By AMANDA BRONSTAD
Los Angeles Business Journal
February 7, 2005
Wall Street is not much
interested in the overbilling scandal at Fleishman-Hillard's Los Angeles
office. It involves, after all, only a few people from a single office of
a single division of the global giant Omnicom Group Inc. – a company made
up of hundreds of individual units.
Omnicom stock hit a 52-week high of $87.39 a share on Jan. 18, five
days after John Stodder, a former Fleishman vice president, was indicted
on charges that he fraudulently billed L.A.'s Department of Water &
Power on a $3 million annual public relations contract.
A $3 million contract for a conglomerate with revenues expected to
reach more than $10 billion this year is not a material concern. In fact,
there has been no mention of ongoing investigations in Omnicom's filings –
nor in any of its press releases. Omnicom spokeswoman Pat Sloan declined
comment on the matter, referring queries to Fleishman-Hillard.
"When you look at the portfolio of companies
that Omnicom has, Fleishman is like a pinky nail in the annual report,"
said Mike Paul, president of MGP & Associates PR in New York and
former vice president and senior counsel at Hill & Knowlton's New York
office.
Far more important to Omnicom these days, at least at the bottom
line, is the impact that Procter & Gamble Co.'s pending acquisition of
Gillette Co. is likely to have on billings. Gillette spent $812 million on
advertising for the first nine months of 2004 and much of that business
was handled by Omnicom units. Omnicom shares fell after the acquisition
deal was announced, and Deutsche Bank projected that $100 million in
Omnicom revenue could be lost if the Gillette work gets dropped.
Maintaining relationships
That the brouhaha over Fleishman's L.A. contract, along with
scattered embarrassments at other Omnicom units, would have little effect
on the corporate entity speaks to how the advertising and public relations
business has changed over the past decade or so. Once a hodgepodge of
largely privately held agencies, the industries have undergone massive
consolidation that has resulted in smaller shops being bought up by
slightly larger ones, which in turn have been sold to still larger ones.
The result has been the expansion of international powerhouses such
as Omnicom, Interpublic Group of Cos. and WPP Group plc. But unlike
roll-ups in other industries, the acquired operations in P.R. and
advertising often retain their name and identity rather than being
amalgamated into a larger entity. This reflects the importance of
maintaining ongoing relationships with clients who would prefer to work
with individual units within the conglomerate rather than the conglomerate
itself.
"In an agency, you watch your assets walk out the door at 6
o'clock," said Jerry Swerling, director of public relations studies at the
USC's Annenberg School of Journalism and its Strategic Public Relations
Center. "It's still all about the people. Different firms have different
cultures that appeal to different professionals. And an agency's culture
becomes an important attribute."
The upshot is that the parent firms tend to have a much lower
profile than the divisions within that parent (often not even being
mentioned in marketing materials). At the same time, these conglomerates
do not report the results of their various divisions in annual reports.
In its 2003 annual report, Omnicom divided revenues into only four
categories. Traditional media advertising, the largest of the categories,
generated $3.7 billion that year, or 44 percent of total revenues. Public
relations, the category that includes Fleishman, had generated $955
million, or 11 percent.
The result is an environment in which individual units tend to
operate separately, and specific financial information is shielded from
public view.
"These conglomerates are very fragmented," said Michael Nathanson,
media analyst at Sanford C. Bernstein & Co. LLC. "A corporate officer
in New York has not a clue about what's happening at the client level
across the country in terms of a billing issue. It's just not material."
Fiscal responsibility at conglomerates like Omnicom often ends up
on the shoulders of the managers running the regional or local offices of
each division. Local offices sometimes attract entrepreneurial types who
are responsible for pursuing new business.
"Headquarters will know you've got the client, but they won't know
the details of the account," said Swerling, who previously ran the
California office of Porter Novelli, an Omnicom division. "You rely very
heavily on people in the market and very heavily on the people who head
that particular practice or that office."
Several embarrassments
Within that framework, some argue that ethics are not a primary
concern. "There's a healthy cynicism that's endemic in all advertisers
that their agencies are probably not Boy Scouts," said Jim Singer, vice
president of global management consulting firm A.T. Kearney in New York.
But Omnicom units have been making headlines on several
ethics-related fronts, besides Fleishman's L.A. office.
Ketchum and Fleishman-Hillard were named in separate reports by the
Government Accountability Office during the past year for violating
federal laws against funding "covert propaganda."
The GAO reports said both firms created video news releases without
disclosing their affiliation with the government agency benefiting from
the videos. The videos are narrated by individuals who appear to be
reporters and often are broadcast by TV stations during news reports.
Ketchum was embroiled in another scandal involving conservative
commentator Armstrong Williams, who did not disclose that his company was
paid $240,000 by the public relations firm on behalf of the U.S.
Department of Education.
When the Williams scandal first broke, executives at Ketchum denied
that the firm had any responsibility for disclosing the matter. A few days
later, they apologized, calling the decision to pay Williams a "lapse in
judgment."
Meanwhile, Shona Seifert, president of the New York office of
Omnicom's TBWA/Chiat/Day unit, is now on trial, accused of inflating bills
to the federal government for work on the White House anti-drug campaign.
The allegations against Seifert involve her work at Ogilvy & Mather, a
unit of WPP, which withdrew $850,000 in undocumented billings on the
contract and paid a $1.8 million settlement in early 2002. Seifert has
taken a leave of absence from her current position at Chiat.
Omnicom itself is the subject of several proposed class action
lawsuits filed in New York that allege the company and its senior
executives gave false and misleading accounts of growth figures,
investments and obligations related to acquisitions in 2001 and 2002. The
company would only say it expects to defend these cases vigorously.
Paul, president of MGP & Associates PR,
said company officials at Omnicom have not taken their own public
relations advice.
"The public is talking about it and you have to
satisfy the public with your answers," he said. "You can't say other
organizations have similar problems, or there are a few bad apples. Spin
doesn't work. Truth works."
But Richard Kline, Fleishman's regional president, senior partner
and L.A. general manager, calls the recent billing fraud allegations "an
aberration." "It appears to have involved a small number of people who are
former employees, and L.A. is one of 75 offices we operate around the
world," he said.
Still, he acknowledged that several changes have been made since
the allegations first surfaced last summer, such as the launch of a
refresher workshop on billing procedures and a 24-hour hotline for
employee complaints. Also, managers are now required to sign a statement
certifying that billing information is accurate, while human resources
staff members in the division's corporate office are encouraging employees
to report concerns during exit interviews.
Los Angeles Business Journal, Copyright © 2005, All Rights Reserved.
