Case Study

O’Reilley Associates
In 1990 O’Reilley Associates was one of the largest advertising agencies in the United States. Billings for the ad
industry were over $260 billion on a worldwide basis that year, compared to $125 billion in 1984. The 20 largest
firms accounted for nearly 35 percent of worldwide billings in 1990. Fourteen of these were independent agency
networks and six were advertising groups (firms with more than one agency network). Most of the firms were based
in the United States or United Kingdom. The proliferation of extensive advertising groups grew out of increased
demand for services around the world as clients entered global markets.

Companies of all sizes retained advertising agencies to create and execute marketing plans, advertising strategies,
and campaigns. The agencies ranged from those that provided only traditional advertising services to others with
extensive market research and consulting capabilities. To best serve clients, an agency had to be extremely
knowledgeable about its clients’ products and strategies. The most successful partnerships between advertisers and
agencies lasted for years. O’Reilley Associates had worked with many of its clients for more than 20 years.

Advertising agencies were compensated by their clients in one of two ways. Traditionally, an ad agency received a
15 percent commission on advertising placed in television, radio, or print. The client would be billed the full amount,
and 15 percent would be “kicked back” to the agency from the medium. Creative work and campaign development
were not charged to the client (except out-of-pocket expenditures).

With the increased use of nonadvertising services, a fee-based system was introduced. These services included
design, graphics, market research, sales promotion, direct mail campaigns, merchandising, event planning, and
public relations. For these nontraditional services, clients were charged billable hours plus expenditures (similar
to the compensation arrangement used by law firms). For production of the campaign (actually producing material
or copy), the client was billed cost plus 15 percent. This fee structure was necessary because the kickback scheme
no longer was feasible with the new services and different media.

O’Reilley Associates was organized into six divisions, as indicated below:

Account management: The account executive and her staff were responsible for overall client contact. This group
developed the marketing plan, handled strategy, and coordinated other divisions within the advertising firm.
Creative management: The creative division conceived, created, and developed advertising copy and artwork for
the advertisements.
Information management: The information division primarily planned and conducted market research. It also
recommended promotion strategies and merchandising programs. A library and training group was maintained for
client sales training.
Media management: The media division developed the media strategy and purchased space and time in various
media.
Administrative management: This division managed the advertising agency itself, including the human resource,
finance, and support functions.
Production management: In the past, agencies hired producers, booked studios, and produced television and radio
copy externally. As O’Reilley Associates grew, it established a production department that employed a staff of
producers, directors, and production personnel. The department owned some production and editing equipment.
This group worked closely with the creative and account management teams.

The account executive ultimately was responsible for managing the client account, including coordinating the
creative, marketing, and media strategies within the agency. A new account executive typically was given one
account. As her career progressed, additional accounts would be transferred to her. The frequent turnover required
these managers to learn new businesses each time an account was transferred to them. The learning was an expensive
undertaking, but O’Reilley Associates believed it brought fresh thinking to their clients’ products.

New Client Decisions

One of senior management’s most critical roles was deciding which new clients to accept. Potential clients whose
products competed with an existing client’s products were not even considered. Aside from this, O’Reilley
Associates considered any new client that (1) had a solid business reputation, (2) was in good standing in the
community, and (3) whose product met a consumer need.

O’Reilley Associates applied its past experience to assess the profit potential of new accounts. The agency served
approximately 50 clients and over 250 products, covering a wide range of product categories. It used cost data from
these current accounts to estimate the cost of servicing new accounts. Additionally, it estimated the spending
necessary to build up a product to desired market share. Typically, a product’s cost included an allowance for
advertising costs. If the advertising allowance could cover the expected cost of building market share and
maintaining the product, that was sufficient evidence for accepting the assignment.

New Product Introduction

A host of issues needed to be studied before launching new products. The information management division began
by conducting marketing studies and using focus groups to determine if there was a consumer need. If a need existed,
the consumer benefit was identified. This test marketing stage was intended to gauge consumer acceptance.
O’Reilley Associates maintained a research panel of several thousand consumers around the country to conduct test
marketing.

Once a consumer need was identified, a creative strategy, based primarily on the consumer benefit, was developed.
Test marketing continued to determine the effectiveness of executing this strategy. If this part of the test marketing
was unsuccessful, it was assumed that the selling message was not conveyed effectively and the execution was
changed.

When the agency finished test marketing, it gave recommendations to the client about the probable outcome of a
full-scale product launch. Only after the client decided to proceed would the agency generate any significant revenue
from the assignment. This revenue was a function of the advertising budget needed to support the full-scale product
launch and had to cover all expenses up to that time. Management’s early assessment of the product’s chances of
succeeding was critical to the profitability of O’Reilley Associates

Existing Product Support

Advertising strategy for existing products was quite different from that for new products. Market acceptance of
existing products was better known, although product obsolescence was a constant concern. Existing products
needed advertising to maintain consumer awareness of their attributes. The client’s marketing group worked closely
with the agency to develop new plans to increase these products’ market share.

