Think Twice Before Extending Agencies' Payment Terms
I was once a marketer with a large advertising budget. I worked with the who’s who of agencies, and negotiated contracts with them, typically ending up with a master services agreement for global use. Our local markets would fill in the details on scope and personnel.
Are you still awake? I know this is not the kind of first paragraph that will grip you. Master services agreements? Scope? Yawn, right!
Actually, no. Your agency ecosystem is, if everything is set up properly, a great extension to your marketing department — one that brings skills, capabilities, creativity, original thought and strategy.
At the same time, though, as marketing procurement has gotten involved, their sometimes heavy-handed and somewhat ill-informed tactics have done marketers and agencies a disservice.
One area where this has become abundantly clear is on payment terms. Payment terms typically dictate how soon (or long) after submitting your invoice you’re getting your money. In case you did not know, they have dramatically improved (if you are a cost-conscious or budget-challenged marketer) or dramatically deteriorated (if you are in any contract negotiating role in an agency or other marketing services provider).
The Association of National Advertisers has published its latest overview of the state of payment terms in our industry, and it makes (at times) for painful reading.
The ANA publication has the catchy title “Payment Terms: Current Practices For Marketing Services.”The overall conclusion is that marketers are forcing their service providers into longer and longer terms, meaning it takes longer and longer for agencies to get paid.
Yes, large agency holding companies have some very smart finance people, and they are very adept at figuring out ways to bridge the time between invoice and money-in-the-bank. They might negotiate an early payment discount — for example, if the client pays within a week from invoice date, the agency gives a small discount. About 18% of ANA respondents reported they have shortened their terms over the last year. However, 37% increased their terms.
Going forward, 56% of respondents say that they do not anticipate a further change (increase) to their payment terms. But about one-third does. And let’s be clear, if the world is slipping into a COVID-19-induced global recession, these numbers might change very quickly.
Who bears the brunt of the extended payment terms? Agencies and research firms, for their people fees. That means that you, as a marketer, are prepared to financially challenge your thought and development partner on the one thing that you’re buying from them: their assumed-to-be-smart people. Marketers are always lamenting they want true partners, and incentivize on things like “strategy,” “creativity” or even “above and beyond.”
But at the same time, you’re telling your thought partners “but we won’t pay you until three months after you’ve done the work.” How motivating do you think that is? How do you think the agency finance director will direct the account manager on your business? Money drives behavior.
I think that payment terms are a very blunt instrument that can do real harm to relationships and impact the outcomes on effectiveness (and as a result, efficiency) from your agency partner. So think before you extend.