craper Seni rmntins 638 case 141 O’Reilley Associates 1 1990 OFeiley Associates was one ofthe lrgest advertising agencies in the ‘Ualted States, Billings forthe ad industry wore over $260 bilion on a word wide basis that yea, emparedt $125 bilion in 1984. Th 20 largest firms ac- Counted for nearly 35 percent of worldwide billings in 1990, Poarsen of these swore independent agency networks and six were advertising groups (ems Iwth more than one agency network). Most of the fms were based in the United Stale or United Kingdom. The proliferation of extensive advertising troupe grew out ofinsressed demand for serves around the word a cients tered global marks ‘Companies of ll sits retained advertising agencies to crate and execute marketing ples, advertising strategies, and campaigns. The rgencae ranged fom those that provided ony tational advariingsarice to others with fxtensive nrket research and consulting capabilites. To bet serve clients an Sageney hed to be extremely knowledgeable about its clients’ products and strategies, The mort uccesfl partnerships between advertiser lasted for years, O'Riley Asorntes had worked wids maay ofits lens for spore than 0 years “Advertising agencies were compensated by thir clients in one of two ways ‘Traditionally, an td agency reeived a 18 percent commission on advertising placed in television ado, or pint. The ian would be billed the fll amount, End 16 persnt mould be “icked back tthe agency from the medium. Cre. tive work and campaign development were not charged tothe int (except ttt pocket expenditure) ‘With the increased us of nonadvertsng services, « fee-based sytem was {introduced These services included design, graphics, narket research, sales ro ‘motion, direct mil smpaigns, merchandning, event planning, oad public rela ‘dona For these nontraditional service, cients Wee charged lable hours pss ‘spenditues (similar tothe compensation srvengement used by law fms) For ‘redaction of the campaign actuellypreducing material or cop), theclent was Billed cost plas 16 perce, Tle fs stroctare wat necresry Beeaue dhe Kick ‘coches no longer was fase withthe new sormess and dierent medi. ‘Ofeiley Assostes was organized int si divisions, a indisted below ‘Acount management The sou xaativ nd her al ware ean or ‘eral elloneonrat Ths woupdevelped the marktng plan, hailed sat ‘brand eordnnted other vitor within Use adrertsing Chrtce management Th cestive division onesie, crete, and developed ‘svertng copy and artwork ortho aaron Injormatin management: Te ieforation division pimary panned and (dete mere! fever alae recomended promotion seg nd torehondiangpoprams Abrery and trsni up Was alsin fr ‘Son ssie ting “isco as ads yA i (90 op) ude he pin of Pree ov sinnoinsnd Rte ny ao tac by tna oa) Reaperdio menogonnt Te mia division tle the mola atey and pu ‘Adminitrative mancgenent: This dviion managed tbe overisg agen {cc ieuing he aman sour, Soa and npr ons Produtos management nthe ps, gece ied producers, baked tl, ‘nd prodicd tls end ade cofy eternally As ORelley Ansan re, ‘esata a pruction pare that emplyed eal of predarere ie tor and production personal. Th dparten aed sxe produces tad ‘tng euipment This group worked ety withthe crentie and seman. ‘Tho acezuntexccutivo ultimately waa rexponsible for managing the alent account, induding coordinating tha creutiv, marketing, and media strategies ‘within the agen. new account enceulive typically ws given one eect ‘Asher career progressed, adational accounts Would be transferred ther. The frequent tarnover required those menagors ta learn new businesses exch ime fan account was transferred to thom, The learning was an expensiv> under {ing bt OReilley Asocator believed it brought fresh thioking to thelr tients protut. New Client Decisions (One of senior managements mest cia ols was deslding which now ents to acept Fotentilelionts whose products competed with an exiting clients products were not even considered. Aside fom this, Rally Asscites con: Sidered any-acw cont Ut (1) had a etd busines reputation, (2 was a good ‘Standing i the community, and @) whose product meta consumer nes, ‘ORailey Associates applied its past experience to asee he profit potential of new accounts. The agency served approximately 60 lients and over 250 product, covering a vide range of product eatogories ward ont data from these carrot acenunts to estimste the cast of servicing ew eeeounts. Aad tionally, it estimated tho spending necessary to bulld up a product te desired market shar. Types «product's cot inside an allowance for advertising fests. I the advertising allowance could corer the expected cart of building ‘market shave and maintaining the prodac, that wae sufiint evidence fr aa opting theessignment ‘New Product Introduction ‘A host of lnune noaded to be studied bofre launching now products, The information ‘management division began by conducting marketing studies ‘and using hea groups to datermine if there was a consumer need. Ia need ‘nite, th consumer benefit was identified. This fost marketing stage wes ‘Intended to gauge consumer acceptance. OReilly Astacates maintained a research panel of sveral thousand eonsumers around the county tocondct test marketing ‘Once a xntemer need wasidentfe, a creative tratepy, bated primarily on ‘the consumer bone, was developed Tst marketing continued to determinethe efectivonais of exeoatng thie strategy. I thie prt ofthe test marketing ‘wan ensucoeael twos sanumed thatthe sling message was at conveyed ‘MTevely and tsoexeestien vas changed ‘When the agene finished art marketing, it gave secommendetions ta the tient sbout the probable outcome of a fll-seale product launek. Only after th client decided to proceed would the agency generate any sipifcat rev. fenue from the assignment. This revenue wat a function of the advertising bhudget nocdod to mpport the fllsala product launch and had tocover all ex penses up fo tha: time. Managment early assessment of the product's ances of tacceecng Was erica tthe profitably of O'Relley Associates. Existing Product Support ‘Avortisng sratagy for existing products was quite diferent ffm that for new products, Mawet