Anew campaign for an existing product began when the previous campaign’s run period ended. The decision to
develop a new campaign required both the client’s and the agency’s judgment. A drop in a product’s market share
was a definite sign that a new campaign should be considered. Additionally, meeting competitive threats was a
critical part of maintaining a product.

Account executives managed new campaigns within the agency. First, the creative department developed a strategy.
The account executive and her staff reviewed the strategy with the client’s sales team. The parties would agree on
an advertising strategy and marketing plan, and the necessary advertisements, commercials, and other promotional
material were prepared. Then the media department arranged to execute the plan through various media.

Account Profitability
Another critical responsibility of the agency’s top management was to assess the profitability of various accounts.
The most profitable accounts were those that advertised frequently with the same copy. The agency incurred its
major expenses up to, and including, the preparation of advertising copy. After that, the agency simply executed the
advertising plan by purchasing media time and space. A client who required a constant stream of new copy was far
less profitable than one who used the same copy repeatedly. Constant development meant additional creative
strategy and copywriting, which were expensive undertakings. A client’s size frequently affected its profitability.
In large client organizations, the advertising plan had to be cleared at numerous levels, which involved a great deal
of time and effort on the agency’s part. Additional revisions to the plan and numerous conferences sometimes made
a large client’s account unprofitable. There were more compelling reasons than profitability to keep a client account.
An unprofitable product account might be retained if the agency held accounts for a client’s other products that were
profitable. Additionally, the client might choose to continue a marginally profitable product line for competitive
reasons. In this case, little advertising was in order. The agency continued to handle such an account, albeit
minimally.

Personnel Costs
Personnel constituted much of the cost associated with servicing an account. Payroll accounted for 60 to 65 percent
of O’Reilley Associates’ gross revenues. In a typical agency, other expenses accounted for 20 to 25 percent of
revenues, and the remaining 10 to 20 percent was pretax profit.

All employees except administrative staff filed time sheets that recorded the number of hours they worked, broken
down by client account. Administrative personnel who could allocate their time to a specific client did so.
Approximately 85 percent of the payroll was accountable to individual clients. Since 65 percent of revenues covered
payroll and 85 percent of payroll was accountable, 55 percent of revenues were direct personnel expenses. At
O’Reilley Associates, if direct payroll associated with an account was less than 55 percent of revenues, the account
was considered profitable.

Approximately 20 percent (4 to 5 percent of revenues) of the nonpayroll expenses could be allocated to a client.
This included travel, entertainment, rough copy costs, research, and copy pretests. Indirect expenses included rent,
telephone, and utilities. These expenses were allocated based on direct payroll.

O’Reilley Associates was extremely secretive about the profitability of its accounts. Only three people knew its
account profitability: the company’s chairman, president, and treasurer. This policy was created to encourage teams
to provide the highest level of service to their clients without regard to the accounts’ profitability.The agency’s
management believed employees would be less enthusiastic about working on unprofitable accounts and their work
would suffer. It was top management’s job to decide on account retention. The rest of the firm was responsible for
serving the clients.

T&D Corporation Account

T&D Corporation was a large manufacturer of tools and dies that were sold to industrial customers. The corporation
had many divisions, each of which conducted its own business except when the overall corporate image was
involved. This included advertising. The corporation’s divisions used O’Reilley Associates as well as
other advertising agencies.

Until a recent review, each of the T&D divisions that used O’Reilley Associates was thought to be profitable to the
agency. However, a recent review of T&D’s International Division account raised questions about its profitability.
A profit and loss worksheet for the T&D International Division account is provided in Exhibit.

The International Division did not advertise in the mass media. It did its own artwork in-house. O’Reilley
Associates’ main responsibilities were to provide advertising copy and buy media space. The O’Reilley Associates
account executive on T&D International had spent considerable time and energy learning the client’s business and
understanding T&D Corporation’s objectives. This was done to create an advertising plan that would be supported
by the client’s corporate management. The account executive also spent considerable time familiarizing copywriters
with the company to ensure that the copy was in line with T&D’s corporate policies.

Anil Chitkara, a member of O’Reilley Associates’ staff at headquarters, was told to prepare a report for the agency’s
top management review of the T&D International account. The report was to cover all relevant issues, set forth
alternative courses of action, estimate the consequences of each, and articulate Chitkara’s recommendations.

Questions
1. What management control system would you recommend for O’Reilley Associates?
2. What would you include in Anil Chitkara’s report described at the end of the case?