Many agencies assume some degree of financial risk on behalf of their clients. Often, they book media campaigns on a client's behalf, paying media vendors for the ad space and billing the client for that space, many times with a pre-determined markup. This model is risky, however. Agencies can be left "holding the bag" if a client can't pay for their media commitments for whatever reason. Over the years, agencies have tried to minimize their exposure to this potential problem through a variety of methods.
One method introduces the notion of "sequential liability" into media contracts. That is, terms of an advertising agreement are conditional with respect to the client's ultimate liability for payment. This method is fairly common – sequential liability language appears in the IAB-AAAA Standard Terms and Conditions for online ad buys.
Another method is to require payment from clients in advance of an ad flight. In many cases, clients dislike this method of doing business, as it requires payment in advance of services delivered. This can diminish a client's negotiating leverage.
Yet another way for agencies to reduce their risk is to have media vendors bill the client directly. In many cases, this can also be undesirable from the client's perspective. After all, they hire agencies (in part) for their ability to manage ad campaigns, including the billing process. Approving various vendor invoices for payment, ensuring that ads were delivered, and fielding calls from vendors takes time away from a brand manager or VP of marketing, so it may not be the most desirable of methods.
Still, agencies, clients and media vendors need to take steps to protect themselves from being the one left standing when the music stops. Media vendors are tired of hearing the same line from the agencies – "We'll be able to pay you when the client pays us." is common.
But what happens if the client is not able to pay at all? The dot-com boom and subsequent contraction taught many agencies a valuable lesson about assuming financial responsibility for clients. As many dot-coms declared bankruptcy, their agencies were often left holding the bag from a financial standpoint. This put several agencies in precarious financial positions. After all, not only were these agencies not receiving full payment for placed media, but they were also missing out on fees and/or commissions.
How can agencies protect themselves from this exposure to liability? While I'm not a lawyer, I've seen various payment policies in action. Here are some ways to cut down on the financial risk associated with the media business:
- Manage client payment expectations before they sign an agreement with the agency - Clients should be aware of agency expectations concerning payment before they award their media buying business. Agencies should be prepared to discuss how vendor invoices should be handled, whether the agency will manage the payment process or not, and net terms of payment of agency invoices before there is an agreement in principle for the agency to handle a new client's business.
- Streamline the vendor payment process - Once vendor invoices arrive at the agency, they should move along the process toward payment as soon as they can. I've found that the best way to ensure that invoices are handled properly is to develop a clear and effective process beforehand. Consider having vendors address invoices to a special PO Box or specific individual within the agency, so that the invoice finds its way to the proper party within a short period of time. Also consider using a PO (Payment Order) system of numbering invoices, such that those responsible for cutting checks at the agency can easily verify amounts and attribute them to the appropriate agency client. Be 100 percent clear about who is responsible for ultimate approval for a vendor check.
- Clearly delineate payment terms on insertion orders - It is important to let media vendors know the appropriate procedures for billing the agency. Specify PO numbers and how invoices need to be addressed in order to expedite payment. This will greatly minimize the number of vendor invoices that "fall through the cracks" and will save you headaches down the road.
- Use sequential liability language - Agencies function as agents for their clients and there is no reason for an agency to assume financial risk in the event that a client fails to pay for media placements it has approved. Sequential liability language helps to cut down that risk.
- Stay up to date on client invoicing - Of course, most sequential liability terms are conditional. The agency must make its best effort to collect funds from its clients in a timely manner. Every day that an agency fails to bill its client is another day that media vendors don't get paid. If it can be demonstrated that an agency failed to make its best effort to collect from the client, sequential liability language may not protect the agency. So be sure to stay on top of this.
If we all take steps on the agency side to handle processes appropriately, we can improve our industry's payment practices and make this a more profitable industry for all concerned.