Sequential liability states agencies, as agents for their clients, are not liable for production payment unless they've been paid by the client.
Agencies can rightly claim sequential liability has long been a part of contracts–it was instituted decades ago as a protection for agencies making huge media buys, when instability in client finances could leave the agency holding a large amount of debt. However, a producer says, "[now] it's being applied and used in a way that's not appropriate and realistic to how production works. It dealt with media, with agencies being banks and credit services for clients. It doesn't line up with the realities of how production works."
Typically, agencies have paid half of production costs up front and half upon completion of a job (more recently, as final payments stretch out, production companies have asked for up to 75 percent up front). The sequential liability push will see agencies no longer paying any up-front money, leaving production companies to manage massive outlays, including labor costs, that, by law, must be paid relatively quickly (usually within 10 days). Production companies also can't rely on consistent revenue from any one agency. "The whole way this business is structured is one-offs," says Association of Independent Commercial Producers president Matt Miller, "there is no guaranteed amount of work. What agencies are setting up production companies for is to play a cash flow game that's never been a part of this business. Think of it as a consignment; they are consigned to do one job, cash flow is set up to meet obligations they are being contracted for. Now you have agency changing terms saying we're not going to do that any longer." The changes in contract language could potentially sink smaller production companies, according to those in the production world, and are certainly adding financial strain to relationships long based on social bonds and aesthetics.
According to a source on the agency side familiar with the recent shift, a memo was sent to all heads of production at Omnicom agencies explaining the sequential liability issue as well as the procedure. "It's not ideal, and there's been plenty of pushback from production companies, but that's our course no matter what. I tried to fight it, and then I realized just how deep it was, it's coming from the holding company CFO so there's nothing I could do."
"There's so many jobs that it wouldn't affect, network-wide," said the source. "The package goods, the hard-working jobs, as we say, where you're not fighting for the artist, necessarily. I understand why it's a directive but I think the top 5 or 10 percent creatively are going to have to find ways to make it work."
While Omnicom has been identified as the catalyst for the change, it appears other holding companies may be moving in this direction; one source at WPP said the network is also trying to reduce its risk and keep debt off its balance sheet through similar measures.
Omnicom U.K. agencies were recently forced to drop the changes after a vocal show of unity from member companies in the country's Advertising Producers Association.
Stateside, the AICP convened an Owners Summit meeting of heads of production along with post houses and editorial companies a few weeks ago, Creativity has learned, during which the group discussed the revised terms.
"If there is a problem here with people assuming risk and liability we need to come up with a collective solution to that," says Miller. "It's interesting to see what did go on in U.K. and will be interesting to see if production companies here act the same way on an absolute basis."
The production companies say the changes would erode their business model and force them to bear the weight of a client default more heavily than at present. Spokespersons from Omnicom and WPP did not respond to requests for comment.
"How can an ad agency go to a client and demand that they pay them up front and then stick this to us?" asks one head of a high-profile production company. "I didn't realize we were also in the banking business. When no one can finance anything, they're asking us to do it."
Acting as financiers as well as managing production is untenable, the production head says. "No one has that wherewithal. You'd need a fund of 100 million bucks. Why are we financing corporate America? It makes no sense. We're the low people on the totem pole rendering a creative service. It's like Warner Brothers asking a director to finance a $100 million film and then they'll pay them later."
While initially the Big Three's instability caused agencies with car accounts to begin emphasizing different parts of contracts in September, sources say, the practice is no longer limited to automotive work.
One production company head says as credit dries up, we may see the worst case scenario. "If I'm at the mercy of waiting 90, 120 days to get payment, it's not as if people are lining up to extend loans to production companies. This isn't an issue that's going to be understood by agencies until in the middle of a job a [production] company goes under."
Many producers assume the terms between production company and agency will continue to tighten and be governed by economic necessity as opposed to the handshake politics of years past. Another production company EP says if production companies are forced to outlay greater percentages of the whole there will be major repercussions for all, not just production companies. "You'll hold markups higher; you'll be tougher with cost consultants, and everyone will have to have lines of credit. Cash flow in big corporations costs money. You'll have smaller amount of companies doing a larger volume of work; the number of companies who will be able to afford to do business like this will be smaller. And when you have smaller amount of companies, prices will be higher. I don't think it ends up being good for the client; ultimately it will end up costing the client more money."
While Miller says sequential liability becomes a non issue if clients pay agencies up front for production, some doubt whether that scenario is realistic.
Another option put forward is the client placing the money for a shoot in an escrow account up front, which one prodco EP says was considered for recent automotive work. "Production companies were talking about going and saying look, all these big corporations are going out of business. We need to be assured in some physical way that we're not going to be doing [a corporation's] job and they go down. How do you protect it? You put it in escrow, like you're buying a house. At least you know the money is there."
Sweet Shop global president and managing partner Steve Dickstein says his shop will adapt, whatever plays out. "The only thing I can say is that I have always considered it my job to provide smart solutions to our agency customers. Clever solutions are needed more now than ever before. And, in fact, the circumstances encourage innovation. Invention has always been the best part of the production company process."
Miller can only offer guidelines to member production companies. "All I've heard from the beginning is that everything an agency does is in benefit of their client," he says. "this is scenario that this is ONLY of benefit for the agencies. This is a moment where the agency is trying to protect its own business potentially to the detriment of the end creative product."