$137.8B U.S. ad spend for top 200 advertisers
Now that Mars has become the latest marketer to jump on the deferred payment bandwagon, agencies are once again complaining (behind closed doors anyway) about feeling financially bullied by clients.
There's little doubt that when the world's biggest marketers extend payment terms to 90 and 120 days, the repercussions are felt at every level -- from media agencies who have to pay for their buys, to the creative agencies who have to pay production companies and other vendors, and to the employees who may suffer deferred or canceled bonuses and raises.
The heads of the major agency holding companies have been vocal about this topic over the past year, publicly agreeing that they don't want to be treated like banks. Unfortunately, it hasn't stopped the forces that are driving deferred payment. So it's time for agencies to start dealing with the issue head-on instead of acting like victims.
Whether we like it or not, it's a trend. Mars has explained: "The reason we made this move to 120-days payment terms is to align closer to the trends of our peers." Many of the world's biggest advertisers are now starting to see this practice as "standard." It's actually a self-fulfilling prophecy: The more marketers that jump aboard, the more standard the policy will become.
As an industry, we have to get past indicting these companies. And by the way, Ark Advisors is part of this ecosystem too -- as consultants, we're regularly presented by marketers with the same payment terms.
We all have an obligation to forgo helpless complaining by taking an active role in the negotiation process and being honest about our expectations. And we need to speak up when our expectations aren't met. It has been our experience that, when asked, most clients are willing to negotiate more reasonable terms.
Our company has managed successful term negotiations, for ourselves and for agencies, during many of the pitches we've led. The key is leaving nothing unsaid: Payment terms are a critical part of new business pitch discussions and must be clearly understood and agreed by all parties at the very beginning of the pitch process.
When we run a pitch, we disclose the client's terms to the agencies upfront so that there are no surprises later in the process. This information will then help inform the agencies' decision whether or not to participate. We have had agencies pass on pitches when they felt that the client's payment terms of 120 days were a deal breaker.
Despite the trend, all hope is not lost, because there's also evidence of a counter-trend. A little-quoted statistic, from an ANA survey last year, is that 17% of marketers had actually shortened terms in some cases. The survey also found that across-the-board shifts are still relatively rare, with 90% saying they made no changes in payment terms for at least some of their services during the year.
I cannot speak to the particulars of the Mars policy because I am not privy to them. Whatever the specifics may be, however, there are three clear options for agencies in this type of situation:
Accept. If this is an opportunity that you simply cannot pass up, then make sure your CFO is onboard and can manage the agency cash flow accordingly. There are occasionally times when agencies see such a decision as net positive for category experience, to offer talent an intriguing creative opportunity or for press.
Negotiate. Try offering a counter that you believe is more fair and equitable. Some holding companies and agencies have former procurement executives within their financial departments to help negotiate with client procurement executives. If they speak the same language, there is a better likelihood of success in negotiations. Remember, this is a negotiation and not a hostage situation. In our experience, these negotiations can often be successful if addressed in an honest and timely manner.
Just Say No. If it seems like you're dealing with a less-than-flexible client or prospect, be prepared to walk away from the table (however painful it may be). Trust your gut and know that the path you are taking may lead to a short-term financial hit, but a healthier decision for your agency long term. And be prepared for the fact that this move could actually wind up leading back to option number two. You may be surprised how flexible a client may become when they are faced with losing a valued partner.
Unfortunately, there's way too much polite deferment that takes place between marketers and agencies when it comes to compensation negotiations. Both parties should be honest about their payment expectations and engage in open dialogue upfront (not during the finals stage of a search). Don't make the mistake of being too scared to rock the boat -- because that's precisely the moment when you start to sink.