Creative Production

Perfect Storm: The collision of client payment terms and the post COVID economy

Payment Terms

“Pull Quote”

Large advertisers with significant buying power have often revealed in the past that they don’t really understand how to communicate effectively with their partners in the creative production process. Now is the time to learn.

For some time, advertiser payment schedules have been a source of contention in the industry, as advertisers attempt to extend their payment terms to 90 and even 120 days and agencies and vendors look for ways to adapt. (*1) Extension of payment terms is generally a company-wide effort driven by finance and executed by procurement, whose overall purpose is to maximize the corporation’s cash position to improve the company’s financial statements for reporting to investors and Wall Street.

Efforts led by indirect procurement to implement these policies in the marketing execution ecosystem have raised a lot of questions as most vendors, and even a lot of agencies, are smaller creative companies who are ill-equipped to carry large receivables for many months after a project has been completed and the majority of their production costs, including talent, crew payroll, etc. have already been paid out.  (*2) In addition, they are disinclined to be used as a bank by huge multi-national corporations and often forced to adopt risky financial tools like factoring their receivables just to keep up with the cashflow on these projects.

Now the issue of payment terms has escalated into a crisis by the effect the coronavirus is having on the advertising business, as large advertisers, some of whom are now experiencing serious financial distress themselves, are again looking to their agencies and suppliers to bear at least some of the financial pain. (*3) Many agencies were already struggling to collect from their clients before this whole thing started. AICP (the trade association that represents commercial producers and post-production companies in the U.S.) has estimated that their members are already carrying close to $200M worth of late payments from advertisers, without even counting outstanding money for work in production when the crisis hit. (*4)

It’s likely that in many cases, the process is already stretched close to the breaking point, and there is no wiggle room left on the receivables side of the equation to carry the weight of these financial challenges. Doubtless agencies will do their best to help “good” clients who have a history of dealing with them fairly, but they are not likely to be able or even inclined to extend similar help, if they are even capable of it, to clients who are already taking advantage of a buyer’s market to grind them on fees and payment terms.

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It may be time for advertisers to use some of their financing clout to make sure the resources they need to get their marketing on track in this crisis stay reasonably healthy, or at least survive.

It may seem counter-intuitive to look at this crisis as an opportunity, but now is actually an ideal time for advertisers to examine their policies and behaviors and make some judgments about whether they actually support the long-term goals and success of their organizations. Mark Cuban has suggested that how brands treat their workers in this crisis will define them “for decades”; how they treat the valued suppliers and creative partners in their marketing ecosystem may define them as well, in that it will determine their ability to get their messaging out during the crisis and after it going forward. (*5)

Brands would do well to look carefully at how their finance and procurement departments are managing their creative relationships. Communicating effectively and responsively with customers will probably turn out to be a lot more important to the long-term health of a company right now than pandering to a small group of Wall Street analysts on an earnings call, and it will depend on those relationships.

They would be wise to make a serious effort to analyze their SOW’s and accounts payable now and make sure they are dealing fairly with agencies and vendors that they will need in a  few months when they are rushing to refresh or re-focus their messaging and get back up to speed.

One prominent production company owner I spoke to said, “These big clients are going to have to understand, when this is all over we are not going to be able to carry big receivables the way we used to….It’s not going to just go back to business as usual overnight and by the time it does, a lot of good companies will be gone.”

Large advertisers with significant buying power have often revealed in the past that they don’t really understand how to communicate effectively with their partners in the creative production process. Now is the time to learn.

If we come out of this crisis with an ecosystem where agencies, clients, and creative partners co-exist in a more fair and collaborative business environment, something will have been gained.

About the author

References

1. Ad Age: How Advertisers’ Long Payment Schedules Are Hurting The Creative Process.

2. AdAge: Payment Terms, E.J. Schultz.

3. Ad Age: Marketers Are Delaying payments to Agencies, Ad Execs Complain.

4. Ad Age: AICP Calls out Brands for Owing Hundreds of Millions in Late Payments and Coronavirus Pandemic.

5. Ad Age: How Brands Treat Their Partners Now Will Have Consequences For Their Post-Pandemic Potential.

The views and opinions expressed are solely those of the contributor and do not necessarily reflect the official position of Marketing Procurement iQ or imply endorsement from the publisher