Wrong problem-and wrong solution. The Ogilvy & Mather billing scandal, setting aside the specific questions of ethics and fraud, is a symptom of a fundamental flaw in agency compensation: Advertisers are paying for resources, not results.
The ultimate solution would make sense for marketers and dollars for agencies: Pay agencies based on their contribution to clients' success, and let agencies pocket any savings they get from being more efficient. An agency that takes a day to hit a home run merits more money than an agency that takes a month to pitch a bad idea.
Savvy marketers won't obsess about time sheets, for even the most precise data measure the wrong thing: agency hours, not marketing intelligence.
David Beals, president-CEO of client-agency relations consultancy Jones Lundin Beals, said compensation is in a state of transition from commissions to fees to pay schemes based on performance. Some advertisers have figured out solutions. The world's largest, Procter & Gamble Co., pays agencies a straight sales-based commission and has never used time sheets for its roster agencies.
But too many marketers still pay agencies for the input of resources, not the output of results. "Advertisers and agencies have to collectively start to experiment with and formulate compensation schemes that tie agency pay to the results generated by agencies' ideas," said Tom Finneran, exec VP-agency management services at the American Association of Advertising Agencies. To get there, he said, the market will need better measurement tools-"and a rebuilding of the trust between advertisers and agencies."
That won't be easy given fractured relations between marketers and agencies. Distrust and lack of respect toward agencies will grow in the wake of the Ogilvy scandal. "It's bringing out the whole lovely image of the advertising industry to me," said a veteran advertising procurement executive. Added Michael Farmer, principal at advertiser consultancy Farmer & Co.: "This case is just another notch in the handle of the gun."
If there's been outrage or angst about Ogilvy, it's largely played out privately. After indictments in the government case came down in late 2003, a number of Ogilvy clients analyzed their contracts and determined they did not need to make any changes, said an executive familiar with the matter.
Major Ogilvy clients contacted last week declined to discuss the scandal, though executives with one large client said it has not colored its relationship with the agency. The marketer, which has fee-based pay for ad agencies, negotiates annual flat fees with each agency. While fees are open to change should its marketing plans shift during the year, time sheets never enter the picture.
Other solutions are open for discussion. Mr. Farmer proposes a system in which a marketer pays a multiple of 2.1 to 3.0 times salary/benefits for assigned professional agency staff (account service, creative, planning, production, traffic) based on factors such as the agency's record, level of satisfaction, type of work it does and seniority of people.
Those multiples, he said, translate into pretax profit margins from 5% to 33%. Contracts no longer would include an allocation for agency "overhead"; efficiency savings would go to the agency's bottom line. Great, efficient agencies would thrive.
How to proceed? A good starting point is for marketers and agencies to acknowledge reality: The standard "cost-plus" fee scheme-where pay is based on staffing, overhead and an agreed-upon profit margin-doesn't work. Indeed, it gives agencies incentive to pack extra people on an account to generate revenue. The labor-based contracts are based "on a failed theory," said Mr. Finneran.
Focusing on the time-sheet mess will not fix the fundamental problem.
And when a marketer has an agency it trusts, the marketer is in the best position to spend time on what really matters.
Just ask Jeeves. Greg Ott, VP-marketing at Internet play Ask Jeeves, believes his shop, Omnicom Group's TBWA/Chiat/Day, San Francisco, has a good handle on who is working on what. So he for the most part has cast time sheets aside. Said Mr. Ott: "You don't need to worry about things like that."
contributing: claire atkinson, alice z. cuneo, jack neff