Death by client!

2 weeks ago

By THE HAMMER

Number crunchers are running riot in an industry they know nothing about.

Weaponising cashflow to rude advantage is rearing its ugly head.

Nobody is talking about it, but this is going to hurt…

Before that, let me get some shit off my liver.

I need to correct a massive misconception we are all guilty of. When an agency wins a RM100 million piece of advertising business, it does not get to put RM100 million into its bank account.

On the contrary, the agency probably has to look for an escrow facility to offset the spend the client will make in the hope that client will pay. Ridiculous you say?

That’s the dark reality. So the agency is a bank and absorbs a lot of risks hoping clients will pay. Of course there is a contract in place. Yawn.

On top of that, advertising is sadly treated as a supply chain to be trodden upon, where procurement gymnasts play a zero sum game at will.

We know the dynamics have changed with Covid-19, yet the guardians of budgets are playing God. Are they drunk in some celestial righteousness we don’t know about?

Moneybags are the new storytellers (albeit boring) in a scheme to deprive the very industry that keeps them in employ. Shielded by curtains of bureaucracy, well orchestrated by dumbfounded storylines of lies and delaying tactics, accountants with bad haircuts are dictating the destinies of livelihoods of thousands by keeping them in line.

Devaluing an ideas industry that makes or breaks the creative economy is beyond their comprehension, let alone intelligence.

Hanging by a thread, the advertising industry’s dedicated workers are victims of an ecosystem fine-tuned over decades of subservience.

Slaves to cheque signatories.

Who do you pay first? The creator of your brand’s image or the order of office stationery that becomes a 5-year stockpile.

In our story this time we talk to 6 heads of large multinational and local agencies to bring you a sense of the desperation that makes the business so fragile. Stories you’ll never hear in the boardroom, lest a paymaster gets “offended”.

All of those we spoke to refused to allow their names to be published except for one. But believe you me, all these stories are TRUE.

When clients don’t pay their bills it results in massive agency losses and even closures. It is a shallow way to show tough love, if that is the intent.

Anway, brace yourself for some blunt truths now…

It takes only one delinquent client to kill you.

“My first experience of a client playing God set us back close to the tune of RM1 million. The agency was promised and reassured by this client that all will be reimbursed once the paperwork for additional budget was approved by the Ministry of Finance (MOF).”

(Ed’s comment: It is an unspoken truth that government or government-linked advertisers are notorious paymasters and their game begins the moment the contract is signed. Yawn.)

“We were working on a campaign with a Government Ministry in accordance to the terms of contract, following Purchase Orders (PO), approved creatives all pitched and won under a competitive open tender process, etc.  Playing by the book with no back door entrance.

Most of the budget  allocated was utilised for airing of TVCs besides production, outdoor and print media placements. All was going very well until the Deputy Secretary-General (TKSU) of the Ministry steps in and wanted to increase airtime slots…

The client asked the agency to book additional TVC spots during prime time which was above their allocated budget to ensure there was enhanced key messaging of the campaign (maybe that’s the only time the Minister watches TV).

Although agency cautioned the client that it would blow the budget, agency was repeatedly assured that an application has been made to MoF (Finance Ministry) for approval of additional budget and that it was being processed.

Based on previous experiences, the agency more often than not gets approvals for additional budget requests. Based on precedence, we proceeded to book the additional spots.

The campaign ended successfully and payment as per contract was made to the agency with the exception of the additional media budget. Month after month, agency was told that the additional media budget application was under process, etc. And the amount was substantial.

There was a cabinet reshuffle and the incumbent Minister was assigned a new portfolio and the TKSU was transferred to another Ministry. The agency was left high and dry!

Representations to the new KSU of the said Ministry drew blank responses with the usual line, “It was not sanctioned by us, but the previous guy…”

Agency did not file a legal suit against the said Ministry for fear of repercussions since we were doing other government projects too. We did not want to jeopardise our working relationship and hoped that by securing other projects it could help reduce our losses.

It was hoping against hope, and it got dimmer by the day.

Over the coming months, this shortfall resulted in the agency experiencing serious cashflow problems which  affected the viability of the company being unable to meet its overheads, etc. Eventually, the once thriving agency of 35 years had to close shop for good.”

GLC with no TLC

“We secured a very promising GLC account . In fact, it was paying the agency an attractive monthly retainer fee of RM150k. All looked very good on paper. There was no issue of payments.

As per the GLC’s mandatory requirement a strong team which included an account planner, account managers and creatives were brought on board.

The challenge was that the client was very indecisive and hesitant in embarking on the advertising campaign due to internal politics. The agency’s team were given the task of attending to a series of BTL collaterals but not implementation of the campaign proper.

After one year of paying the RM150k monthly retainer to cover the overheads of a full-fledged and dedicated team, our services were abruptly terminated with the excuse “factors beyond their control”. The GLC was unable to commit to the execution of the campaign.

We had no choice but to walk away and a highly talented senior team had to walk out the agency door.”

