VoxComm, the global voice for communications agencies of which IPA is a founding member, is warning agencies and clients of the damaging consequences of extended payment terms.
Many agencies, being people businesses, do not have the financial resources to fund months of payroll. Simultaneously, extended payment behaviour harms the agency-client relationship and negatively impacts brand reputations.
Some marketers have abused their power to impose egregious extended payment terms on agencies, which agencies can fund only by increased borrowing.
Borrowing is expensive and harmful to the long-term sustainability of agency businesses as it drives higher costs and risk profiles. The impact restricts agencies’ abilities to pay their people, to build or acquire new capabilities, to invest in research, and to retain and attract the best talent. Weakened agencies are detrimental to their clients' best interests. Agencies accepting these sorts of demands hurt all agencies while likely driving their own business into the ground.
Marketers need to understand the commercial consequences of these practices, and agencies need to push back on clients’ insistence on longer payment terms. We encourage agencies to keep a record of the date when work begins and the date when payment is made for that work, and also inform the clients about it. This process should start before sending an invoice and before the payment term begins.
Best practice payment terms are 30 days. However, some marketers 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 often constrained to accept these damaging payment terms. It’s vital that marketers fully understand the potentially harmful consequences that may follow.
Corporations requesting longer payment terms are forcing agencies to cover several months of costs since they cannot pass these delays on to their employees, who typically represent of the order of 80% of an agency's cost base. Clients asking for extended payment terms are asking agencies to act as banks and to provide supplementary interest-free loans, which harm the industry's best interests. Supply Chain Financing from clients is expensive and unreliable and is not an acceptable approach.
Companies seeking to implement harsh financial conditions on agencies should 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. 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.
The emergence of this type 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.
"Clients should not be waiting for legislation to behave reasonably. Commitment to CSR is essential for brands to build a positive reputation and attract socially responsible consumers."
Brands should view fair payment practices for suppliers, including communications agencies, as part of their ESG considerations and ensure these practices are established within their firms.
"Pushing out payment terms is a pernicious pathway to go down and agencies should be aware that extensions are tantamount to a discounting of their net income."
We applaud clients who resist the temptation to make these demands. They will enhance relationships with their agencies to the benefit of effectiveness.
In light of increasing incidents of irresponsible behaviour from clients, VoxComm wants to warn marketers of the potentially harmful consequences to their agency partners and the relationships that 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 clients to act more responsibly.
This piece was first published by VoxComm. Established in 2020, VoxComm is the new global voice for communications agencies, championing the value agencies bring to their clients. With more than 35 national trade associations from around the globe, VoxComm stands for the power of commercial creativity in all its forms – across strategy, ideas, content and media – as a proven lever for growth that businesses neglect at their peril.