How Extended Payment Terms May Affect Agency Relations

How Extended Payment Terms May Affect Agency Relations

A recent report urges agencies to push back on clients' increasingly frequent requests to extend payment terms

November 24, 2023

By Chris Warren

A recent report from the 4A's doesn't mince words regarding the current state of payment terms between client-side marketers and their agencies. "The Ripple Effect of Extending Payment Terms" is a full-throated call to action for agencies to only accept 30-day payment terms. "Anything beyond a normal 30-day cycle is incompatible with the typical agency commercial model," the report says. "Extended billing terms represent a sub-optimal cost allocation of the final product value chain ultimately increasing costs to the consumer without returning any benefit." But if agencies decide to push back, they run the risk of losing the business altogether.

The report stems from the high number of accommodations (sometimes voluntary, sometimes not) that agencies made to their clients during the pandemic, according to Marla Kaplowitz, president and CEO of the 4A's. "We started to see clients reaching out to their agencies and asking them for extended payment terms, or just extending them," she says. At the time, the 4A's urged its members to not let what was framed as temporary extensions — due to a then-creaky economy — become a permanent situation.

And while the pandemic lingers, more workers are heading back to their offices and the economy is humming along, and inflation has started to ease.

Nevertheless, saying that they face a seemingly endless threat of a recession, along with financial pressures from upper management, client-side marketers continue to ask for extended payment terms, putting the squeeze on agencies, Kaplowitz says. According to the report, many agencies — especially during reviews of current business and pitches for new business — are being told that terms of more than 30 and up to 120 days are typical for fees, production, and even media.

"Anything beyond a normal 30-day cycle is incompatible with the typical agency commercial model, and particularly destructive with respect to zero margin pass-through billing, forcing agencies to act as banks to their usually better capitalized and profitable clients," the report says.

The report argues that the main driver of the trend is the desire among brands and organizations to improve their working capital and cash flow to bolster their balance sheets and look more attractive to investors.

Although the ANA does not support specific payment terms, a report released in 2020 acknowledges that extended payment terms can create "ripples through the system" and often come with consequences, including "strained relationships with vendors, reduction in flexibility, and higher prices." It's also noted that, "in addition, the business models and livelihoods of smaller players in the marketing supply chain can be threatened by extended terms."

Reset the Table

Though tension over payment terms is nothing new, the 4A's wants to reset the debate so that 30 days is the default expectation.

"I wish nobody had ever said yes [to extended payment terms]," Kaplowitz says. "The majority of agency costs are people costs, technology, and overhead, and agencies should not have to go out and borrow money at high interest rates to pay their employees, freelancers, and rent. They're not banks, and anything beyond 30-day payment harms their business model."

Lisette Arsuaga, cofounder of the Alliance for Inclusive and Multicultural Marketing (AIMM), and co-CEO of DMI-Consulting, stresses that smaller, minority-owned agencies are particularly harmed the most by extended payment terms.

"Payment terms can be extremely detrimental to diverse agencies, to the point that agencies sometimes don't accept an offer to work with a client simply based on their payment terms," says Arsuaga, whose clients include Pernod Ricard, Procter & Gamble, and Synchrony Financial. "There are companies today that pay 160 days after the work is completed. This means an agency can work on a campaign for three months, hand in the work, and not get paid for 250 days after they started the assignment."

The financial hardship for agencies can be significant, but both Kaplowitz and Arsuaga insist that marketers themselves get harmed when agencies are forced to accept extended payment terms. The cost to marketers can come in the form of frayed partnerships with agencies or a reluctance among agencies to provide their top talent to clients they feel are treating them unfairly.

"When diverse agencies shy away from accepting assignments from marketers with detrimental payment terms, this then can affect the marketers' ability to connect with diverse consumers," Arsuaga says. "The insights and experiences they have would not necessarily be brought to the table if a general market agency does the work instead."

Unintended Consequences

So how do marketers and agencies approach payment-term negotiations in a way that maintains a strong relationship between the two sides? Aside from holding firm on 30-day payment terms, Kaplowitz says agencies need to do a better job educating their clients about agency business models and, if necessary, accepting extended payment terms, but with conditions.

"It's making it clear how those funds are being used — how the agency does business," Kaplowitz says. "I'll have some agencies say they will accept longer payment terms but will charge the client interest on the delay. That usually turns the conversation around."

Robin Seasock, CEO of software platform and ANA member Decideware, says that there is frequently little wiggle room in negotiations. "Payment terms for large advertisers are generally set. They're not very negotiable," she says. "I've seen them anywhere from 30 days to 120 days, but there's not usually a lot of negotiation."

Seasock says there have been times when she was working in procurement when she would adjust her payment terms to be able to work with smaller agencies.

"We wouldn't necessarily change payment terms, but we would advance them money before a project," Seasock says. "That would give them something to work off of, knowing that [they're able] to pay their employees and the talent that's working on a project. It was to help with the lag before the cash flow starts coming into the agency on a monthly basis."

When clients are not willing to provide money upfront and insist on payment terms longer than 30 days, Seasock says that agencies can consider changing their own pricing. "You don't charge the same price that you would charge for 30-day payment terms," Seasock says. "You charge a premium because you know that you've got to bridge salaries and have other expenses."

Negotiate in Good Faith

Another strategy for agencies unhappy with proposed payment terms is to insist that the negotiations include the marketers who they work with directly, not just people in the client-side marketer's procurement department.

"Often these negotiations are happening between a procurement person … and the marketers put their hands up and say, 'We can't do anything about it,'" Kaplowitz says. "That is part of the challenge, where you're not getting the internal support from the client."

Kwan Yim, director, global agency management at Citi and co-chair of the ANA's Agency Relations Committee, says that more productive conversations about payment terms can happen when both agencies and clients commit to transparency and bring the right people to the negotiating table. "I think both sides need to be transparent about their financial policies," Yim says. "If a client asks an agency, 'Why can't you take X days [for payment terms]?' the agency may say it's 'because of our finances' and explain why."

Yim adds that both agencies and clients negotiating payment terms can benefit by considering the type of relationship they want to build. Is it a one-time deal, a transactional project, or something for the long-term in which the agency acts like a true partner?

"If my goal is to work with this company, agency, or client longer-term — if you think about it that way, I wonder if that changes the conversation for people so both sides can back up a little bit," Yim says.

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