• by Joe Mandese  @mp_joemandese, March 5, 2008

On May 14, 2007, after months of tense, high-stakes negotiations, Michael Donovan flew to Chicago for what would prove to be his last meeting with one of his biggest clients. Donovan--the founder, chairman and CEO of New York-based Donovan Data Systems, the data processing firm that has effectively become Madison Avenue's default operating system for a half trillion in media buys--arrived at the office of Jack Klues, CEO of Publicis Groupe Media, in a last-ditch effort to strike a deal that would keep Publicis' Starcom MediaVest unit as a Donovan client.

But something went awry. Tempers flared. Emotions got the best of the executives when Donovan produced a document--then flung it on the desk, leaving Klues and his CFO Frank Voris gaping in horror. The exact nature of the document has never been publicly disclosed. It is referred to in court transcripts and sworn affidavits simply as "a highly confidential document," but it clearly contains highly sensitive information about SMG's operations that the agency does not want aired publicly.

To Donovan executives, it is the smoking gun that led to pulling the plug on SMG, putting billions in media buys for some of the world's biggest advertisers--companies like Procter & Gamble, Wal-Mart and Coca-Cola Co.--at risk. They describe the document as a "business plan," detailing SMG's plan to develop a potential joint venture and co-market a new data processing system that would compete with Donovan's.

To Publicis executives, the document was some "Powerpoint slides" that were part of a due diligence assignment to sell the concept of developing a new, state-of-the-art digital media management and processing system to the media group's corporate parent in Paris. They say it contains costs and benefits associated with various scenarios for developing the system.

Regardless of who is describing it, people with knowledge of the document say it contains invaluable information about the finances of the Publicis media unit that would put it at a competitive disadvantage if it were leaked publicly. Much of the past 10 months of arbitration that followed that ill-fated meeting has centered on ensuring it never does.

Under the terms of the American Arbitration Association agreement that was a clause for resolving disputes between Donovan and SMG, neither side can speak about it. But it is clear from court transcripts and sworn testimony made public in certain legal affidavits that the outcome of the May 14, 2007 meeting has cost both sides dearly. It cost Donovan a piece of business worth an estimated $10 million in annual revenues. It cost SMG millions in incremental manpower needed to make the transition from Donovan to a new system.

It also caused incredible stress within Publicis and its new data processing provider, MediaBank, which was forced to accelerate the creation of a new system to meet a deadline of Dec. 31, 2007--the date the Donovan contract expired, and its old provider stopped processing billions in media buys.

"SMG will not be able to adequately process media buys or complete the processing of buys already in the DDS system; ensure that clients are billed for their media purchases and that media vendors are paid for advertising they run; or perform any monitoring or reconciliation functions to determine the extent to which the media that SMG purchases is actually run," Voris said in a sworn affidavit submitted Dec. 17, 2007 as part of a motion to get a temporary restraining order that would have prevented Donovan from pulling its plug. The judge who heard that case ruled in Donovan's favor (see sidebar in today's MediaDailyNews), even though Voris claimed it would risk more than $1 billion worth of advertising buys.

While it may never be publicly known exactly how much disruption was caused by the shift, even Publicis insiders acknowledge that there has been some dislocation associated with processing media buys placed in December, January and February. Although its new system is up and running, the sheer magnitude of the data involved has created significant delinquencies that are no doubt straining the graces of some of SMG's media suppliers.

Michael Donovan vs. Jack Klues: Round One

The sequence of events that led to the SMG/Donovan rift began nearly three years ago, including luck, pluck and a fair amount of personal ego. It began in mid-2005 when Klues, a lanky Midwesterner with an "aw shucks" demeanor, made a trip of his own--to Michael Donovan's office in New York. Klues had been a Donovan client for about five years, switching to the company after SMG scrapped its own, in-house data processing system in 2000. SMG was midway through the second year of a three-year contract with Donovan and was growing frustrated by the company's inability to process digital media buys, which were becoming a critical part of SMG's business.

