Are payment terms the new advertising agency remuneration negotiation strategy?

Since 2008 and the Global Financial Crisis, major corporations have been finding ways to manage cash flow and reduce cost of money. The most common appears to be extending payment terms. Only last month I had more multi-billion dollar global companies inform me that their payment terms are now 60, 70, 85 or even 90 days.

Recently I was reflecting on this with my friend and colleague, Debbie Morrison from ISBA when we met in London and she was explaining that this has been a major issue for the advertising agencies there.

"Our payment term is basically 70 days as shown below, so we ask all the suppliers / agencies to issue an invoice at the end of each month and make payment around 10th day of the 3rd month from the one in question".

She recounted that at a recent meeting the consensus was that the agencies should offer discount to the advertisers for early payment on their invoices.

Interesting view considering that occasionally you see agency contracts that provide an interest penalty on payments over the agreed period. Therefore if payment terms are 30 days from compliant invoice, the agency can charge daily interest on the unpaid amount which is usually based on the cash rate plus a few percentage points.

The process problem with this strategy is that if a Purchase Order (PO) has been raised for a specific amount against a project estimate or quote then this needs to be modified to accommodate the interest if and when required.

The practical problem is that it is virtually unheard of for an agency to enforce the late payment penalty and so therefore the clause is redundant.

So if you agree to payment terms in your contract or say 30 days or 14 days or 7 days and the advertiser changes their policy on payment to a longer period, what can you do?

Well you could offer a discount of 5% on your fee to provide an incentive for the buyer to meet their contractual commitment or you could take legal action.

The Australian Government has a policy of paying interest on late payment to small businesses.

‘The Government has announced a policy of paying interest on late payments to small businesses. The Procurement 30 Day Payment Policy for Small Business (the policy) states that contracts for procurements with a value of up to A$1 million (GST inclusive) from a small business must also provide that, if full payment is not made by the agency within 30 days of receipt of a correctly rendered invoice (or the shorter period specified in the contract), the agency must pay simple interest on the unpaid amount (‘contract amount’)’.

Perhaps this should the standard for all of business? What do you think?

Is it fair that major corporations are using their smaller suppliers to fund their short term cash flow? Is it right that where there are agreed payment terms, larger companies should be able to ignore these without consequence? Or should smaller companies offer discounts for on-time payments?

Leave a comment here and lets be heard.

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About Darren Woolley

Darren is considered a thought leader on all aspects of marketing management. A Problem Solver, Negotiator, Founder & Global CEO of TrinityP3 - Marketing Management Consultants, founding member of the Marketing FIRST Forum and Author. He is also a Past-Chair of the Australian Marketing Institute, Ex-Medical Scientist and Ex-Creative Director. And in his spare time he sleeps. Darren's Bio Here Email: darren@trinityp3.com
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7 Responses to Are payment terms the new advertising agency remuneration negotiation strategy?

  1. Anne Miles says:

    This problem extends down the line from agencies through to all creative businesses that supply to them – each time usually getting smaller and smaller where cash flow can be the difference between staying in business or keeping the family home at times. These longer terms may be of benefit to an agency to wait if it is part of the deal but they don't often consider the suppliers down the line. They work to a 'I'll pay you when I get paid' principal.

    My experience is that agencies don't want to see discounts for early payment from their suppliers as Sarbanes Oxley ruling means that the discount has to be likewise offered to the client up the line – therefore of no direct benefit to the agency in the middle to look after their suppliers.

    It would be different if everyone's fees accommodated the delay but my guess is that they don't – and simply smaller fish get fried.

  2. Mike Inman says:

    Also answered here: http://mjinman.wordpress.com

    In this post and this linkedin thread, Darren Woolley (Founding Partner & Managing Director at TrinityP3) rightfully identifies clients/customers unilaterally adjusting payment terms in their favor as a bully tactic.

    I mentioned it was a GREAT opportunity for a supplier to renegotiate other things in their favor – and it was pointed out that this is very difficult. Yes indeed – but much less difficult and more beneficial than the alternatives. Let’s explore:

    1st of all, most “buyers” don’t really want to go down this path – it’s typically driven by someone in Finance. The buyers know they committed to payment terms in their agreements and have <some> honor… and know this will cause problems later and/or quality and delivery to suffer. Not to mention eventual cost creep that will cost more than it ever saves. Especially with interests rates being so low…

    Now, let’s look at what happens if a supplier just takes it, which potentially signals the buyer several things:

    1) the supplier is making too much money….

    2) the supplier isn’t managing their business well

    3) they can do it again!

    4) the supplier will be looking for some other way to cut corners and make it back…

    ALL bad things for the relationship. Nothing good can come of this.

    So the alternative is to at the very least have a dialog. It can be as simple as reminding the buyer that there is an agreement in place and that the buyer DID SUCH A GOOD JOB NEGOTIATING that there is no extra $ to fund extending the payment terms.

    Guilt is good – for the supplier.

    Which will cause the buyer to either:

    1) override the system and reset your payment terms (yes, they do that, and often)

    2) renegotiate something else of similar value in that deal (extra products/services, delivery, fuel surcharge, etc.), or

    3) tell you “no,” but at the very least you’ve stood up for yourself and the guilt just may work in your favor on the next deal.

    In short, you MUST ask for something in return, even if it’s just for the buyer to be a reference.

    • TrinityP3 says:

      That is a great strategy Mike. I have often found in this situation that the marketing 'buyer' abdicates the responsibility by passing it off to it being imposed upon them from Finance above, as you mention. But making a stand in the relationship is better then not making a stand, right?

      • Mike Inman says:

        Absolutely. Taking a stand, either to prevent it from happening again, reversing it, or getting some future potential bargaining chip, is the only way to make a positive out of the situation. Otherwise it is definitely going to be a blemish on the relationship.

        • TrinityP3 says:

          I checked out your blog Mike and there is a lot of really useful advice there. Thank you for sharing.

  3. Anne Miles says:

    I agree that payment terms aren't as stuck as many make out and if there is a real value that is tangible it has seemed to prove possible in my experience. I see this as a great strategy to get the best value in the project in the very beginning and all parties feel they're getting something of value.

    It also helps if the terms have clear cut off milestones where a shoot is cancelled, or a master is not delivered to secure payment. I've never had any issue with payment terms being met if they're discussed up front. The standard terms of trading is where the whole thing seems to slide though.

    I've had one (not so nice) client stretch things just to stress me out! He had the cheque in his pocket all along but delayed and delayed so that I couldn't get it banked that day. It was simply a small time operator doing it for sport though. I am more savvy about pulling the plug on the job now if he doesn't deliver what was agreed than back those days. Decent agreements and tight paperwork mean there are no grey areas which I enjoy.

    • TrinityP3 says:

      Anne, I think this is an issue with large and small clients. The difference is with the smaller client is it is a personal choice. As you said, he had the cheque book in his pocket. With large corporates they are able to hide behind the "It is company policy" and abdicate themselves for any responsibility. But as Mike says, it is worth challenging this either to simply prove you are not a push over, or to open opportunities to negotiate value in other areas.

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