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This article is from August 25, 2004, and is no longer current.

Industry Analysis: The Corrupt Partnership Between Advertising Agencies and Graphic Arts Businesses


There is a different side of the advertising and graphic arts business that many of us are aware of but few speak of: the often-corrupt partnership between some advertising agencies and some printers. For this article, I conducted a dozen interviews with executives, production managers, and art directors from advertising agencies as well as executives from prepress and printing companies. Additionally, I have been in contact with Justice Department trial attorney Rebecca Meiklejohn, who is heading up the Department’s own investigations.
Over the past several years the Justice Department Antitrust Division’s New York Field Office has been investigating the cozy relationship between New York advertising agencies and the prepress and printing companies that serve them. The investigation is being conducted in partnership with the Federal Bureau of Investigation and the Internal Revenue Services Criminal Investigation unit.
In a recent case, executives at Color Wheel were among a group of printing and prepress executives who were found guilty of conspiring with employees of Grey Global to bilk Grey’s clients out of millions of dollars. Grey’s clients were billed huge sums of money for work that never took place, tickets to the World Series and other entertainment expenses. In some cases, when particular jobs for a Grey customer would run over budget, Grey executives would allow Color Wheel to fraudulently shift the over-budget amount onto jobs for a different Grey client.
Convicted were Mitchell E. Mosallem, former executive vice president and director of graphic services at Grey Global Group; Haluk K. Ergulec, former owner of The Color Wheel Inc.; and salesperson Birj Deckmejian, a Manhattan supplier of graphic services; as well as several other executives.
Mosallem pled guilty to 11 antitrust, fraud, and tax crimes, and agreed to serve a prison term of 63 to 78 months. For his part, Ergulec was sentenced to 37 months in prison and ordered to pay $1.5 million in restitution. The Justice Department called these cases “their most productive recent investigations, involving the advertising, printing, and graphics industry in New York City.”
Since September 2002, the case has produced 12 guilty pleas. It is unfortunate though that for all of the Justice Department’s collaborative efforts they have caught only a few minnows in the ocean.
Is This Just a New York Thing?
When the Grey Advertising scandal hit the news wires it was written off as a “New York Thing.” This is not a New York phenomenon and based on my interviews, these activities have existed for decades. From California to the New York Island, from the Redwood Forest to the Gulf Stream Waters, prepress and printing companies in collusion with their advertising agency partners, have been bilking their clients out of hundreds of millions of dollars. Client budgets have been misused to acquire everything from cash and entertainment to travel, and even drugs. The costs for these “habits” are billed back to Corporate America.
Strictly Off The Record
Since so very few of the people involved ever get caught, production managers have been free to bill their clients for just about anything; and this is how we arrived at where we are today. Some production managers are highly skilled in the art of shifting costs between clients in an effort to avoid suspicion. Some executives I spoke with have admitted either participating in some form of these activities or were aware of someone else at their company who was up to their neck in gratuities.
In spite of all the publicity generated by recent corporate scandals, most people I spoke with did not find their own actions or the actions of others troublesome. Generally, it was stated, “This is how our industry operates.” Those who admitted billing clients for work that was not produced for them, but for another client, felt they were doing nothing fraudulent, criminal, or unethical.
Said one production manager, “If I am savvy enough to produce a client project for less money, where does it say I am under any obligation to return those funds to the client? I’m not. If the client expects to see an invoice for $26,000, that is exactly what they get. Who cares if part of the invoice included me flying to the Bahamas with my boyfriend?”
A few production managers blamed it on their own clients. The extra expenses are justified they say, because most clients wait until the last minute to approve their projects causing 60+ hour work weeks.
One printing representative chartered a private jet so that he and the ad agency exec could fly from San Francisco to Las Vegas for a quick press check. After the press check, the two grabbed a couple of rooms at a top Vegas hotel and took in a New Year’s Eve U2 concert. The $50,000 bill was invoiced back to the agency’s client.
Some Advertising Agencies Are Pigs At Their Clients’ Troughs
When it comes to spending their clients’ money, some advertising agencies are like pigs at a trough. They overeat, stuffing themselves with super-sized invoices; they are gargantuan billing machines and experts at finding creative ways to invoice their clients for work, even if the work was for a different client.
This partnership between some printers and ad agencies is one reason prepress work remains priced at high levels. Prepress companies often see profit margins of 28 percent and it is not uncommon to achieve profit margins of 40 percent or more. The more invoicing for extra-curricular activities, the more profit on the jobs. Without question these un-audited billing policies have a very positive effect on the bottom line for everyone but the agency’s client.
Some corporations believe that requiring their agencies to have strict bidding guidelines for print and prepress work will keep their agencies honest. Wrong! There are ad agency production managers who get around all of this by sharing bids with their preferred vendors and, in the end, if a preferred vendor is forced to low ball the price to get a job, they can always make it up on “change orders.”
Denial Not Just A River, But A Right Of Passage For Those At The Highest Levels Of Executive Management
Many top ad agency executives claim that they don’t know about these shenanigans, but they do. They do not want these practices to stop because it adds revenue to their bottom line.
When an agency finally gets caught, being at the top affords the exec the luxury of being able to point blame at those who work in the swamp, i.e., the production manager. Of course production managers are guilty for the acts they commit; but clearly, the agency’s top execs should suffer too.
Fortunately there is a pill corporations can take to cure this problem and if taken daily the problem can be controlled. It’s called The Wal-Mart Vendor Business Code of Ethics.
Unlike executives in our industry, those at Wal-Mart realized that without a strong code of ethics and strict polices in place, the temptation for Wal-Mart buyers to take a share of the billions of dollars of products they purchase each year would be far too great.
Wal-Mart buyers, unlike agency production managers and art directors, cannot receive meals, tickets to events, or gifts of any kind. A Wal-Mart buyer or executive can attend offsite vendor meetings and plant tours but if food of any kind is served there, the buyer must pay for the meal. With Wal-Mart’s policy, there is no way for a Wal-Mart buyer to receive a trip to Las Vegas to see U2, unless the buyer pays for the trip himself.
There Is No Such Thing As A Free Lunch
Over time nice gestures quickly become expectations and buyers start taking more and more. A ball game and $2.00 hot dog becomes a $10,000 dollar shopping spree in New York or Paris. Before you know it the buyer is awarding work to the vendor just to retain the benefits.
Ad agencies should simply enact policies that prohibit their employees from receiving gifts from their vendors; there is no reason for an art director or production manager to have lunch or attend ball games paid for by vendors or spend the weekend at a vendor’s home in the mountains. Of course none of this will stop greedy and bitter production managers from billing their clients for work that never took place, but it would be a good start.
Corporations must take action themselves and force advertising agencies to adopt strict polices, like Wal-Mart has. Fire any employee and ban any vendor who breaks the policy. The executive of a printing or prepress company will understand the penalty for their actions: they’ll lose the entire business.
Scandals at Enron and MCI have taught us when there are large sums of money at stake, some employees will take advantage of the system as they see fit. Printing and prepress organizations that play by the rules and do the right thing should demand action be taken as they are losing business to companies who don’t. This criminal activity must be stopped and reform is needed across the entire Graphic Arts Industry immediately.
Change will not happen because of this article, but at least the issue is on the table. For now, honest print and ad firms must hope that the Department of Justice will continue to investigate these practices.
Jeremy Smith is CEO of Smith Consulting, a consulting company in the San Francisco Bay Area that specializes in sales, business development, and executive management for the printing, graphic arts, and imaging industries.
 

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