It has been a few years now since agencies and production vendors were put on notice by multiple large advertisers, spearheaded initially by Anheuser-Busch InBev, of their intentions to transition their vendors to 90-day payment schedules (and, in some cases 120 days). For smaller agencies, and particularly production vendors, this was unwelcome news.
For a production company producing high-level creative work, close to 80 percent of the gross revenue that a project brings in is essentially pass-through—made up of costs for crew, equipment, talent and director’s fees—and most of these costs, by contract, are paid out within 10 days of the shoot.
The math for an agency is not much better, given the necessity to pay multiple production vendors, SAG talent, etc. Therefore, a small agency or production vendor, under these suggested payment terms, could easily be forced to finance more than $1 million in advance costs for as much as 120 days on behalf of a client. Needless to say, very few, if any, production vendors or agencies have the cash flow or balance sheets to advance that kind of money, and holding companies are generally unwilling to advance production costs to their agencies on behalf of their clients.
When advertisers get it
Some advertisers, to their credit, recognize the problem and, understanding the special nature of the creative production process, create special exceptions to their payment policies to allow for quick turnaround production payments and project fees for agencies not under retainer agreements. This is especially true among those advertisers who have been contracting directly with creative and production vendors and disintermediating agencies from the production payment process. They limit the payment issue to long-term retainer engagements, where, in theory at least, an agency or vendor can build the cost of financing the first three or four months of the engagement into the overall cost. Most retainer agreements, for obvious reasons, do not include the cost of production projects, which are generally not known in advance, anyway, so in those cases the workaround is still an essential part of the process.
This still leaves a sizeable universe of advertisers whose finance and procurement departments are either not inclined to make accommodations for their marketing departments, or simply do not understand the problem.
When advertisers don't get it
Unsurprisingly, vendors and particularly smaller agencies are often forced to turn to the only avenue available to them, which is a form of financing called factoring. This is the practice of assigning a receivable to a financing company, which advances the receivable immediately, less a fee (usually 10 percent of the face value of the invoice) and then collects the full payable from the client. Factoring has probably been around almost as long as banking itself, but it has not been common in the advertising business until recently.
According to one banker I spoke to, financing companies are sensing opportunity and actually targeting the advertising industry specifically as a growth area for this kind of financing, recognizing that financing receivables is becoming a standard practice where it was relatively unknown before.
In addition, several industry folks have told me of cases where procurement executives at large advertisers have offered to connect vendors to specific financing companies to address the very issues their own payment schedules are creating.
In an industry where the cost of high-quality creative is a constant challenge for all the parties involved, adding an entirely new layer of cost to the process that contributes absolutely nothing to the final creative product is hardly a positive development. It’s hard to believe that the companies who first initiated this push to age their payables anticipated this result, and it’s pretty clear that their marketing departments were not consulted about the long-term implications.
Now there is a new development in receivables financing that could, according to a banker I spoke with, bring the attention of regulators—a prospect that should give the industry pause after its most recent brush with the Department of Justice. Apparently, some of these financing entities are exploring the packaging of these loans into securities, which can then be sold to investors as low-risk investments.
If that reminds you of the mortgage-backed securities that caused the financial crisis, it should. But there is a larger question specific to this industry: Supposing the client should turn out to be an investor in these securities, essentially profiting from selling a solution to a problem their own policies caused in the first place. Would that be appropriate? Would it survive a regulatory smell test?
The unfortunate irony of all of this is that by simply aging payables across the board without any consideration of the particular nature of the creative execution process, advertisers are attacking the issue of payment schedules with a blunt instrument to serve a company-wide payment policy. It fails to take into account other opportunities in the payment process, which could deliver greater value and might include things like discounts for quick payment or advantageous rates for inclusion in client rosters, which are common in the production industry.
Thinking bigger (and smaller)
Advertisers who want to produce high-quality creative work efficiently should think bigger and focus as well on the nuances of the process with sophisticated thinking about accounts payable management, pre-selected vendor rosters, optimizing the approval process, and experimenting with new creative resources and innovative ways to make great work.
There are opportunities to work smarter and produce measurable improvements in cost and effectiveness that can come from purpose-built process, based on nuanced analysis of the creative execution workflow, and that can drive benefits for marketing, finance and procurement.
Procurement departments and finance would do well to look for more creative ways to produce real value from creative partners in a win-win environment that results from the contributions of all of the players in the process, and refrain from punitive payment practices that do long-term damage to important relationships with creative partners.