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Clients, Agencies React To ONDCP Guilty Verdicts

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The guilty verdicts last Tuesday in the fraud conspiracy trial of two former Ogilvy & Mather executives will likely strengthen the hand of clients in their dealings with marketing services agencies, client lawyers and agency execs agreed. The convictions could lead clients to demand more transparency of agency finances, more detail on compensation negotiations and more audits of agency books, sources predict.

As a corollary, ad agency insiders predict contract negotiations will get more tense while value and performance-based compensation agreements will get a big boost from the outcome of the trial involving the White House's $1 billion anti-drug account. And most executives expect the negative effects on the industry's reputation will linger for some time.

In the trial, former Ogilvy executive group director Shona Seifert and former finance director Thomas Early were convicted of masterminding a scheme to recoup a $3 million revenue shortfall on the ONDCP account by falsely inflating dozens of employees' hours on time sheets.

"Consultants will use this to further beat up the agency business in the eyes of their clients," said Burtch Drake, president and CEO of the American Association of Advertising Agencies. "It will only exacerbate the problems and discussions we're having about agency compensation. I suspect there will be an increased level of distrust. Beyond that, it further points out that we still haven't cracked the code on where the whole compensation system should go next."

Certainly, both client- and agency-side legal counsel agree that is a likely outcome of the trial. "The industry is going to take notice," said Doug Wood, a partner at ad law firm Reed Smith Hall Dickler. "This is the kind of thing that auditors out there will say, 'This is the reason we need to do this.' "

The jury decision also may accelerate a trend in which clients spend more time examining the previously private financial information of their vendors, added D. John Hendrickson, a partner at Katten Muchin Zavis Rosenman in Los Angeles, which represents both clients and agencies. "What's most disturbing is the inquiry of advertisers into the profitability of agencies," he said. "Even if the fees charged are consistent, they want to look at the income statements to find out what the profit margin is [and] then reduce the fees accordingly."

Hendrickson has also seen more client-ordered agency audits during the last two years. "I've seen an increasing number of situations where the agency has been required to open its books and verify its expenses, typically at the termination of its relationship, when there's acrimony to begin with," he said.

Other clients whose names appeared during the trial on time sheets that had been altered—Kraft, Ford, IBM, Eastman Kodak, Kimberly-Clark, Maxwell House, Abtei, Gillette, GlaxoSmithKline, U.S. Satellite Broadcasting—kept a low profile on the issue last week. Most did not return calls or declined comment. (USSB no longer exists.)

A representative for K-C came to the embattled agency's defense: "This had to do with two individuals acting on their own. It had nothing to do with Ogilvy & Mather, and we certainly have no concerns whatsoever."

Kodak has previously stated that all Ogilvy's billings must be justified to outside auditors before they are paid.

In a statement last week, Ogilvy said, "Our civil settlement in 2002 relating to the billing missteps voluntarily eliminated any billing for which there was not reliable backup. In addition, Ogilvy upgraded its accounting system to create the most rigorous accounting compliance program in the industry, which includes expanded ethics training for employees, a dedicated ethics officer and an ethics hotline for employees."

The new austerity is still rippling through the agency world. Bill Koenigsberg, CEO of independent media agency Horizon Media in New York, worried that clients' cost-cutting might leave agencies with too few staff to administrate contracts properly.

"I think a lot of people are taking a look in their own backyard to make sure that all the i's are dotted and the t's are crossed from an administrative standpoint," he said, "especially those agencies who are operating on time sheets. Whether or not you agree with the verdict ... I think that the conclusion can be drawn that you've got to be buttoned up administratively."

Some executives also saw the verdict as yet another indictment of an over-consolidated business. "It shows the pressure that the holding companies have put on individual managers to make numbers at all costs," claimed Jon Bond, co-chairman of MDC's Kirshenbaum & Bond in New York. "Just like clients shouldn't be running agencies, Wall Street shouldn't be running agencies. It's counterproductive."

Joe Grimaldi, CEO of Interpublic Group's Mullen in Wenham, Mass., worried about the overall image of the agency business. "It puts the focus on the wrong thing. Clients should be looking at their agencies for value creation, as opposed to how much time they're logging into the business," he said.

"This [the ONDCP case] is out of the boundaries when it comes to what you hear about time sheet issues," said Susie Rashid, CFO at Omnicom's Element 79 Partners in Chicago. "This is not about folks not doing time accounting, this is about people forcing employees to change their time sheets."

Rashid added that she's never heard of anyone being asked to change a time sheet because very few clients simply pay whatever hours are billed—the time sheets merely back the previously negotiated fee. If an agreed upon scope of work exceeds the hours needed, the agency eats it.

So is what happened at Ogilvy an anomaly? "I hope to God it is," Rashid said.