Federal fraud charges against two former Ogilvy & Mather executives highlight serious flaws in a commonly-used "bill-by-the-hour" compensation system that is so inexact, tough to implement and open to manipulation that time-sheet inaccuracies has become commonplace.
Numerous agency staffers who spoke with Advertising Age-from administrators to CEOs-concede the mushy science of compensation. It ranges from ballparking how they spend their time, to figuring that discrepancies will even out in the long run, to hiding costs and hours in client codes that can more easily absorb the expense. Though inaccuracies generally are minimal and not maliciously designed to deceive clients, they say Ogilvy got hit for run-of-the-mill shortcomings.
Account managers usually are adept at managing accounts, but they aren't above swapping hours worked on one account with available hours on another to make their numbers balance out, said one mid level executive who acknowledged doing so. "I've never seen anyone switch hours to screw a client. I've seen them [do it] to ensure their time sheets look good for their bosses."
David Beals, president of Chicago consultancy Jones Lundin Beals and a former group account director at Omnicom Group's DDB Worldwide, Chicago, said shops may also shift expenses from poorer clients to those that are flush.
The American Association of Advertising Agencies maintains inappropriate billing is rare, and agencies say most interactions are above board, with discrepancies a case of sloppiness rather than fraud. Ogilvy, of course, is accused of having an intent to defraud, not just sloppiness.
Two former Ogilvy executives, Shona Seifert and Thomas Early, were charged Jan. 7 with perpetuating a fraud by instructing employees to revise time sheets to show they had worked more hours on the Office of the National Drug Control Policy account than they had. Both have pleaded innocent. (Read more: AdAge.com QwikFIND aap27b).
Ogilvy has faced similar allegations in the past. Included in a sexual-harassment suit filed last year, Yvette Dobbie, an executive administrator in Ogilvy's Culver City, Calif., office, said she discovered billing improprieties at Ogilvy's Los Angeles office. The suit said two coworkers told her Dena Moore, director-print services in the Los Angeles office, had directed staff that non-billable administrative time in excess of two hours daily should be billed to Ogilvy clients and that other administrative time should be "buried" in client invoices and that time sheets should be regularly be "padded."
(In November, U.S. District Court Judge Dean D. Pregerson threw out those allegations, saying Ms. Dobbie did not represent Ogilvy clients and could not sue for unfair business practices on behalf of the general public. Ms. Dobbie's attorney said she is still pursing the sexual-harassment and unlawful-termination case against the agency.)
Another allegation was made by Al Leong, a former junior staffer at Ogilvy. He said that when he worked in the Seattle office a decade ago, he was told to bill Microsoft, a $40 million client, for work done on Visio, a $1 million client that used Microsoft operating systems. (Visio was bought by the computer giant in 2000.) He said colleagues told him that Microsoft had been billed for Visio charges. However, another former Ogilvy executive who worked with him vehemently denied Mr. Leong's accusations, saying such practices would have been "completely unprofessional, unethical and not allowed."
A spokesperson for WPP Group's Ogilvy said, "The billing allegations in the Yvette Dobbie lawsuit were completely baseless and without merit and they were summarily dismissed by the court. The Al Leong allegations, which were brought by an employee who worked over a decade ago in a low-level position at the company for less than five months, are also totally baseless in fact."
Time sheets are a point of contention throughout the industry. Some agencies have installed computer programs to track hours and others dock pay of employees who are remiss in filling out their sheets.
To eliminate discrepancies, Procter & Gamble Co. has paid its agencies under an incentive system since 2000. Mitsubishi Motors North America employs a system of checks and balances to monitor Interpublic Group of Cos.' Deutsch, Los Angeles.
Many agency executives would welcome an alternative to time sheets. "It's silly to spend half your time trying to figure out how to bill the other half of your time," said one executive at another agency.
While agencies complain that marketers feel entitled to dictate their profit level and examine overheads, clients grouse that agencies are flabby and greedy. As the economy soured during the last few years, client-procurement types began to hammer agencies as they have other suppliers. At the same time, agencies have moved from privately held businesses to units of publicly held holding companies, which demand quarterly targets be met. The fallout is a system in transition with questions over the model and disagreement over minutiae.
"My philosophy is to keep negotiating price down till they scream, and then they're making a profit," said one retired marketing executive. "You push as far as you can and see what you can get away with, and they push" and do the same.
An agency executive with marketing experience said that agencies routinely would underbid to get business in the door. Agencies do try to service the marketer at the agreed-upon price that is in the contract, but over time realize to cover expenses, they will need to bill over and above what is stated in the contract. "What clients won't [remember] is that they got an incredible deal" to start with, this executive said.
One New York agency head said the trend is for customization, with as many permutations as there are relationships. Once the rule, commissions largely are gone. Flat commissions that do remain are easy to track but leave many clients resentful that they pay the same commission throughout a project when the real work was at the beginning or end. Retainers let agencies and clients plan based on how much money is going in and out, but agencies complain they get treated like chattel, while marketers question whether they're getting their money's worth. Both complain about scope that lacks in detail. Now the norm, cost plus compensation-with hours and expenses-also is easy to track but leaves marketers wondering if the numbers are real.
Consultants, agencies and many marketers said clients would benefit if they rewarded efficiency and results rather than just hammer on price because if agencies are continually slammed on price, they will be more focused on their own survival than on client opportunities. Until that happens, don't look for the vitriol to abate.
"When the economy gets better, CEOs, marketers and finance people are going to get less interested, but the purchasing people will not forget," said one consultant.
contributing: alice z. cuneo