Indy Ad Exec: Extended payment terms are crushing adland
by Tom Fels (@thomasfels) There’s a red tide sweeping onto the shores of adland. Some of the worlds’ largest multinationals are extending their supplier payment terms to 90, or even 120, days. Outrageous! Nonsensical! Crippling! I would expect expletives like these to flow freely from advertising agencies. And yet, surprisingly, there’s been little reaction.
Internationally brand owners such as Mondelēz, Procter & Gamble and, most recently, Mars are hiking their uniform payment terms as high as 120 days. As big business leaders, they’re not only setting a trend but also creating a groundswell of perceived acceptability for their peers to follow. Many justify this by claiming they need to ‘compete on fair grounds’ and implement more predictable payment processes.
What is clear to me is that behind these claims lies an ugly truth — the largest companies in the world are generating a line of credit through small business to enhance their own shareholder value. The impact of this could be catastrophic to the little people.
Out of business
Much has been said about the impact extended terms may have upon production houses. However, I see the middleman — the agency — as being most at risk. We’re cornered into accepting extended terms because we need their business; the multinational giants are necessary for growth and stability.
Agencies now find they’re the piggy in the middle as downstream there’s mounting pressure from suppliers who simply cannot afford to agree to extended terms. Effectively, agencies are left to bridge the gap by fronting cash where it should be forthcoming from the big brand owners.
Many hundreds of small- to medium-sized, highly talented enterprises around the world will buckle under increased cash-flow pressure and, quite likely, close their doors.
Easing the burden
To ‘help cashflow’, many corporates are striking agreements with financial institutions to provide an option for suppliers to negotiate early settlement. These agreements work on a discounted sliding scale, based on the time between when suppliers need to be paid and when the big brand clients are actually paying the agencies.
Once an agency survives a rigorous procurement processes, margins are already scrutinised and bargained down. Add the bank’s interest charges for bridging finance to the pot, and another few percent is knocked off an already-slim bottom line.
Curiously, there has been little in the way of macro debate and industry action to address the incoming tide, most likely because these shifts are happening on a micro-level; agency by agency, brand by brand.
Rather than escalate the issue, many may be looking internally for effective measures to counter the moves, perhaps by scrutinising their staffing structures and putting cheaper resources in place, or inflating costs to create a buffer for lending to fund production — the results of which do not ultimately serve the best interests of brand owners, either financially or creatively.
As agencies, we stand up and pitch against one another every day, scour award rankings and make comparisons — but this is one cause that needs to be addressed with the solidarity of a single voice.
There is untapped power in the experienced hands of network agencies. There is also a fiery resolve across smaller independents who know that their future may be under threat.
By harnessing their combined force and channeling it through an appropriate industry body, I have no doubt that a powerful message can be sent to big business, which is increasingly keen to talk partnership but less willing to walk it.
The only questions that remain are: Who will stand to take this on? And who is simply willing to accept the tide for what it is, slow and suffocating.
With a decade of local and international experience in leading independent brand consulting, design, shopper marketing and integrated advertising roles, Tom Fels (@thomasfels) has gained a deeply relevant understanding of the dynamics of independent agencies. His skills are put to work daily as group managing director of MACHINE. He contributes the monthly “Indy Ad Exec” column, an ad exec talking to other ad execs, to MarkLives.
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