P&G recently announced they were shifting payment terms from 60 to 75 days with their vendors, including their agencies. Mondelez one-upped P&G by announcing they are going to pay in 120 days.
The rationale these companies are using is that it improves their cash flow. But at what cost? As one of the above articles mentions in 2009 when everyone was struggling financially agencies agreed—in the spirit of partnership and to help their clients—to extended payment terms. Who knew back then that these companies would try to establish that as the norm and creep the terms even longer.
This is bad for everyone, and those who will suffer the most will be the clients. First, let’s discuss the ethics of these demands, then the consequences. Are P&G and Mondelez going to ask their own employees to wait four months to collect their salaries? Obviously the answer is no. The client is deriving an economic benefit from their agencies/vendors. They need to treat these agencies/vendors the same way they treat their own employees. If the clients were to bring this work in-house would they pay the personnel on time?
An agency’s value to its clients is the personnel devoted to the client’s business. Good talent creates more value for a client than bad talent. When an agency is strapped for cash they have to replace expensive talent (translation: GOOD) for less expensive talent (translation: BAD). Bad talent will work for less because they are less in-demand elsewhere. Bad talent working on a client’s business means inefficiencies in process, mistakes, lack of innovation, work that is derivative and not original. How is the prospect of bad outcomes in work product beneficial to a client?
Here’s a thought for agencies: Let us see how long this situation persists if the client pays the media or pays the production houses directly. Clients can get away with extending payment terms now because the agencies want to collect from the client and margin the work. The margins are already thin. The process is typically transparent, too. What benefit does an agency get in waiting for money to pay a vendor? None. Whose credit is harmed by P&G and Mondelez stretching terms? Not their own. It’s the agency’s credit rating that suffers.
Can’t we just say no?