Accounting: Billings lose agency value

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Forget about billings. They mean nothing. Or do they?

As agency holding companies prepare to report second-quarter results, ad industry insiders and watchers continue to debate the accuracy and usefulness of billings.

Critics say the measure of a client's media spending has no relevance today, when the top three holding companies-Omnicom Group, Interpublic Group of Cos., WPP Group-collectively get less than half of revenue from advertising. The skeptics point out that, unlike revenue and net income, billings are not ruled by Generally Accepted Accounting Principles and are not part of the disclosures required on quarterly reports to the Securities and Exchange Commission. That leaves plenty of room to maneuver. An agency might count new billings as soon as the account is won-regardless of how long the transition takes-and wait until an account completes its exit to tally the loss. The possibility is there for an agency to claim full billings for a client when the agency only does media buying or creative.

`inactive'

Billings claimed by an agency when an account arrives don't necessarily correlate with eventual real billings, let alone revenue for the agency and holding company since clients may change spending plans. Loose definitions around new billings inspired a longstanding agency joke: The winning agency says the new assignments is worth, say, $50 million while the loser says the account was "inactive."

"Billings are kind of a dodo bird," said Arthur Anderson, managing principal of agency consultancy Morgan Anderson Consulting. Few advertisers pay agencies on a strict percentage of billings anymore, he said. Morgan Anderson's 2002 compensation study found more than 90% of clients pay agencies some form of fee-based compensation.

Others say billings, analyzed in the right light, can be a good barometer of agency market share and that they can be adjusted to even out differences in compensation.

Outsiders' new business tallies can undercount wins because they are based on accounts announced by agencies or reported in publications, so they may miss local accounts awarded overseas or accounts that went below the radar, said Troy Mastin, advertising analyst at William Blair & Co. (See Blair's report in TurnSignals, P. 8.)

But new-business numbers get attention because they point to market share changes, said Michael Russell, advertising analyst at Morgan Stanley. Still, he admitted they're not analysts' preferred metric. "We would prefer the companies to report `new revenues won' and perhaps split the revenues won by discipline," he said. "However, since ad billings or revenue grossed up to billings is how they describe new business wins, we try to speak that language."

Agency companies are caught between the need to please investors and their own clients, who don't want to divulge details of marketing spending. They admit billings are not the most exact measurement but say billings are what can be released without compromising client proprietary information.

"Given that so much of our business is now in marketing services, billings numbers have become an imprecise measure of performance. They are, however, often the only available public metric relative to advertising wins, losses and new assignments," said an Interpublic spokesman.

Spokespeople for the Big Three holding companies vouched for the accuracy of their billings. "Obviously, we have a system in place to ensure statements are accurate," said an Omnicom spokeswoman.

Advertising Age reports account billings, typically in the form of measured media spending. But Ad Age's annual Agency Report for decades has ranked agencies on gross income-revenue from fees, media commissions and markups on materials and services.

gross income

Gross income is a cleaner metric to compare revenue across an agency company's diverse services. Mr. Mastin noted, though, that new billings also can be capitalized to correlate them to revenue. His basis for capitalization puts revenue on a creative account at 12% to 13% of billings; a media-only account at 2% to 3% of billings; and marketing services at face value.

Billings can be unreliable, but they're not entirely irrelevant, said Skip Pile, CEO of agency consultancy Pile & Co. and ComPile Data Services, which reconciles billings and revenue for Wall Street clients. Pile's Agency ComPile Web site tracks billings activity. Billings are helpful for marketers that want to deal only with agencies of a certain size, he noted. Said Mr. Pile: "It's too easy to kiss [billings] off as an anachronistic, non-GAAP number."

contributing: lisa sanders

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