If banks aren’t even lending to other banks, how can production houses be expected to continue to get short-term loans in order to combat the perennial slow payment/cash flow problem on spot projects? For that matter how can production companies be expected to serve as bankers for multi-national advertisers and agencies on jobs when the banking industry itself is reluctant to extend credit?
This is a paraphrased sampling of the questions that have come across SHOOT’s editorial desk in recent weeks as the Dow Jones turned into a daily roller coaster, the $700 billion federal bailout took shape, and terms like “mortgage meltdown” and “credit freeze” became part of the everyday financial vernacular.
Even in so-called good economic times, production houses having to tap into their lines of credit in order to wait out payment of significant past due balances–essentially bankrolling agencies and/or clients of greater size and resources–seemed to fly in the face of fiscal common sense.
But now for the most part the imprudent has become impossible in light of the credit freeze that has gripped the global marketplace. Even those production companies still inclined to be financially accommodating to clients and agencies can no longer be for the most part given today’s economic reality.
Several production house executives under the condition of anonymity have voiced their concerns to SHOOT. One shop for example found itself with a significant balance on a major production having become 90 days past due at press time. The production house extended itself financially and still has no assurance of being paid in the near term as the agency involved has cited sequential liability as an explanation. (“The client hasn’t paid us so we cannot pay you.”) The production company exec said he’s in no position to operate this way on any future projects given the weight of his current commitment. And even if he could, there’s nowhere to go to get the necessary short-term line of credit to meet obligations to crew and vendors. “Still, he said, “agencies and clients somehow expect us to continue extending ourselves in this manner–and we simply can’t anymore. Business practices have to change.”
Matt Miller, president/CEO of the Association of Independent Commercial Producers (AICP), observed, “There’s no reason for advertisers to think differently unless production companies act differently. Production companies have been covering for some time those agencies that aren’t meeting their contractual obligations in terms of paying in a timely manner…The sequential liability explanation from agencies has come to the forefront like never before.”
Just as the mortgage meltdown was spurred on in large part by the abandonment of sound lending practices, so too arguably has the commercialmaking industry been hit hard by ill-advised business practices.
For example, the AICP’s annual membership survey has documented that final payments from advertising agencies are late a significant portion of the time.
According to data from the latest survey (2007), only 43 percent of respondents reported on-time payments. Twenty-three percent reported payments in excess of 30 days past due, and 30 percent of survey respondents said that payment delays had increased. These findings are part of a steady trend that has prompted the AICP in recent years to take action in the form of revised guidelines.
Towards the end of 2006, for example, the AICP national board of directors changed the organization’s national guidelines relative to payment schedules. The board decided to replace the longstanding 50-50 and 50-40-10 plans with a 75-25 arrangement whereby the first billing would be 75 percent of the contract price on a job.
At the time the revision was necessitated by several factors, according to the AICP–the first and foremost one being the fact that some 70 percent of the cost of a production is laid out by the production company within the first 10 days of a shoot. This combined with late payment by advertising agencies and/or clients made cash flow a major issue for the production house community to contend with.
Fast forward to today and Miller noted that this revised guideline is even more relevant in light of the world financial crisis. “When they were originally issued, guidelines like this were important considerations for production companies,” said Miller. “Now they’ve gone from important considerations to being imperative…At least by insisting on a 75-25 arrangement, a production company isn’t behind the eight ball from the very beginning.”
AICP memo
Through the industry grapevine, SHOOT obtained a copy of an AICP memo from Miller issued to member production companies on Oct. 10. The document contains thoughts and recommendations regarding business practices in response to the worldwide economic tumult. Front and center was the 75-25 payment guideline which the AICP memo read, “needs to be discussed with the agency or advertiser directly and up front.”
Also covered in the memo was the aforementioned sequential liability and the fact that this was the number one reason given by agencies for late payments, according to the earlier cited AICP membership survey.
In the memo, Miller wrote, “I would venture to guess that we will see more agencies including in their contracts strict terms, which include sequential liability, meaning that the agency will only meet the payment terms that they have agreed to if the client has paid them; otherwise, you must look to the client for payment.”
In this scenario, the memo advised production houses to make sure that:
• The client has an “agent relationship” with the agency.
• The client has committed to the terms of the contract that you have negotiated with the agency.
• And the client is aware of the payment terms and is committed to meet them, if the agency doesn’t.
These three suggested points are best accomplished, continued the memo, by having the advertiser countersign the final contract along with the agency.
Like the 75-25 guideline, these recommendations relative to sequential liability have been espoused by the AICP for some time.
Indeed AICP’s position on sequential liability has been chronicled over the past several years in SHOOT, perhaps most significantly with the issuance of a guideline in December ’04.
Risk evaluation The AICP memo went on to advise production houses to evaluate risk when entering into an agreement, including how to do business with those parties that you feel may have trouble meeting their obligations.
If you have doubts regarding whether or not a client can meet its financial obligations, the memo reads, “there is no reason why you can’t secure assurances that they can do so.” The document then went on to suggest that such assurances could be achieved by:
• Getting 100 percent payment for the job up front.
• Having 100 percent of the payment put into an account that is specified for your production (with proper documentation outlining the terms of disbursement of the funds).
• And/or requiring other written assurances that would put you in a strong collection position legally if a company were to go bankrupt.”
The memo noted that while these may seem like drastic measures, they will not be foreign to advertising agencies or advertisers. Similar measures are outlined, for example, in a book written for agencies and published by the American Association of Advertising Agencies (AAAA) entitled Controlling Risks When A Client Is Financially Distressed.
In the AICP memo, Miller conjectured, “In times like this, I would think that all agencies are evaluating the stability of all of their clients.”
The memo further noted that the AICP will be making these risk evaluation points in statements to the industry and to individual agencies and clients, as appropriate.
“But the only way,” cautioned the memo, “that you [production houses] will be covered and you will secure these safety measures is if you discuss them up front, and are firm about insisting on these prudent steps during the course of booking a job.”
Rumor mill While the rumor mill and fear have contributed to the volatility of the stock market, the AICP would like to avoid a similar set of dynamics impacting the production community.
Miller wrote, “Over the past few weeks, I have heard many rumors about companies and their financial state, always from a third party who heard it from a third party and always couched in a statement of ‘concern.’
“Rumors flying do no one any good,” continued Miller. “The less confidence that is instilled in the community about the stability of companies or the veiled innuendo of an otherwise stable company’s ability to meet their business obligations, the more it puts all companies in a bad light. This in turn conveys instability. If you are truly concerned about a company, and want to know about their well-being, pick up the phone and call one of the company’s principals.”
The memo concluded, “This is a time to support each other and embrace a sense of community, which will only strengthen all of us in the long term.”
