Ogilvy Scandal Tarnishes Image-Building Business

Allegations that Ogilvy & Mather improperly billed its ONDCP client are just the latest in a series of highly publicized charges to cast a cloud over Madison Avenue in the last 20 years.

Some of the complaints about overbilling since the 1980s can be attributed to the decline of the commission system and the rise of a labor-driven, fee-based compensation structure. But when scandal deals a blow to the image of one agency, the larger industry ends up with a black eye. Given the widely held perception of ad agencies as indulged pockets of corporate America, populated by free-spending, high-living executives, many clients tend to suspect the worst when questions arise.

“Clients feel [these situations] are more reflective of the industry than individual cases,” says Linda Fidelman, partner at New York consultancy ADvice & ADvisors. “A lot of that comes from the way advertising is portrayed in movies and on TV, with advertising misrepresented by the way the business was in the ’60s and ’70s.”

In 2000, when Alan Levitt, the ONDCP official in charge of the White House’s anti-drug campaign, allowed that some of Ogilvy’s irregularities could have resulted from misunderstandings about what charges are permissible under government regulations, he said on CNN: “In the ad industry, people fly first class. They can’t do that in the government.”

Maybe so, but there are also examples of outright fraud in the agency business. Recently the industry has been plagued by the scandal involving production house The Color Wheel. In November, Grey Worldwide’s former director of graphic services, Mitch Mosallem, was sentenced to 70 months in prison for conspiring with former salesmen at the Manhattan firm to rig bids and overbill clients. A Department of Justice anti-trust investigation into several printing and graphics supply companies continues.

Back in 1990, Young & Rubicam pleaded guilty to one count of conspiracy and paid a $500,000 fine to settle charges that it paid Jamaican businessman Arnold Foote Jr. to help it win the island’s tourism account in 1981. The indictment charged that Foote, in turn, had bribed the then-minister of tourism.

That followed another industry embarrassment in 1986, when N.W. Ayer exec John A. Bidus pleaded guilty to taking $60,000 in kickbacks over 12 years from a subcontractor while working on the U.S. Army account. After 19 years, Ayer’s Army contract was not renewed, and the shop—which had created the “Be all you can be” campaign—was unwelcome in subsequent reviews. The Army claimed the agency had falsified time cards and submitted noncompetitive bids in conjunction with subcontractors.

In some instances, client money wasn’t even at issue. In the early ’80s, J. Walter Thompson revealed it had posted $24 million in bogus bartered TV ads through a series of phony computer entries. In the hype over the misreported revenue, Marie Luisi, the svp in charge of the media unit involved, felt she was unfairly made a scapegoat and sued JWT for libel.

The negative headlines had no lasting effect. Y&R, for instance, won a $100 million contract for U.S. Census work in 1997. Still, some observers argue that the ad industry’s history, along with the difficulty of placing a value on creative endeavors, make it easily suspect.

“To some degree, there’s always been some uneasiness; there’s a higher level of concern over bookkeeping than in other industries,” said Rick Kurnit, partner at New York law firm Frankfurt, Kurnit, Klein & Selz, noting that the very first ad execs were print reps paid a commission by the media to secure ads. “The model of the industry goes back to the 1890s, and it’s based on a kickback scam. Advertising has always operated in a kind of fantasy land outside the norms of business. Historically, clients hung on to it because no one knew how to value what agencies do, so they just took 15 percent.”

While the commission system has been phased out, Kurnit notes that agencies still grapple with traditions like the “topsy-turvy, loss-leader” spec creative presented in new- business presentations—an expense that must somehow be recouped.

“When I talk to people at agencies about [alleged overbilling], they say, ‘What’s new?’ They seem to say it’s endemic,” said Arthur Anderson of consultants Morgan Anderson in New York. “They say this goes on frequently, because they’re not being paid on billings—it’s about fees that are labor driven, and there are more incentives built in to labor cost plus. There is a lot of stuff that goes into these labor-based arrangements.”

The latest flap may add more muscle to the growing power of client-side procurement people in their scrutiny of agency overhead and billing practices. More than ever, agencies need to be in command of their financial practices, lest they encounter some of the same problems of their ill-fated peers in recent years.

Noted Dick Roth , founder of New York consultants Roth Associates: “We all know agencies are notoriously bad at running their own businesses—I’m talking about giving attention to it, not lack of honesty. Agencies have managers who are not business trained; they have client skills and relationships.”