A week after the biggest advertiser in the world -- Procter & Gamble -- announced it would stretch the time it takes to pay agencies to 75 days, packaged-goods giant Mondelez has gone a step further, instituting 120-day payment terms.
Execs across adland are decrying the practice, saying it verges on unethical. But they also say they feel helpless going up against such big players who wield massive ad budgets and work with dozens of agencies.
Shops may want to begin holding frank discussions with clients, however, given more and more marketers are reexamining the length of time they have to pay vendors. From advertisers' perspective, it's all about maintaining a competitive advantage or not allowing a competitor to gain one.
"We're continually looking to drive efficiency and improve our processes on a global basis," said Mondelez in a statement. "Extending our payment terms allows us to better align with industry and make sure we compete on fair grounds, while simultaneously improving transparency and predictability of payment processes." The company noted the 120-day payment terms apply to all suppliers, not just agencies.
Said the trade group for advertisers, the ANA: "Our members have told us that many of them have been asking for extended payment terms from all types of suppliers (not just those in marketing) and the reason for doing so is pressure to improve cash flow. Given that overall pressure it is not a surprise that companies are now also turning to their marketing suppliers/partners and making similar requests."
At the Mirren New Business conference in New York this week, extended payment terms were a hot-button issue. During one session focused on agency compensation trends, an owner of an independent agency said she was convinced the worst is yet to come. Her evidence? A client had recently informed her it was planning to make a move to 120-day payment terms. Some fear it will only be a matter of time before even longer extensions, like 150-day terms, take hold.
That's potentially four to five months that a marketer could expect agency partners to continue delivering work without paying them.
Extensions on payment terms crept up in 2009 as companies were reeling from the recession. Major advertisers that instituted lengthy payment terms included AB-InBev and Johnson & Johnson. At the time, when the business world was collectively in a state of crisis, agencies were more understanding of their clients' cash-strapped plights. But now, some four years later, shops say they feel like they're just being abused.
The revived trend is creating more tension between agencies and clients in what can sometimes already be a tense relationship. A term commonly creeping up around the water-cooler at agencies in reference to clients' behavior is "bully."
"We've been squeezed on rates and margins for a long time and people have figured out a way to deal with that," said Nancy Hill, head of the 4A's. "But between patent indemnification and payment terms, we're being asked to serve as an insurance company and as a bank. That's not our job. It points to the erosion of clients' respect for agencies."
Last week's P&G announcement prompted discussions about between Ms. Hill and holding company heads. But her hands are tied for the most part, given trade associations can't propose legislation and are limited in their advocacy, which could be viewed as an antitrust breach.
"It's frustrating to watch this," said Ms. Hill. "The minute P&G says it, it gives permission to everyone else."
Agencies say the fiscal health of adland is at risk, with smaller shops especially exposed. While not ideal for holding companies, their scale and large number of contracts with big advertisers puts them in a better position to manage around the payment issue, observers say. Still, all agencies fear extended payment terms could impact their ability to pay salaries to their staffs. They're also worried about the chain reaction it sets off as shops will be on the hook to pay their service providers, such as production companies, studios, and freelancers.
"Production works in a very different manner than any other aspect of communications, because of the very large sums of money you deal with in a very short amount of time," said Matt Miller, head of the Association of Independent Commercial Producers. "Production companies are normally contracted for a job days or at most a few weeks before a job, and start spending money right away. That's why typically 50-75% of the payment has been given up front before the job ever starts. That's been the industry standard."
Mr. Miller noted that in order to access certain locations for commercial shoots, payment must be delivered up front and production companies may have to pay other vendors for equipment such as cameras or lights. Moreover, up to 60% of the budget on a production shoot can be devoted to freelance labor, which in many states are mandated by law to be paid within a matter of weeks. Labor unions have already been calling the AICP with questions this week about what it means for them.
"Production companies haven't historically had to borrow funds or secure short term loans that by their nature aren't favorable terms," said Mr. Miller. "They don't have the resources or lines of credit that can extend such terms to marketers. There's no company that could float that." His view is that if indeed these extended payment terms continue to more broadly ripple across the industry, the overall cost of business will increase. "All the money flows from the clients so if they're making it more expensive to do business, even for agencies and media companies that can float it, it will find its way back into the overall operations of the business."
"All we can do is educate them that it's not in their interest to act this way towards the industry, but that relies on groups like ours and the 4A's to offer education about that. There should be open discussion around it and marketing services vendors need to explain their busnesses and not just feel like they have to take it," Mr. Miller said.
Ms. Hill took a similar stance. "The best advice I can give them is to sit down with clients making requests, get an understanding of why they are making the request, and try and negotiate around it."
At least one consultant, Joanne Davis, recommended agencies play hardball and refuse such payment terms. "You'd be surprised how much they might be willing to bend and make exceptions," she said.
Either way, there's agreement that being complacent is the worst thing agencies and production companies can do. The problems could be much bigger a few years down the road if more marketers continue to follow P&G's lead.
"The interest rates are low right now, but two or three years from now when they go up it's going to cost money in a big way," said Ms. Hill. "I fear that we're getting set up for not what's going to happen tomorrow, but what's going to happen down the road."
Contributing: E.J. Schultz