Adage: Competitive Bidding, Creative Choice, And The DOJ Investigation

This post was originally published in AdAge on February 9, 2017

Contributed by T. Alex Blum

News that the Department of Justice is investigating "bid rigging" by ad agencies to favor in-house agency facilities highlights how competitive bidding works in the world of advertising and exposes a problematic industry practice, one that undermines the trust between agencies, clients and vendors.

In theory, film editors and other creative professionals are not interchangeable: each one brings a different approach to a project. The process often requires a winnowing down of choices from hundreds of options to three or four final bidders. The agency's job is to provide the client with a recommendation for the best choice to execute their project at a fair price. There is no requirement, unless it's stipulated by the client, that it be the lowest price. The preferred choice will generally be asked to meet, or at least get close to, the lowest bid.

This is how an efficient bidding process functions. However, if the bidders are not comparable in quality and approach, the process breaks down. Either the job is re-bid, additional bidders are brought in, or the job goes to someone nobody intended to work with. That's bad producing, since the bid was not an "apples to apples" comparison in the first place.

What this means is that the competitive bid process is not an effective way to determine who the final "winning" bidder should be on a creative project, which is why strict "always award to the lowest bidder" policies almost never work in advertising. But it is an extraordinarily effective way to establish the appropriate context for a creative bidding process. In other words, competitive bidding makes it possible to determine that a comparable group of bidders has been established for a project, and provides a means of comparing their approaches. If the prices are all in an appropriate range, it provides an assurance that the project has been properly briefed and that everyone has the right information. Conversely, if there are wide ranges, or significant outliers, it provides a warning that the process needs should be reexamined. There is no reason for any of it to be anything other than transparent. The more information everyone (from vendor to client) has, the better.

Stacked deck

You don't need to be an ethical giant to know that asking your vendors to bid against an in-house facility that is competing with them for the same work is going to raise questions, especially if that facility has access to the price information from the outside vendors. Often, these same vendors are being asked to loan out their talent for in-house projects from the same agencies. It's hard to believe that most agencies don't know this is bad business, in that it creates distrust and poisons relationships with the same vendors that are going to be asked for favors in the future.

But the real issue is lack of transparency in how that information is presented to a client. If the bidding process is not transparent, and the client is led to believe the work is being given to the in-house facility because they are the low bid -- and the in-house facility has an unfair price advantage -- it's not surprising why the DOJ would take an interest in that.

Bidding an in-house editorial facility against an independent post vendor is never an "apples to apples" competitive bid; it's a misuse of the process. In-house facilities do not have overhead expenses for sales reps, and they do not develop and manage creative talent, both of which are significant overhead expenses. Therefore, the price from an in-house facility should always be significantly lower on every single project. This means that the advantage of competitive bidding, which is to establish a reliable context for the bid and a useful comparison, is wasted.

There are plenty of good reasons why agencies have in-house facilities (cost, convenience, efficient management of creative resources, location), and those advantages can be advantageous to clients. The way to manage the process correctly is for the agency to pitch the advantages of its in-house facility in a transparent way, negotiate a rate card, and agree on a methodology for managing workflow and tracking costs. This way, it could dispense with competitive bidding altogether.

This DOJ investigation is going to continue to be big news in 2017. It could have very serious personal consequences for people in the advertising business, and it will probably further erode the already tenuous trust between clients, agencies and vendors. I'm guessing that it was all completely avoidable.