Woolley Marketing: When is an agency no longer an agency?

Here’s a question: is your agency really acting as your agent?

Yes, I know it sounds like a trick question. Or possibly a ‘dad joke’ with a weird punch line but this question is more than just semantics. It’s perhaps the most important a CMO or their procurement team can ask of their agency.

The reason is that the term agency has a definite meaning both in language and in law, particularly in Australian contract law. Yet the way agency business is increasingly undertaken raises the question of whether it is potentially misleading and deceptive for agencies to present themselves as an agency – especially if the actual legal relationship is no longer an agent relationship.

But what is an ‘agency’ relationship? And why are advertising agencies less and less acting as agents these days? How did we get here? And what does it mean going forward?

The dictionary defines an agency as: A business or organization providing a particular service on behalf of another business, person, or group. e.g. “an advertising agency”

In many ways most agencies fit this common definition, providing services including everything from media planning and buying through to communication strategy, creative concepts and production.

Then there is the legal definition of an agency which is: “The legal relationship that exists between a principal and a person appointed with the power to act on their behalf and has the power to legally bind a principal to arrangements.”

Agency is inherently a ‘fiduciary’ relationship. This means that an agent has a legal obligation to act in the best interest of the principal.

But this is where the nature of the relationship between marketers and their agencies has fundamentally evolved in a way that threatens the agent / principal relationship.

By Dennis Flad

When the media commission system was in place up to 30 years ago, the ‘agency’ provided media and creative services under an agent agreement, where the agency acted on behalf of the client to procure media and production services on behalf of the client, binding the client to those agreements.

This meant that if something changed, such as the advertising needed to stop, even due to unforeseen circumstances, the client was legally bound to pay the costs incurred by the agency acting on their behalf. This includes third-party production cost for creative agencies, but more significantly, it includes media cost with media owners.

Usually, the agency would take all steps to minimise the cost on behalf of their client, negotiating with the suppliers and media owners to ensure the impact on the client was minimal. This was because they were acting on the client’s behalf and primarily to their benefit.

But then procurement became involved. One of the functions of procurement is to not just reduce cost to the business, but to also minimise risk. Having an agent contract with an external supplier legally means the client carries the risk as the agency has the right to legally bind the client as the principal to the financial risk.

Therefore, procurement introduced contractor agreement to replace the traditional agent agreements to minimise this risk. This is a vendor / principal agreement. Now the agency, who was no longer an agent, took the risk.

It meant that if a creative agency wanted to engage a third-party production company, they would not only need to have the client approve the proposed cost in writing, but they would also have to have the client approve the contract with the production company, and approve any cost overruns in writing, as the agency could no longer legally bind the client to the agreement on their behalf.

For media agencies, it meant that in the process of negotiating with the various media suppliers, they would need to have the client approve the final negotiation in what was often a time-sensitive process.

This has been made even more complex when it comes to digital transactions, where often the agency is transacting with the various platforms and the ad tech vendors through their own accounts on behalf of the client, and now taking all the risk should the transaction fail to meet the client’s needs.

But there is one part of the agent agreement that did work in the client’s favour and that was an expectation that the agency acting on the client’s behalf would offer full transparency to those agreements. This is why when the contracts changed from agent agreements to contractor agreements, procurement would go to great lengths to add clauses demanding transparency from the agency regarding mark-ups, kickbacks, rebates and commissions.

So why, when most agreements between clients and their agencies are no longer agent agreements, why do we still call them agencies? And does it matter?

Operationally both the agent and the contractor agreements work. But there is a fundamental difference between the two. Agent agreements require a high level of trust and integrity. Look at the examples of other agent agreements – newsagents, real estate agents – all act on behalf of the sellers and this comes with significant fiduciary responsibilities that do not immediately apply to contractor arrangements.

By continuing to refer to agencies as agencies, when they are no longer legally acting as agents on behalf of their clients or principal infers a relationship that simply no longer exists.

See also: Woolley Marketing: AI or not AI, is that even a question now?
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Darren Woolley is Global CEO of TrinityP3, Australia’s largest and most influential independent marketing / pitch consultancy and is well known to the advertising industry. Founded more than 20 years ago TrinityP3 has a significant presence in Australia where it leads the pitch process for many of the country’s leading advertising accounts as well as having offices in London, New York and Zurich.

Dennis Flad is responsible for Trinity P3 EMEA and founder of t’charta, a management consultancy boutique for strategic product management, pricing and go-to-market based in Zurich, Switzerland. Dennis worked his entire life in marketing and advertising, which allows him to infuse his whimsical drawings with a realistic understanding of management practices and behaviours.