ANA Study Highlights Perils Of Extended Payment Terms
It looks like the practice of extending payment terms for advertising and marketing services is more of a broader trend than a few isolated instances. After examining the trend in a detailed study, the Association of National Advertisers has urged marketers to think long and hard before extending payment terms because the impact on marketer-supplier relationships and even the health of some industry segments could be quite negative.
The study follows a few widely publicized examples earlier this year of national marketers acknowledging their efforts to extend payment terms for their suppliers of marketing and other services. Procter & Gamble, Johnson & Johnson and Anheuser-Busch InBev were among the companies that indicated they would take 75 days or longer to pay service provider -- a cycle that is much longer than the commonly accepted norm of 30 days.
The study found that 43% of marketers had extended payment terms over the past year on at least one marketing service in their portfolio. That portfolio includes agency fees, research, media, production, and talent payments. A small minority of marketers (17%) said they had actually shortened payment terms.
Looking ahead to next year, 42% of respondents said they were somewhat or very likely to change payment terms.
The primary corporate objective for extending payment terms is improved cash flow, per the study. But many respondents acknowledged that unintended consequences could follow. Fifty-seven percent said the term changes implied “strained vendor relationships.” And 25% said that higher prices would likely result while 23% said “strained management processes” was a likely outcome.
Among those companies that instituted payment terms changes in the past year, about 60% did so for company suppliers across the board -- and not just those in the advertising and media space. Forty percent implemented changes to just a segment of their supplier base.
Over 85% of respondents said changes were driven by company finance departments and 52% said change was driven by procurement forces within their companies.
The ANA concluded that marketers that are considering extending payment terms “proceed with caution and are encouraged to evaluate the down-stream implications of such payment term extensions.” The study quoted Tom Finneran, executive vice president of the 4As surmising: “Extended payment terms will result in elevated supplier pricing and reduced supplier choice. It’s that simple.”
The ANA study also concluded that the “livelihoods of some of the smaller players in the marketing supply chain are threatened,” including smaller agencies, production companies, editorial houses and media outlets. Such companies, the study reported, require “predictable cash flow, often don’t have access to large lines of credit, and have pricing models that do not currently reflect the costs to their business resulting from extended terms.”
Bob Liodice, President and CEO of the ANA said: “While the ANA does not recommend any specific term or practice, we do advocate better collaboration that advances the quality of the marketer/supplier relationship and the products and services delivered.”
More on the study can be found here.