Why it is important to implement appropriate marketing agency compensation terms
Remuneration timescales need to be more realistic otherwise the agency partners that brands need to be able to rely on will struggle. Stuart Pocock, Co-founder & Managing Partner of The Observatory International, explains why implementing appropriate marketing agency compensation terms in difficult times is so important.
You don’t need me to tell you that money is tight for all at the moment. Not just the man in the street, but for big businesses too.
Everyone is struggling – from families trying to put food on the table and keep their kids warm, to large corporations facing increased energy and fuel costs as well as the knock-on effect of rising costs from suppliers. They remain determined, however, to keep prices competitive in the marketplace.
So, whilst it’s going to continue to be a difficult time for all, some businesses are going the extra mile to ensure their position is shored up, often to the detriment of others.
Appropriate compensation terms
None more so than Keurig Dr Pepper – which recently declared that it was looking for 360-day payment cycles from its communications suppliers and, when criticised, rejected the idea that it was in anyway capable of being accused of corporate bullying. Whilst this position may be extreme, there’s no question that payment terms are getting drawn out, and we constantly observe agencies trying their damndest to push back against ever-longer terms of payment.
Most agencies look, not unnaturally, to a reasonable 30-day payment cycle – but we see from the recent WFA and Observatory International report on Global Agency Remuneration Trends 2022 that payment terms are now, on average, 60 days.
Given that this is on average, that means that for every client who’s adhering to the agency’s payment requests, it’s safe to assume that a similar number are taking longer than 60 days to pay – and very often it’s the bigger, more powerful players who are doing the latter.
Add to that evidence that POs are late arriving (yes, we know it says in the contract that a job shouldn’t start until a PO is received – but try telling that to a CMO who needs the work yesterday) and it becomes obvious that even a 60-day payment cycle is, in reality, often much longer.
The argument, of course, is that the first role of business is to stay in business. So having longer payment terms is highly positive because it enables advertisers to develop healthy cash-flows as their financial outgoings are delayed while their incomings remain the same.
Impact on the supply chain
But it shouldn’t go unnoticed that agencies are businesses too – so their needs are much the same. Not all of them are large organisations – many are effectively SMEs with the traditional focus on cashflow that comes with being an SME.
To go down another level, many of the suppliers to agencies aren’t media monoliths either – the vast majority of suppliers to agencies are small businesses or one-man bands – photographers, illustrators, researchers and freelancers (the latter being in higher demand than ever at the moment due to the pressure on talent).
Agencies can’t afford to lose these people – unlike their clients, they need to adhere to appropriate payment terms – otherwise key people won’t be available when they’re needed again by advertisers.
There are few mid- and large-sized companies that don’t have ethical standards including agreed behaviours on payment, which should be applied to their advertising supply chain. Sadly, these are often overlooked when it comes to negotiating payment terms.
Asking agency suppliers to act as ‘virtual banks’ or lines of credit is unacceptable but until legislation is further revised – or indeed properly implemented, things are not going to change.
And that means that agencies’ cash flow restrictions can have significant impact on talent retention and acquisition in a rising market – with the inevitable detrimental effect on the clients business.
The country is not in great shape right now. It needs money to be flowing rather more quickly through the system – not just to struggling businesses but right down to that man or woman in the street trying to feed his or her family – rather than sitting in large corporation’s deposit accounts.
First published in The Drum