Painful lessons:

  1. Clients can make all kinds of promises but when it comes to due dates for payments, but the agency must be vocal without fearing repercussion to future business.
  2. Contracts must be water-tight and agencies must take great pain to ensure that their rights are protected.
  3. Agencies must stop getting overly excited and overconfident when winning new business. All it takes is just one delinquent client to screw you up for life.
  4. Take everything with a pinch of salt.
  5. Agencies must never take overdraft (OD) facilities for it gives a false sense of financial confidence.

A short story on the death of a Malaysian ad agency.

“My agency was called Earth, Wind & Fire and was incorporated in 1999. We had a good run for 10 years and were proud to be a home-grown full-service agency – creative, strategy planning, media planning and buying. Within a year of incorporation, we were accepted as a member of the 4As. We had a mixed bag of clients, with a total annual billing of around RM10 million.

This was about the time when the industry was still in the early days of trending towards specialist media agencies. So it still made sense then to provide media services, although the writing was on the wall. Trouble started from 2009 onwards, rolling over from the recession of the global financial crisis.

Margins were thinning, with clients pushing for discounts on creative fees as well as rebates on media commissions. The larger agencies were tapping on our panel of clients. A phenomenon affecting other mid-size and small agencies at the same time. The big boys were throwing prices to reel in smaller clients to make up for their own declining revenues.

The credit crunch started to hit in when clients were stretching payment cycles. 30-day terms stretched to 60 days. But things went awry when it went past 100 days, and even more.

Prevalent credit control and collection methods were not working anymore. Some new clients, that passed the initial credit rating tests, became problematic after several months when billings started to grow. In a tough market environment, we fell to the temptation of taking on new work, expanding the portfolio, but the price to be paid was bad credit. It was a vicious cycle. Bills had to be paid – salaries and overheads, printers, production houses, the media.

We did our best to hold the fort for around 2 years, draining out all savings – business and personal, borrowings from family, rolling payments to creditors, burning out bank guarantees….

Progressively, I had to start putting into effect the most painful act of all, which was to start letting staff go. The bleeding, once it started, became difficult to plug.

Up to a point where I realised it was no longer tenable, and there was no choice but to fold. The current situation of the industry brings back memories of that awful period from 10 years ago. ”

Playing with other people’s money

“There is a rare breed of client, unfortunately not extinct, who believe themselves to be above the law (or at least the legalities of a mutually agreed contract) and that agencies are either banks or charities.

This client, an internet start-up, was four months new when they pitched out their account. Although there was a rush of hungry aspirants, they invited six well known agencies to participate in their quest to build a paying audience. For a start-up, the pitch process was disproportionately extensive and therefore gruelling.

Eventually we were selected – congratulations and celebrations all round with many backs slapped. A contract was duly signed, which had uncommonly generous payment terms due to the gradual accumulation of an anticipated audience.

Three months after the campaign started the first tranche of payment came due…only to be delayed by mutual agreement for 30 days. Not a good sign, but surprisingly 30 days later the first bill was paid. Many sighs of relief especially from the media group head and the Finance Director.

This kind extension was taken by the client’s Marketing Director as fiscal freedom from the contractually agreed payment schedule. And so every time payment was due, a month’s extension was expected…and given…by the media group head and the Finance Director – except that each time the month’s delay was eating into cashflow.

By the end of nine months, only two of six payments had been made.

Having made the most urgent list at the weekly debtors review, senior management were now informed and involved. There was pressure to pay. The contract was invoked. Letters and e-mails of demand were sent. Lawyers found employment.

We were then immediately told the client was in the midst of being acquired by a well-known global player. And that during this process no payments, debts or liabilities could be settled.

Our lawyers advised us to wait. We did.

When the acquisition was completed we asked to be paid only to be notified that our client no longer existed as a legal entity and due to the nature of the deal structure no debts would be recognised and paid.

Our lawyers would have got rich contesting this in court.

So we ‘absorbed’ the loss.

A post mortem highlighted the roles of media group head and the Finance Director in the debacle. Blame, it was decided, lay ultimately with the Finance Director who, after 12 years with the company, was fired. We did not make our annual financial target. Some bonuses were reduced and many were not paid.

Ironic justice: 18 months after their acquisition the now not-so-new start-up was shut down and our client contact, the marketing director, laid off. He’s still around…somewhere.

Many advertisers have also been using the MCO ruse to delay payments. “Cannot go into the office to make payments”. Yawn.

As a parting shot, check out this interesting comment, “My GLC client approved the creative and budget and signed off on the contract. We ran the campaign and when it came to payment they suddenly told us they don’t like the campaign and will only pay 70%.”

We salute responsible advertisers

Some agency CEOs we spoke to also highlighted the case of amazing clients who have come forward in these trying times to help agencies’ cashflow situation by paying early.

Some clients even deferred their review of agencies to next year by retaining the incumbent, thus offsetting unpredictability in an unpredictable environment.

Understandably, for most marketers the priority is to sustain their supply chain of materials for product, without which everything else is irrelevant.

But until most advertisers do not see the error of their ways, the industry will remain in free fall.

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