Agencies ‘should not be hired to be banks’
The Association of National Advertisers, the trade group representing marketers, as well as consultants, have advised against long payment terms.
“While the ANA does not recommend any specific payment terms practice, there have been situations that have crossed the line,” ANA CEO Bob Liodice wrote in the report. “Agencies are hired to drive business results—they should not be hired to be banks for client-side marketers.”
The 4A’s has been working with the ANA on developing training for procurement executives on how best to work with agencies, and they are considering payment terms as a component of that training, Kaplowitz said.
Tom Denford, CEO and co-founder of agency search firm ID Comms, wrote in the 4A’s report that he’s witnessed several agency-client relationships break down because of “unreasonable payment terms.”
“Even in an age of algorithms, we observe that so much of the value delivered from agencies is still discretionary and based on people and relationships,” Denford wrote. “Agencies tend to have preferred clients and it is these clients that invariably get access to the best talent, creativity, first-look opportunities and innovations.”
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Supply chain financing
Banks including Citibank, JPMorgan, BNP and Bank of America have made it a business to offer programs where they pay invoices on behalf of companies to vendors, including agencies, to get them paid before 120 days, if that is the stipulation, the report said. If agencies want to get paid in 30 days, they will get a lesser amount under these programs.
The amount the banks keep is based on an interest rate, which was 7% in the case of Keurig Dr Pepper’s PR review last year, Kaplowitz said. She said they have likely gone up since then as there has been a spike in interest rates this year.
Meanwhile, “clients get a cash boost when they pay the bank later in 120 days,” because the bank earns revenue on interest, according to the report. The agencies incur the interest.
The programs allow for the banks and marketers to reap the benefits at the agencies’ expense.
“With supply chain financing, you are getting these companies to say to agencies, ‘You take on the loan, the interest, the liability,’” Kaplowitz said, noting how these programs could also violate an agency’s debt covenants with their own banks, which tend to be exclusive. “What if the roles were reversed and one of [the marketer’s] distributors needed extended payment terms and offered supply chain financing? How does that work?”
Kaplowitz said agencies have to stay strong in their stances against supply chain financing and long payment terms.
“Agencies need to remind clients they are in business, too,” she said. “In the same way the client is looking to be profitable and healthy, so too is the agency.”