This week, the 4A’s – the advertising trade association that counts 600 agencies among its members – released “The Ripple Effect of Extending Payment Terms,” a guidance that discusses the implications of lengthy payment terms in agency-client partnerships and makes the case for 30 days as a best practice. The paper cites a 2020 ANA study that found average payment terms over the past decade have crept from 30 to 60 days, with clients continuing to press for even more unrealistic terms.
This issue isn’t limited to the advertising industry. We all remember the Keurig Dr Pepper PR agency review last year, where the food & beverage company required that participating agencies agree to 360-day payment terms, or participate in a supply chain financing program where they would be paid sooner but receive a reduced amount.
As an agency search consultant who spent 15 years working in and consulting for agencies – from emerging and mid-size independents to the largest global players – I am privy to the pain points on both sides of client-agency relationships. Recently, contract terms have been a major topic of discussion on the agency side, and I believe it underscores a bigger issue: a misalignment between “supplier diversity” promises, and companies putting their money where their mouth is.
While many companies tout their commitments to working with minority-owned, women-owned, and small businesses (to name a few), their business practices severely limit the playing field. Payment terms are just one example of how this plays out. When a client requests their agency partners accept lengthy payment terms, whether during an agency review or contract renegotiation, they are essentially asking those agencies to function as a lender. And many excellent small and independent agencies – without the financial resources of the larger firms – don't have the capacity to handle payment terms beyond 30 days.
It would be naïve to believe that clients would prioritize another business's financial well-being over their own. But how can they expect their agencies to attract and retain the best talent, invest in the latest tech and resources that fuel the most innovative work, and support the client’s business for the long-term, when those agencies bear the financial burden of extended payment terms?
Let’s be clear. Client-side communications and marketing teams are often not the decision-makers when it comes to contract terms. But it’s critical they educate themselves on the ramifications of their organization’s procurement criteria and insert themselves into those conversations, as it could greatly impact which external partners are able to work with their business. Here are a few questions clients might consider asking themselves:
- When we seek new external partners, do we reach out to the same established firms, or do the harder work to educate ourselves about lesser-known, but equally capable players?
- Do our contract terms and negotiation processes favor larger, well-resourced agencies?
- How much unpaid labor does our new vendor onboarding require?
I applaud the 4A’s for taking a stand on fair payment terms and holding the industry accountable. Beyond adhering to these guidelines, I hope companies will more broadly revisit their business practices as they strive for greater diversity in their agency partners.
Rachel Huff is President and Founder of Victoire & Co, an agency search consultancy.