Business can sometimes be a game of each company putting off paying the other company. Cash flow rules everything.
But lately, hard-hit publishers have had enough with agencies extending payment terms even well after they’ve been paid by their clients. Agencies then use the money as float, according to multiple publishers and agencies interviewed by Digiday.
Like most bad practices in digital media, this issue starts with marketers. Clients have messed around with extending payment terms for years. Ever since the 2008 financial crisis, brands have gone to not paying agencies for up to 120 (or more) days. Agencies have been famously miffed: Grey, for example, a couple of months recently resigned Coty because the brand doesn’t pay agencies for 120 days.
Shit tends to roll downhill. When advertisers pay agencies late, they also pay their vendors late. A 2013 ANA survey found that a third of suppliers — that includes publishers — had found payment terms extended.
But agencies are also, for example, taking client money (off a 30-day payment term) but imposing longer terms of 90 or 120 days on their publishing partners. That leaves them with 60 or more days to have the money as float. One publisher said that agencies were holding onto money for 210 days, the longest period Digiday heard about from executives.
One agency executive said that the money is not used to fund operations at the agency; it’s done to make extra money. “We would put that money in things in an index fund, some low-risk index fund,” he said. “So you make some money off it.”
This person also said that in his experience, agencies are elongating payment terms as part of the negotiation — asking for longer terms from publishing partners so they can have the extra days.
Like agencies before them, publishers will combat the payment elongation by taking out credit lines or getting paid against account receivables. One small-publishing executive said that an agency at one point sent checks early that ended up bouncing — and the company that handles its factoring then began to scrutinize the publisher. The executive said the agency claimed a mistake in accounting, but it was then unable to pay its freelancers. “What I’ve heard is that they’re using it for operations. They’re using it to invest and make money.” And standard IAB-recommended terms and conditions that recommend media companies be paid in 30 will be changed to 90, 120 or more, said this publisher.
It affects midsize publishers the most. Brian Fitzgerald, co-founder of Evolve Media, said he had to hire an extra collections person because receivables aged up to 210 days. “They are absolutely using this delay tactic to float their operations or even generate profit in low-yield, fix-term investment instruments. It’s outrageous,” he said.
To be clear, this isn’t illegal. Most of this stuff is baked into contracts, said multiple agency employees with knowledge of the matter.
P&G chief marketing officer Marc Pritchard outlined the issue in January at the IAB in a presentation in which he said that the advertiser had discovered that agencies were using media money as float. But when P&G looked at the contract, Pritchard said it made a discovery: It said that P&G would pay the agency, which would make the purchase and accept all liability with publishers, and it had no provision that prevented the agency from making money on the difference between the two.
Reps for major holding companies either declined to comment or said this does not happen because it is unethical.
“Compare it to a bank,” said one agency executive. “Media agencies are sitting on a ton of cash. People need to think of them like that. There is an opportunity to do some totally legal things and make extra money on the side.”
An executive at one of the world’s largest publishers said that “it’s totally true.” “[The terms] have pushed back further and further, and it can be a real challenge for the billing process.”
It’s not a good thing for agencies, per one finance head at a shop: “You’re asking for trouble by merging those funds,” she said. “Even if you’re paying everyone on time. If we ever needed money, we’d sooner take a loan than fund anything out of media cash. Even it was all above board, it just seems like the access to capital is easy enough, interest rates low enough. Either you’re really being a pig or overextending yourself by playing with the media cash.”
One publisher who has 120-day payment terms said this is reflective of an agency model looking to increase cash flow through whatever means necessary because they’re being squeezed. It creates a model that’s essentially, according to this publisher, “agency as financial institution.”
Bill Duggan, vp at the Association of National Advertisers, said that this is not unheard of and is absolutely not OK, even if it’s not illegal. “Decreased compensation and extended payment terms will of course put pressure on agencies, so then this happens,” he said. But he also said it’s on the client, who needs to be clearer and cleaner about contracts. “Agencies are holding onto the money. I think the brand should absolutely fix this.”