Last Updated May 18, 2009 6:20 PM EDT
In the gap between the agency buying media and the client paying the bill, the client holds onto its ad budget, earning interest on the cash all the while. The agency, conversely, loses that interest.
The obvious problem with all this was writ large with the news that a now-bankrupt Chrysler owes BBDO $58 million in back payments for work the shop did. Still to come is Chrysler's list of nonproduction suppliers, and hundreds of agencies left dangling as Chrysler's newly axed dealers file Chapter 11 instead of pay debts to their agencies.
Sure, interest rates are at rock bottom right now. But even if Chrysler got only 1 percent on its cash, delaying that payment by 30 days might earn it about $48,000.
That's not much to Chrysler, but it's a useful sum to BBDO, where vendors frequently bill for far lower amounts. (Here's one example: Ogilvy & Mather was accused of trying to bilk Avon over a $25,000 payment to a music composer.)
You can quickly see how those 1 percent interest accruals quickly add up over the years on the client side -- and detract at an equally speedy pace from the agency's coffers. That's one of the reasons Anheuser-Busch/InBev has extended its payment terms to 120 days -- they want to keep the money.
Adweek has a story on this today, describing how agency CFOs are starting to become more careful about extending credit to clients. But if you think that we're entering an era in which agencies will demand payment before work is done, think again. The power relationship in the agency-client world is clearly defined: Clients say what they want and agencies do it. Clients will be happy to engage in a race to the bottom to find the most fiscally lenient agency networks.
Moreover, clients have good reason to resist paying for something an agency has not yet delivered. In the Ogilvy example, the dispute started because the agency delivered a subpar commercial to Avon and the client demanded a do-over. More recently, Bermuda authorities have complained that their Tourism agency, Globalhue, took payments from the island before doing work and in doing so overbilled the account.
The temptation for an agency who gets advance payment from a client is obvious: With the payment in hand, the agency knows exactly how many corners to cut in order to increase its margin on the business.
So, this notion that agencies will be conducting credit checks on their clients presents clients with a choice: Agree to advance payments, lose the interest on the cash, and risk getting cut-rate work; or gently tell agencies to go take a running jump.
The latter is more likely.
Photo by Flickr user thisisbossi, CC.