acceptance of existing product waa beter known, al- ‘thoagh product obilescenc was aconrtant concer, Exiting products seeded advertising to maintain consumer awarenose of thelr etibutes. The clients Iarketing group vorkedclsoly withthe agency to develop new plans ta i crease these prods marketshare "A new campaign for an existing product began when the previous cam paig's run period ended. The deceen to dovelep «new campaign required both the client's and the agency's judgment. A drop in «products marketshare was a definite sige that a new cempaign should be considered. Adionally, ‘meeting competiiethrete wes aerial par of malntaining a oduct, “Account executives managed new campaigns within the ageng. First, the crostive department develope a stratoy. The seountexeetive and her staf ‘evtewed the statoy with the lens Sls team. The parties wosld agree on fn advertising tategy and marketing plen, and the necessary advertise: ‘ents, commercials, and ether promtionl material were prepared Then the ‘media depatmentarranged to execute the plan through various medi, Account Profitability Another critical rsponibiity ofthe ageney’s top managoment was to assess the praftailty ofverous secounte The most profitable nounts wre toes that advertised frequently withthe same copy. The agency insured te major expenses up to, aml including, the preparation of edverning coy After that, the agency simply eccuted the advertising plan by purchasing mela time and pace. client who required a constant stam of ae copy Was fr less pra Table than one we used the same copy repeat]. Constant development ‘moent additonal teative strstogy and copywriting, whish wet expensive ‘Sndertakings. ‘Aint siz fryuently affected ite profitability In large cientorgenzatons, ‘headvertsing planhadtobe cleared at numerous levels, which invlved gest oa of ime and eft onthe agency’ part. Adaltional revisions o ihe plen and ‘numerous conferences eomotings made large ints acount unproStable "Thore wore more compelling reasons then proftability to hep « dient account, An unproftabo product eecount might be roteined ifthe agency heldaccounts fora clients other products that wore proftbe, Addtonally Slient might chooser continue a marginally proftebe prodt line for © pottive eatons. In this case litle advertising was tm der Tho agency fined tohendle such an accu, let miisaly Personnel Costs Personnel consitato’ much of the est astcited with servicing an accor Payroll accounted for 60 to 65 percent of ORelly Associates’ grass revert Tina typleal agency, other expentesacounted for 20 to 25 percent of rovent ‘andthe remaining 10 to 20 percent was pretax prof ‘Allemplayees except administrative staff filed tims shets that recorded number af hours they worked, broken down by sient anount. Administra personnel who could allocate their ie to epei cent did so. Appr ‘ately 85 peront ofthe paral was econutable to individual clita S {5 percont of rovenues covered payroll and 85 percent of payroll was sccn ble, 55 percent of rovenues were direct personnel expenies.At O'all At ‘ints if iret payroll associated with an account was less than 58 percen evens, the acount was considered profile ‘Approtimately 20 percent (4 to 8 percent of revenues of the nonpasrol penses could be alloted toa sient. Thisinclded travel entertainment, rot py eusts, esearch, and copy protests, Indirect expanse lauded rent, Phone, and utilities "Thess expentes wer allcstod bess on direct payl ‘Oflloy Assocates was extremly recretive about the profitably of counts. Only throe people knew its acount probity the compact ch tan, president, and treasurer. This policy was erated '9 encourage tea provide the highest lve ofservietothelrelientswithowt gard tothe aout profitability. The agency’s management believed emplayees would be less ent Sestie about working on unprofitable aeounte and their werk would suffer "es top munagemant job to decide on acount eeteation. The rat ofthe tre renponable for ering the cliente. T&D Corporation Account [T&D Corporation was a large manuficturerof tools and des that were sole ‘ndastvalcostomers. The corporation had many divisors, each of which © thuctd its own business excap when th overall corporate image wae vale ‘This included advertising, The corporation’ divisions used Oley Associa 1 well x other advertising agencies. ‘Untisrecnt review, eech ofthe TRD divisions that wed O'Reilley Asst sts was thought to be profitable to the agency. However, a recent rove EDS International Division secant raised questions aloo its profitable prof and ise worksheot for the T&D International Division account if ded in Bei 1. ‘he Intarnationel Division did not advertise in the mass media It did sewn artwork in-house. ORalleyAnsciates' main responsibilities mers to ‘ide advertising copy and buy media spece. The O'Riley Associates eect ‘secutive on TAD International had spent considerable ime and energy ‘fg the cleats business wl sulertding TED Corporations eectEXHIBIT T Income ‘Statement fora. International Divison Onpter 4 Sovie Oronsatins 687 Pero = Yar to 1231/89 Garris dos sae eae Ha bret pyro Deca masagenent F 45000 ony secnaea ena ston Media : See 7.500) : és 650 Ober are apes: ‘Untaie ons : eo Entertainment ate a Dy ct expenses ‘eeiprcy Seem nee Eales tenets soe 8000 Jaane 5250 Inde aerice depart s 36500 Onernarect, EES <_17000| 86780 “otal expense ee eee - Hes00 ro os) Bl tas 5 cessseess 672000) ‘This was done to create an advertising plan that would be supported hy the clients erporate management. The account executive aluo spent considers timo famleizing copywriters with the compeny to ensure thatthe copy was inline with T&D' erporate policies, Anil Caitara, a member af ORelliy Associate staff at headquarters, was told to prepare a repor: fr the agent's top management review ofthe T&D Tntornetimnal acount. The report was to cover al relevant issues, set forth alternative corees of action, estimate the consaquences ofeach, end atculate CChitharas rcommondstions Questions 1. What management control aystem would you recommend for O'Reilley 1 What would you inchude in Anil Chitkars's report deserted at the end of the ease?