Case study - Advertising

MANAGEMENT ISSUE: “GOTCHA!”

Doug Terry, one of the two account supervisors in your group, walks into your office one fine morning and proceeds to tell you that the Marketing Director for High West Financial Services, one of the clients in your account group, is questioning the agency’s billing practices. Specifically, the client is questioning the hourly charge out rates for employees working on the account under the agreed Scope of Work (SOW). As the Group Account Director on the business, you - along with the agency’s CFO - led the negotiations with High West that resulted in the approved SOW/Agency Fee Agreement and contract. Per the contract, the agency charges out employee direct salaries using a 2.50 multiplier to cover direct salaries, benefits, overhead and mark-up of 25% (on direct employee costs). The formula for the contractually agreed charge out rate on High West is below:

Direct Salary + Benefits (20%) + Overhead (Direct Salary x 1.0) +25% (direct costs) = Employee Hourly

1800 Annual Hours Charge Out Rate

Doug proceeds to tell you that the High West Account Executive at the agency regularly plays tennis with High West’s Advertising Services Manager, and at some point told her that she makes $42,000 per year working at the agency. And while this all seems very innocent at the time, the client files this information away and quietly goes to work. What could possibly go wrong?

Using the salary information provided, the Advertising Services Manager computes that if the AE works 40 hours per week, that the AE’s time on the High West Financial account would total 2,080 hours per year. Doing the math using the salary information she obtained voluntarily from the AE, the Advertising Services Manager computes that the AE’s charge out rate is $20.19/hour. The Advertising Services Manager goes back and checks the “math” against the charge out rate of $58.33 as outlined in the agency fee addendum to the contract, and determines the agency is overcharging High West $38.14/hour for the AE’s time on the account. The Advertising Services Manager goes to the Marketing Director with this information, and the Marketing Director immediately calls Doug to set up a meeting the following morning at 9:00 a.m. and wants a “full and transparent review” of the agency’s billing practices and charge out rates for employees on the High West account. Doug is coming to you for advice, counsel and assistance. Over to you…

What’s your advice to Doug? How are you going to him prepare for the meeting with the High West Marketing Director in the morning?

What action do you personally need to take as the Group Account Director on the High West Financial account given the “news” you have just received from Doug?

Who else at the agency needs to be involved in preparing and attending tomorrow morning’s meeting with the Marketing Director at High West Financial? Who leads the meeting from the agency side?

What actions do you need to take within your account group (and maybe even the agency in general) to prevent a repeat of this type of “financial disclosure” from becoming a client-agency issue in the future?