CHICAGO (AdAge.com) -- Leo Burnett's $15.5 million payment to the U.S. Army to settle over-billing claims last week puts the matter to rest legally, but still stirs up issues for the agency's increasingly urgent pursuit of major new-business wins.
The suit, filed by two former employees and later joined in by the government, accused the agency of manipulating its billings by leaving out cheaper third-party contractors when calculating its average hourly cost, and also of treating its own affiliates as contractors.
Burnett Worldwide CEO Tom Bernardin
Related Story:Leo Burnett Settles 'Army of One' Suit for $15.5M
Agency Continues to Deny Army's Claims of Overbilling for Campaign
Still, being tied to the "National Procurement Fraud Initiative" can't be good for business, can it? "It's not a concern at all," said Burnett Worldwide CEO Tom Bernardin. "Anybody who has even a superficial concern about it would take the time to inquire, and when the inquiries come I'm prepared to argue very easily why we chose to settle vs. incite."
"One hundred percent of [current clients] were not concerned," Mr. Bernardin said. (Ad Age called several major Burnett clients to gauge reactions: Philip Morris and McDonald's declined to comment, while Hallmark and Allstate didn't return phone calls.)
'Going to be an issue'
But veteran agency search consultants disputed that view. "Yes, it absolutely is going to be an issue," said veteran search consultant Jane Bedford. "Prospective clients are going to read about it, they are going to note it and they are going to bring it up. They may ultimately decide to go forward, because Burnett is a fine institution, but it's going to be an issue."
Another veteran consultant said it's the last thing an agency needs in a downturn, when CMOs are even more skittish than usual about having to explain any hire with a hint of public scandal -- even a resolved one. "You know that old saying about how nobody ever got fired for hiring IBM?" the consultant said. "Well, Burnett is not IBM anymore."
While the shop did post growth in North America last year, much of that was fueled by a major increase from longtime client General Motors, a development that made the shop more dependent on its most precarious client, which has pledged to cut $600 million in marketing expenses by 2012.
The agency suffered only one significant loss last year, PetSmart, and managed to win a number of smaller accounts, including Harrah's Caesar's brand, the International Sleep Products Association and the vacation club Exclusive Resorts. But none of the new accounts are particularly material at a place accustomed to handling the likes of GM, Philip Morris, Kellogg, Nintendo and Samsung.
Major government accounts such as the $1 billion U.S. Army business -- for which Burnett produced the "Army of One" campaign from 2000 to 2006 and which subsequently decamped for McCann -- are on that scale, of course. In settling with the Army, the Publicis Groupe agency may have kept future government work an option as well, although in recent years ad agencies that have had issues with government contracts -- Ogilvy & Mather's time-sheet flap with the White House Office of National Drug Control Policy earlier this decade and N.W. Ayer with the U.S. Army during the 1980s -- found future federal business elusive.
They also found general business accounts elusive, at least in the short term. Ogilvy struggled to land in account pitches for a period after it was busted for an overbilling scandal with ONDCP. That case involved criminal convictions, but even non-criminal scandals, such as DraftFCB's split with Walmart following what was deemed to be inappropriate contact between the agency and Walmart Senior VP Julie Roehm during the review, made Draft what consultants called "radioactive" for a while with many would-be clients.
Burnett's settlement ended any possibility that the agency itself could face criminal or civil penalties but leaves open the possibility that the Army could "debar" the agency from competing for government work.
Government contracting rules say only "responsible contractors" can bid, and a government agency can keep contractors from bidding if they are deemed irresponsible. That rarely happens, and the periods for which contractors are debarred vary. (Ayer, which created the "Be all you can be" campaign, was suspended for two years over accounting and billing improprieties, but the ban was lifted after the case settled.)
Scott H. Amey, general counsel for the Project on Government Oversight, noted that Burnett's agreement states it doesn't release "the suspension or debarment of rights of any federal agency." Army spokesman Paul Boyce declined to say whether the Army would pursue any debarment.
A more likely outcome, according to contracting officials, is that the settlement could make other federal agencies wary of awarding Burnett new contracts, at least in the short term.
"Independent of the technical slap on the wrist, this is a negative impact on their brand equity for government work," said Al Martin, former director of accession policy in the office of secretary of defense and a consultant for advertising agencies on Defense Department business for 25 years. "It's a near-term image problem."