Death by client!

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.