During that initial meeting, Klues proposed forming a "partnership" with Michael Donovan to jointly develop a new, digital media processing system. The discussion never went far enough to get into actual terms, because Donovan rejected the idea on grounds that it doesn't strike deals that give one client an advantage over others. Jilted by Donovan, SMG began exploring other scenarios for developing a new digital media processing system. It put Denuo President Nick Pahade in charge of the project.

MediaBank--a privately held, Chicago-based company with strong ties to former Publicis clients and executives--was launched in early 2006, and Linda Wolfe, former chairman-CEO of Publicis' Leo Burnett unit, was named to its board. At some point, Wolfe recommended that SMG begin working with MediaBank. Initially, SMG began exploring only a digital media solution with MediaBank, with plans to continue using Donovan for its analog media buys for the foreseeable future. In early 2007, Donovan learned that SMG was working with MediaBank, and the relationship between the two companies grew tense and remained tense, while SMG continued to formulate new options.

By April 2007, there was a slight rift within Publicis, with some of Klues' top lieutenants, including Renetta McCann, Laura Desmond and Nick Pahade, pushing to abandon Donovan altogether and to move in one fell swoop--both for digital and analog media--off Donovan. Klues and Voris, however, favored the parallel approach of developing the new system with MediaBank, and continuing to work with Donovan for analog media processing. At a decisive meeting at Publicis headquarters in Paris, the more prudent voices won, and the decision was made to offer Donovan a new three-year contract for its analog-only media business and to continue developing the digital product with MediaBank.

Two days later, Klues placed a call to Michael Donovan and offered him the new deal--although it wasn't easy to resolve, as the definition of what constitutes "digital media" became a sticking point. Klues was adamant that Donovan use Publicis' definition. Donovan, however, insisted that the deal be based on his presumably more narrowly defined definition.

Klues hung up thinking he had an agreement in principle, but two weeks later, Publicis received emails from Donovan CFO Michael Koizim asserting the deal was off. The air between the two firms grew chilly over the next few weeks, but negotiations continued with both sides seeking better terms, leading up to the May 14 meeting in Chicago.

DDS Vs. SMG Timeline

2000: Starcom shutters highly regarded, but expensive in-house data processing system, begins using DDS.

2004: SMG signs a three-year contract with DDS.

2005: SMG offers to renegotiate its contract with DDS trough 2007 and extend a new contract through 2012. Offer would form a "partnership" in which it would help develop a new, state-of-the-art digital media system in exchange for some preferential terms/treatment. DDS declines. SMG says it will pursue an alternative resource for its digital solution.

July 2006: DDS receives a call from MediaBank to make a presentation on its systems.

August 2006: DDS executive James Biskupic presents to MediaBank.

November 2006: Nancy Oppasser hired to work on project to design a new media data processing system for MediaBank. December 17, 2006: Oppasser expresses her ethical concerns about access to proprietary DDS information.

December 18, 2006: Oppasser is fired.

February 2007: Oppasser shares her concerns with DDS.

May 14, 2007: Michael Donovan flies to Chicago to meet with Publicis Media Group CEO Jack Klues and CFO Frank Voris. Shocks them by revealing "confidential" document.

June 2007: MediaBank acquires Datatech. SMG begins the process of transitioning from DDS to Datatech.

October 2007: SMG begins hiring "temporary help" to aid in the transition, claims more than $1 million in incremental, temporary labor costs to manage the process. Begins processing its media transactions on parallel systems: DDS and Datatech.

Dec. 20, 2007: Judge denies SMG's motion for a temporary restraining order that would require DDS to continue processing buys for SMG's clients.

Dec. 31, 2007: Donovan pulls plug on SMG systems (except for Canada, the U.K. and GM Planworks).

January 2007: Publicis Groupe Media Executive Director of Digital Development Nick Pahade leaves agency to join GSI Commerce after leading the team that developed the MediaBank system for SMG.

Feb. 15, 2008: Wall Street Journal breaks "Ad Heavyweights Battle Over Software" story.

March 5, 2008: DDS unveils iDesk, MediaBank pitches OX at American Association of Advertising Agencies' Media Conference and Trade Show in Orlando.