The average payment terms from clients now stand at 60 days with—on average—a third of agencies having been forced to extend their terms in the past 18 months in order to land contracts, with a quarter of businesses working on 90 day terms or more.
The Global Agency Remuneration Trends Update report by the World Federation of Advertisers has outlined various issues faced by marketing services agencies when it comes to being paid for their work by clients.
The document features the results of an online survey conducted in July–August 2022 with over 200 respondents from 84 different multinational clients who were mainly in a marketing procurement role. Over half of the respondents manage a global remit with 66% managing an annual marketing budget of over $251 million. 22% said that they held annual budgets of over $1 billion.
Within that report, it has revealed a lengthening of the average time faced by agencies to receive payment, however, the report claims that blame lies on both sides of the purchase order (PO). It claims that while clients are quick to commission work when marketers have an urgent need, they are not quite so fast to follow through on requests for POs to be paid.
The standard length of payment appears to have moved from an average of 30 days to 60 days, however, nearly a quarter of businesses were working to a 90-day payment while 10% were looking at 120 days or more. Such delay tactics may pose a threat to smaller agencies which could be forced out of business waiting on crucial payments to cover monthly bills.
“It cannot be in clients’ long-term interest, when reputation is so critical to ensuring you can work with the best possible talent, to unfairly extend payment terms,” said Stephan Loerke, chief executive of the WFA.
The report comes within weeks of news of a request for proposal (RFP) conducted by Keurig Dr Pepper for PR services with applicants asked to agree to exceptional 360-day payment terms or obtain financing from a third-party bank.
The story provoked outrage across the industry which highlighted the potential business damage which could be faced by extending the length of time payments were expected by suppliers.
The same section of the report also claims that more than three-quarters (82%) of agencies begin work before creating a PO. Only 18% of respondents said they never began work without creating one while 44% of clients said they would not pay for any services prior to being received. 43% of clients did say that they would generate a PO to an agency within a week with 11% admitting to it taking more than two months.
Subsequently, almost three-quarters of media agencies (72%) and digital/CRM agencies (73%), over half (52%) of creative agencies/production companies and less than half (48%) of activation agencies said they had extended their payment terms in the last 18 months.
“I think there are situations which are unfair and cross the line, and I am not a proponent of continuing to extend terms. There are some situations which have broached into unfair territory and there needs to be a reckoning between clients and agencies to what is reasonable and sustainable over the long term and stick with that,” added Bob Liodice, CEO, Association of National Advertisers (ANA).
Value for money
Also discovered by the research was that the majority of clients felt they were getting value for money with only 14% stating they weren’t, while less than a third (30%) said that clients focus too much on remuneration, which damaged agency relationships. Despite that 62% felt that changing their current agency remuneration models would improve the relationships they have with agencies.
“The biggest challenge isn’t necessarily how much we pay, but often our over-complicated system for managing budgets, which has a knock-on effect and can put a strain on client-agency relationships. Agency remuneration is a huge topic, but the actual negotiation of fees is relatively minor compared to the whole financial flow discussion,” said Cloe Lowery, a marketing-focused buyer for Nissan Europe.
It was evident that clients still valued excellence from their service providers and said they would be happy to pay more for more diverse agencies (85%), suppliers who can evidence a genuine approach to sustainability (71%) and to ensure talented individuals work on our account (64%).
“Diversity and sustainability strategies should be an integral part of any company’s strategy, not a unique competitive positioning used to justify a premium pricing model,” said Hannah Woodgate, global marketing procurement category lead for Reckitt.
The role of procurement was also highlighted as taking the lead on agency negotiation, with 72% being made responsible, although this was lower than the 84% reported in the last report four years ago with marketers thought to have been “stepping in” to protect their agencies during the pandemic and a potential global recession.
The report also takes a detailed look at the various remuneration models and approaches being used around the world across various advertising services suppliers while examining where budgets may have moved to since the last report.
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