A Disturbing Trend

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.

http://bit.ly/18Kmjeu

http://bit.ly/1884vMb

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?

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9 thoughts on “A Disturbing Trend

  1. Nader Ashway says:

    Good points here, David. Just another iteration of the disturbing fact that marketers don’t see agencies as partners. When you announce this kind of move, it moves that relationship firmly into the “commoditized vendor” zone. Ugh.

    • Thanks Nader. These moves commoditize the offering in general if not the vendor. Clients can threaten to not pay someone else for 120 days instead of not paying you.

  2. henryblaufox says:

    Spot on, Dave. Agencies doing top notch work should politely but firmly push back on the extended terms, even at risk of losing the business. Otherwise, the trusted partner value is demeaned as the agency is treated like a commodity vendor.

  3. Pat S. says:

    Hi Dave, Your article is spot on and this trend is more than disturbing, it can be perceived as a restriction of trade. I too flagged this article when it was published and cannot believe it.
    In this day and age of anti-bullying, I find this new sensibility of extending compensation terms to vendors/partners beyond reasonable time tables… a form of corporate bullying. The pure notion of dictating compensation terms beyond industry standards by the largest manufacturers appears to be purely selfish bad behavior by those companies that should be the leaders of good behavior and innovation.

    • Pat, thanks for the read and the comment. Agencies need to stand up to these bullies and make it known that if a client wants the agency to produce work on their behalf then the terms need to be fair. Good agencies can stand firm and they should.

  4. Ron Bender says:

    You forgot to ask whether the executives and the stockholders are postponing their compensation, or whether these companies are extending payment terms for the companies that buy from them… I’ll go out on a precarious limb and answer for them: Not a chance!

    Just because an agency’s product is IP and service rather than a manufactured item doesn’t allow their clients to drag out the payment terms!

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