By Robert Goldrich

Some three-and-a-half years ago, SHOOT reported on slow payment as a dynamic that was starting to significantly compromise the health of the commercial production house community. Fast-forward to today and the cash flow problem has become an even more prevalent, serious threat to the survival of many spot production companies–a fact reflected in the results of the third annual Association of Independent Commercial Producers (AICP) membership survey, which was conducted and analyzed by independent firm Goodwin Simon Strategic Research, San Francisco and Los Angeles.

Though the full study has not yet been publicly released, AICP president/CEO Matt Miller gave attendees at last month’s SHOOT Commercial Production Forum–held in partnership with Source TV–a preview of key findings. (A detailed rundown of The Forum, held Sept. 29 in New York.)

Nearly 90 production companies–representing about 33 percent of AICP member houses–completed the study, reporting the percentage of jobs for which payment was late. According to the respondents, on average 20 percent of payments were 1 to 15 days late in 2004, 17 percent were 16-30 days late, 12 percent were 31-45 days in arrears and 11 percent were 46-plus days past the production contract deadline. In ’04, four percent of payments were received before the due date, with 35 percent arriving on time. That’s compared to four percent and 38 percent, respectively, in ’03 per last year’s AICP membership survey.

Ironically, noted Miller, as entrepreneurial production houses bankroll jobs for an inordinate period of time on behalf of major agencies and multi-national clients, a number of ad shops deem it necessary to request credit checks on production companies. “It should be the other way  around,” contended Miller, noting that production companies laying out the money up front should be getting financials on agencies and clients, particularly with late payment on the rise and a tenuous marketplace in which it’s being reported that a major agency holding company is teetering on the brink of bankruptcy.

Miller observed that when an agency pays late outside of the terms of what is contracted, it makes it difficult for a production company to work in a way where it can project to its next job and handle cash flow properly. Thus in December ’04 (SHOOT, 1/21, p. 1),  the AICP issued a late payment guideline prescribing that interest be charged on all payments later than 30 days from the production contract due date. The production company determines the rate of interest; the guideline lists “prime plus two percent” as an example.

Indeed many production house executives have told SHOOT that a penalty for late payment is justified. In fact, so many agencies and/or clients are paying late that small enterprises have popped up to extend credit to production companies, thus adding interest to an already tightly squeezed business. In his Forum presentation, Miller noted that some of these credit-extending businesses are unduly exploiting the situation. He affirmed that the additional interest being paid by production houses in such circumstances must and will be passed on to the agency and client.

 

SEQUENTIAL LIABILITY

According to the latest AICP survey, production companies reported that the most frequent explanation given to them for late payment was that the client has not yet paid the agency. That was the number one reason, cited by a whopping 81 percent of respondents. A distant second (12 percent) was that agency billing procedures do not permit timely payment.

Miller related, for example, that The Richards Group, Dallas, adheres to a sequential liability policy whereby the agency will pay the production house only after the agency gets paid by the client. However, as many production houses will attest, it’s difficult to determine exactly when agencies get paid by the client. Furthermore, many production house executives point out that generally they cannot easily have a direct relationship with the client without jeopardizing their relationship with the agency. There have been instances where clients say they have paid agencies and are surprised to hear that the production house has not been paid. Whether or not the clients have sent payment, the bottom line is that production companies have been routinely asked to bankroll jobs for an extended period of time, jeopardizing their financial health.

Indeed while many ad agencies have payment terms in their contracts, they also have sequential liability language in those contracts–or in riders or side letters. This language stipulates that no payment is due until the client pays the agency. Other agency contracts do not refer to sequential liability but they describe the agency as “acting as agent for” its principal, the advertiser–which can equate to the agent being liable for payment to the production house only if the advertiser has paid the agent.

The AICP issued a new guideline on sequential liability last December. The guideline recommends, “If the agency is requesting the recognition of a “principal-agent” relationship, then the client (principal) should not be released from the obligation of payment until total payment is made to the production company. It should be clarified that even if the client pays the agency, the client remains liable if the agent defaults in fulfilling the payment obligation to the production house.”

In those instances when an agency’s internal policy insists upon payment terms based on sequential liability, the AICP guideline states that the production company should make sure the advertiser (client) also signs this agreement. If a rider is involved, the terms of payment and the full contract price should be added to that rider. The AICP guideline also recommends that the production company be provided with the advertiser billing and contact information, copy the advertiser on all invoices and notify the advertiser of payment due as soon as terms of the contract (payment dates) are not met by the agency.

Miller said that there are ad agencies who balk at having clients kept in the loop this way. He conjectured that some agencies “evidently don’t want the client to know what they’re doing.” Miller added that agency payment practices need to be examined in that they often date back to when the ad shop made a commission on production, which is no longer the case.

As chronicled in SHOOT, a busy month followed by a slow month can be a curse for a production company trying to cope with past-due payments. Further underscoring the problem is the fact that even being awarded a major job can turn out to be the death knell–rather than the savior–for a production company already facing cash-flow difficulties. For example, SHOOT became privy to a situation in which a production house, which already was grappling with poor cash flow, went out of business after wrapping a job in which some $1 million went unpaid for more than 90 days. The delay of this seven-figure payment pushed the house–which was financing this and prior jobs–over the edge.

 

BIGGEST THREAT

On a scale of one to five, the latter being the highest, AICP survey respondents were asked to rate factors affecting production companies. Timely payment finished first with an average of 3.93, followed by client guidelines at 3.53, the influence of cost consultants at 3.43, wrap-up insurance and liability at 3.14, and agency contract language at 2.87.

The study yielded similar results in terms of production company respondents who identified the greatest factors impacting the financial health of the commercialmaking community. Timely payment was a resounding first, cited by 41 percent of respondents, followed by influence of cost consultants at 22 percent, client guidelines at 17 percent, and wrap-up insurance at two percent.

Miller affirmed that it’s shortsighted of agencies to engage in payment practices that jeopardize production houses. He said that advertisers and agencies should have a vested interest in maintaining a healthy production house community that’s capable of providing the talent needed to help create and to execute effective pieces of communication ranging from traditional TV :30s to new media forms. Miller cited the contributions of bicoastal Chelsea Pictures/Campfire to the Audi “Art of the H3ist” integrated campaign from McKinney+Silver, Durham, N.C. The multi-faceted campaign successfully launched Audi’s A3 automobile in North America.

“The overall industry would be in a bad position,” he said, if the viability of the production community is adversely impacted–and it is being, he contended, by slow payment.

Miller added that agencies can count on the close relationships formed over the years with commercial production houses. This collaborative bond that agencies and clients enjoy with production companies that understand advertising and marketing is even more valuable now as branded content and other forms start to emerge. By sharp contrast, said Miller, Hollywood looks at advertisers as “ATM machines.”

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