Some advertisers abuse their power to impose egregious extended payment terms on agencies, which can only be funded by increased borrowing.
Borrowing under high-interest rates is expensive and harmful to the long-term sustainability of agency business as it drives higher costs and risk profiles. The impact will mean agencies cannot pay their people, build or acquire new capabilities, invest in research, and retain and attract the best talent. Weaker agencies will be detrimental to their clients’ best interests. Agencies playing along with these sorts of demands hurt all other agencies while likely driving their own business into the ground.
Advertisers need to understand the commercial consequences of these practices, and agencies need to push back on clients’ insistence on longer payment terms, which has led to legislative action in some countries. We encourage agencies to start tracking the day work starts to when that work is paid for as well as making the client aware. This usually starts before an invoice is sent and the payment term clock starts.
Agencies excel as creativity-led people businesses, and advertisers seeking to implement harsh financial conditions on agencies should also be aware of legislation such as the EU directive stipulating that businesses must pay their invoices within 60 days unless they expressly agree otherwise and provided it is not grossly unfair.
Best practice payment terms are 30 days. However, some advertisers request 90 days and, in a few cases, even 120 days. In one extreme example, Keurig Dr Pepper asked for 360-day payment terms to participate in a U.S. PR agency pitch, following which VoxComm intervened.
The industry is in danger of these damaging payment terms rapidly becoming the norm. It’s vital that advertisers fully understand the potentially harmful consequences that may follow.
Advertisers requesting longer payment terms are forcing agencies to cover several months of costs since they cannot pass these delays on to their employees, who usually represent 80% of an agency’s cost base. Supply Chain Financing from clients is expensive and unreliable, with uncommitted funds leaving agencies vulnerable to economic shocks. Ultimately, advertisers asking for extended payment terms are asking agencies to act as banks and to provide interest-free loans, which harm the industry’s best interests.
The emergence of legislation reflects that more is being done at a policy level to address the issue of unfair payment terms based on the principle of “cash neutrality” – that neither party should gain or lose due to the flow of money.
Khairudin Rahim, CEO, Association of Accredited Advertising Agents Malaysia (4As) and member of VoxComm said, “In a world of product parity, the last unfair advantage a brand can have is the power of a high value idea from their advertising agency partners. Agencies exist to help clients, and they strive daily to deliver their best possible work. Why would advertisers want to compromise the agencies output by delaying payments?
Long payment terms are an abuse of the advertisers dominant position that contravenes their own proudly published Code of Ethics for fairness. These advertisers are acting like big bullies! Agencies are people businesses and do not have the financial resources to fund months of payroll. This behaviour harms the agency-client relationship and negatively impacts brand reputations.
In markets like Australia, agencies can look to government regulations for support to push back against unfair payment terms. The Australian Government introduced the Payment Terms Reporting Scheme, whereby large businesses are obliged to report their payment times and terms to small businesses every six months, and this data can be accessed by any agency through a portal. Malaysia should adopt similar regulations and reporting tools for the benefit of all involved.”
In light of this and increasing incidents of irresponsible behaviour from advertisers, VoxComm wants to warn advertisers of the potentially harmful consequences to their agency partners and the relationship they have built. Not only is this approach damaging to agency creativity and effectiveness but also detrimental to businesses’ reputations when they are in danger of breaching laws and regulations around the world. We would like to call on advertisers to act more responsibly.