Lessons from Ogilvy's case

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Ogilvy & Mather's alleged billing irregularities on the $150 million U.S. Office of National Drug Control Policy account is a situation that tries agencies' and marketers' souls. If true, the federal criminal charges brought against two former senior O&M managers are a seismic crack in marketers' $1 trillion annual global marketing communications investment.

The best-case scenario is that Ogilvy staffers prepared erroneous time sheets for which the agency ultimately had no rational substantiation. The worst case is the government proves its allegation that the Ogilvy managers deliberately padded time sheets to boost revenues. Unless plea bargains are reached before trial, all the unpleasant details presumably will be aired further in public.

Let's assume it was sloppy record keeping. This in itself would impair marketer confidence in agency stewardship. Consider the previous indictment of a former Grey Worldwide exec VP (in a bid-rigging scandal involving graphic services supplier Color Wheel) plus the accounting scandals and financial chicanery in the wider business world. It's no wonder marketers are uncertain about what to believe, who to believe and what to do.

Agencies have long enjoyed the luxury of scant client oversight, a holdover from the days of the 15% media commission, when clients rarely asked for financial transparency. The commission's replacement was the labor-based fee. The fees in time motivated agencies to develop ever more creative approaches to reporting client account economics.

The root causes of the alleged mishandling of the ONDCP account ultimately rest with ethics, honesty and business culture-areas not easy to change. But there are practical "best practice" steps marketers can take for greater accountability and effectiveness in the area. Although new approaches to agency compensation and management are necessary, here are some elements to an integrated solution for making labor-based agency fees work better.

* Compliance. "Compliance" is about prevention. It is proactive and is about the client/agency relationship going forward. "Audit" is static and about history. There is a middle ground: verification of time and payroll registers via electronic sampling and benchmarking. Third-party experts in advertising (forensic accountants and management consultants) do this. If there are material variances or suspected defalcation, call in the auditors for a deep dive.

* Full disclosure. Great agency work and full disclosure are not mutually exclusive. Make sure you have state-of-the-art "best practice" audit and transparency provisions. Best-in-class clients have them not because they expect something is wrong at an agency but, rather, to have processes in place that will facilitate compliance and stewardship.

* Work practice management. Clients should look hard at their work practices and process management. Most clients and agencies are fair to poor in this area. The shocking fact is this: Client work practices and processes are the single largest contributor to inefficiency and ineffectiveness in the client/agency relationship. Clients can expect savings or re-investment opportunities of 15% to 25% if they put their shoulder to the wheel.

* Benchmarking. Benchmarking is sunshine. Agencies can change accounting practices without disclosing it, or apply different accounting methodologies to different clients. Through the use of consistently applied terms and benchmarking, these can be identified. Benchmarking also provides useful metrics for assessing agency inputs, such as salaries, overhead, profit and multiplier.

* Stewardship training. Clients need stewardship standards. These are taught rather than God-given. Stewardship principles impart knowledge that marketing and procurement people can use to enhance their agency management skills and client/agent productivity. They make the client and the agency work together better and more productively.

The ONDCP story teaches that clients need new agency compensation models that work better and that marketing can relate to better. Labor-based fees rely on inputs from the agency that the client then vets and responds to. Staffing time and overhead can be treated many different ways by agencies, and profit can be put in the salary overhead buckets as well as in margin. Agency compensation has become an arcane science. As a client said, "There's mystery in margin."

Today's most cutting-edge model for agency compensation is "deliverables-based" compensation. It is output-based, led by client marketing and supported by procurement, rather than the agency. It is grounded in a specific definition for each agency deliverable.

The result is a benchmarked agency cost for each deliverable. Negotiation with the agency on salary overhead and profit is unnecessary. Because of its simplicity, both client marketers and agency creatives understand it.

If you are open to managing agency compensation from a client-centric perspective, one that avoids the pitfalls of labor-based fees, we recommend deliverables-based compensation as the most relevant approach today.

Arthur A. Anderson is a principal at Morgan Anderson Consulting, New York, management consultants to advertisers.

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