An Eye Toward Equilibrium

tomtriscari"Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is written by Tom Triscari, co-founder and managing partner at Labmatik.

In light of the ANA’s Media Transparency Initiative Report, marketing leaders are considering how to cut through all the industry-level information and understand what it means to them as individual brands.

They are also thinking about how transparency and value-add should go hand in hand, particularly at a time when media buying has so quickly evolved into a data-first and programmatic-first world. By looking at the problem through a simple game theory framework of trade-offs, both sides can more clearly see how to bring the client-agency relationship toward equilibrium in a rational way.

Then and only then will they be able to squeeze out more productivity, generate value and get back to the important work at hand – connecting brands and products with relevant audiences in the most impactful and efficient way possible.

While the results of investigations like K2’s may not be pleasant, the good news is that “Rebategate” will hopefully get advertisers and agencies out of denial, with all hands on the table, moving quickly past acceptance and toward a mutually fruitful recovery. In other words, the hope should be that the ANA’s forensic investigation gets both sides back into equilibrium and pushes them toward a more functional business model.

Jay Friedman recently pointed out the root causes of kickbacks and provided common-sense advice, noting that the most efficient way to find a solution is at the client-agency level, not the industry level. The reasoning he used is based on a game theory concept called the Nash equilibrium.

Nash equilibria are around us all the time, working constantly in the background and dictating how we negotiate and make decisions many times each day. Friedman highlights a classic example that asks: If no law existed telling you to stop at a red light, would you still stop or blow right through it even though you clearly see another car about to cross the intersection?

Even though you will not get in any trouble if you run the red light, you have little to no upside in doing so. The best outcome for both drivers is to go when you are supposed to go and stop when you are supposed to stop. If the wrong driver goes when stopping would be more prudent, then both drivers experience outcomes that make them worse off, setting up a potential crash at the intersection of Transparency Avenue and Rebate Street.

A Handy Framework For Advertisers

A similar framework can be applied to help marketers and their media agencies arrive at a better place. If both sides are thinking, “How do I think through all this information to figure out where I stand and what does true north look like for me?”, then boiling down the decision set to some basic choices helps to simplify the discussion. The decision set might look like the following:

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On the one hand, the advertiser believes that its agency is either transparent about media fees or not. There should be no gray area. If the advertiser is not sure, then the first step is to find out and then make a black or white determination. At this stage of the exercise, it is critical to note that, from a payoff perspective, the agency probably gets a higher payoff by not being transparent. And if the agency changes course toward more transparency, then it will likely lose a benefit that it already has.

Value-Add Is In The Eye Of The Beholder

On the other hand, a client's agency either adds enough value to the media buying process or not. For any given marketer situation, the definition of value-add will likely be assessed along a spectrum of three points: 1) verified, fact-based value-add; 2) semi-verified with some facts; 3) unverified, perceived value-add. If the agency’s added value leans too much toward the perceived end of the spectrum, then, in all likelihood, the marketer will end up with a suboptimal outcome by leaving money on the table.

It should also be noted that even if there exists some qualitative aspects to assessing agency value-add, which is likely when it comes to client-agency success metrics, then these parameters should be tightly defined and leave no room for contractual ambiguity.

Four Categories

In the first category (I), both client and agency are in balance. No change is necessary unless the client can improve its payoff by working with a different and equally transparent agency that also happens to generate additional value with better capabilities and more useful insights.

In the second category (II), the client and agency are in “tenuous” balance. The client is aware and accepts the nature of the relationship in exchange for real or perceived value-add. Again, no change is necessary unless the client can improve its payoff by working with a more transparent agency that can generate the same or additional value.

The client and agency are out of balance in the third (III) case. This outcome is actually not a transparency problem. It is a value-add problem. Either the client makes changes to the agency’s tools and processes or the client should seek out an equally transparent agency that can provide the appropriate level of expected value-add.

In the last case (IV), the client and agency are severely out of balance. If the client desires total transparency and top value-add, then the client has three primary options. First, it can change the current agency’s tools and processes, with particular regard to programmatic. It may also seek a new, highly transparent agency that acts as a true partner and provides the desired value-add. Or the client can reimagine the entire media-buying operating model with a data-first and programmatic-first strategy, which may require agency services only if the potential for real value creation is self-evident.

The Buck Stops Here

The buck always stops with the marketer. It is the marketer, and only the marketer, that writes the first check in the supply chain. If a brand is not in the right place today with its agency partner, then either it or its agency (or both) will have to change if they want to reap the long-term benefits of modern media buying, programmatic planning and audience management.

At the end of the day, both client and agency have a massive opportunity to achieve bigger, better and more sustainable payoffs, but it is not going to be easy because there are no silver bullets. With rational, well-communicated goals, along with leadership in the control tower pushing for incentives that create mutual gain, both sides will more quickly find their own Nash equilibrium.

Follow Tom Triscari (@triscari) and AdExchanger (@adexchanger) on Twitter.

 

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