Agencies have been struggling with clients dictating inordinately long payment terms for years, particularly as they climbed to 60, 90 and even 120 days. But Keurig Dr Pepper’s RFP for U.S. PR review—which stipulates the winning agency agree to 360-day payment terms or obtain financing from a third-party bank—has raised an industry outcry like never before.
“Absolutely outrageous and disrespectful” is how Joanne Davis, founder of search consultancy Joanne Davis Consulting, described 360-day payment terms.
"The ad world is famous for our insecurity, infighting and division. Why wouldn’t clients take advantage?" said Douglas Brundage, founder and CEO of creative consultancy Kingsland. "Net 360 is such an absurd set of payment terms it seems silly to even acknowledge it as a potential 'new normal,' as it would put us all out of business, but as the economy tightens brands will continue to bully agencies financially.”
Yet, while there is plenty of outrage, there is still no solution on the horizon. Other than saying no, the American Association of Advertising Agencies offers no formal recourse for agencies faced with demands for long payment terms. The Association of National Advertisers last addressed the issue in 2020, and the recommendation to its members was for a golden rule approach: It urged an "open, honest, and transparent strategic conversations to discuss payment terms," and advised members "to consider what is fair and how they would want to be treated."
Moving past the outrage to a tangible solution is difficult in an $800 billion industry dependent on strong client relationships, particularly as agencies already struggle with issues like indemnity, caps on liability, noncompetes and ownership of creative work. Agencies seem to agree the best way to put a stop to lengthy payment terms is to just say no to the pitch—but in a highly competitive environment, that's easier said than done.
KDP confirmed it had found an agency partner, although the company’s senior director of corporate communications Katie Gilroy declined to disclose any other details about partner agreements beyond saying the company had “mutually beneficial partnerships with a multitude of agencies,” and that partnerships were evaluated to “meet the needs of KDP and our agencies, including on payment terms.”
Calling out the problem
The complaining is louder this time around because given inflation and a looming recession, shops fear this could foreshadow a trend of exceptional payment terms in the future.
“I’m always concerned about payment terms," said Patrick Lafferty, chief operating officer of the Acceleration Community of Companies, even though he hasn’t seen clients ask for payment terms beyond 90 days since the pandemic. “There’s always some actors out there who can be abusive, frankly. They think they can get away with it.”
Demands for long payment terms from major clients including General Motors, General Mills and Anheuser-Busch InBev have made headlines in recent years for payment terms as long as 120 days.
Many agencies attribute the frequency of contracts with longer payment terms to a disconnect with client procurement departments as they tighten their purse strings without a clear understanding of how media and creative agencies work.
When pitching to a client, Serge Rancourt, CEO and founder of No Fixed Address, knows he’s really pitching to two entities within a company, the marketing department and procurement, which may have differing goals for an agency partner. “The CMO of a group wants a great agency relationship because they will work with us for a long time, and no client wants an agency to hire not the best people because they were restricted by fees,” Rancourt said.
However, procurement often just wants to cut costs. “They’re driven by saving money for the company and sometimes saving money for the company doesn’t lead to having the best value for the company," Rancourt said.
Agencies also say that clients can hurt themselves by stretching out payments, which can limit the pool of shops they work with: Small, minority-owned shops can't afford to work that way, and midsize shops are forced to put less experienced talent on the account.
When not paid on time, shops are forced to stretch their company’s liquidity to pay salaries for employees and vendors. Larger agencies may be able to do that for a 90 or 120-day span, but smaller, independent and minority-owned agencies may not.
Scott Knox is on the board of directors at agency trade organization VoxxComms, which blew the whistle on the KDP payment term demand by making it public. Knox became frustrated when he spoke with KDP after he was made aware of their 360-day payment terms, saying the company gave him “all the classic lines.”
So Knox got a bit tougher. “I said, ‘You have a very concrete positioning on diversity and inclusion on your website. How do you think this impacts that?’” Knox said.
After explaining to KDP the impact 360-day payment terms can have on LGBTQ+-, Black-, and minority-owned businesses, the company didn’t seem to have a response, he said. “We didn’t even get to a really good discussion about what you will deliver for your brands in bringing something like this into play for your agency selection.”
KDP declined to comment on Knox's comments.
'This is just bad money'
Despite the diversity, equity and inclusion push most of corporate America made in 2020 after the murder of George Floyd, those concerns don’t always permeate all levels of a company. Kristen Cavallo, CEO The Martin Agency, was surprised at the response she got after speaking about diversity at the ANA financial performance conference earlier this year.
“I don’t think most people think about the diversity angle when they’re thinking about payment terms or about how that impacts the choice of director or the choice of editor,” Cavallo said. “When I explained that, I had a number of procurement people that came up to me and said 'That’s the first time anyone’s ever said that.'”
Another option offered to agencies—like in the KDP RFP—is to finance through a third-party bank, but that isn’t appealing to agencies of any size especially with interest rates rising. Nancy Hill, CEO of Marcus Thomas and a former 4A's CEO, said she doesn’t know how terms such as KDP’s could be profitable for any agency.
“If you're already getting squeezed on a margin and then you have to pay a percentage to get a loan in order to float the payroll, if your margin is conservatively at 20% and you're paying anywhere between three and 5%, now all of a sudden your margin is 15%,” Hill said. “I don't think all money is good money, and I think this is a situation where this is just bad money.”
In the case where a Fortune 100 company is working with an agency that is under $3 million in revenue, Lindsey Slaby, founder of Sunday Dinner, who posted a scathing rebuke of the KDP offer on her LinkedIn, thinks the agency should be paid in 30 days.
“You want minority owned small businesses? Stop making them suffer over whether they can afford to pay their employees and then they can do great work,” she said. “I’m sure the check you are writing them is a tiny fraction of all the other procurement items, so under $3 million in revenue, 30 day payment and CMOs can get that done.”
She added: "Everyone needs talent now and if you don’t have CMOs going to bat to say ‘I need to get these people paid’ they are not the right partner.”
Marla Kaplowitz, president and CEO of 4A's, recommends discussing with clients why extended payment terms negatively impact the business and reminding marketers that agencies are not banks.
"Flip the script on the marketer or procurement and ask how they would handle the situation if they had to wait an extended period of time and was also told to borrow money to manage expenses," Kaplowitz said. "The solution is to highlight this bad behavior as well as be clear why it doesn’t make sense—and doesn’t exist for other client service categories."
General Motors updated its payment terms last year to 30 days for diverse media companies after minority-owned media partners spoke out, saying that payment terms of 60, and up to 120 days, were a challenge to their business operation and cash flow.
When all else fails, Jason Parks, exec VP and managing director at Barkley, says companies need to be outed for their unfair terms. “I know it’s a challenge, but you’ve gotta have the guts to call people out,” Parks said.
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