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Late payers and defaulters: Why clients don’t pay their ad agencies on time

And how to get clients to pay up and pay on time.

By  Priyanka Nair and Saumya TewariAug 24, 2022 3:13 PM
Late payers and defaulters: Why clients don’t pay their ad agencies on time
Clients not paying on time or not paying at all is a critical issue that’s not received enough attention from stakeholders. (Representational image via Unsplash)

In early 2022, a senior client servicing executive from a leading advertising network was mistakenly marked in an email by the finance team. It was a follow-up mail sent to a large technology company which hadn’t cleared its dues for 24 months straight. He was surprised. He couldn’t understand why the agency actively worked with the client when they were not being paid for their services.

Storyboard18 spoke to multiple agency heads who said that clients not paying on time or not paying at all is a critical issue that’s not received enough attention from stakeholders.

In another case, a big technology company hasn’t paid its creative agency for months because the company’s in troubled waters. However, the agency continues to service the client and deliver work.

Since the breakout of Covid-19, delays in compensation for work undertaken by agencies are at an all-time high. While some clients are genuinely struggling, others are using pandemic-related business pressures as an excuse to release payments late.

Agency executives that Storyboard18 spoke to indicate that, currently, the average payment cycle after raising a bill is 60-90 days. This is putting a lot of independent shops and especially digital agencies under pressure. Global digital publishers like Google and Facebook have strict measures in place for defaulters. That’s why agencies make payments to Facebook and Google from their pockets to keep business running as usual.

The delayed payment amount depends on the risk appetite of the agency. Normally there is a cut off, it could be a month’s retainer. So, about 8-10 per cent of annual retainer. The figure can range between Rs20 lakh to crores.

The problem is more acute on the creative side of the business.

Speaking about the media investments agencies, Shashi Sinha, CEO, IPG Mediabrands tells Storyboard18, “The scope of delayed payment is less on our side of the business because clients know they will not be able to run ads without paying upfront.”

Addressing the elephant in the room

Delayed payment is an affliction that no one wants to talk about, but it’s a big issue that every agency is battling, admits Naresh Gupta, co-founder and chief strategy officer of Bang In The Middle.

“We have become short-term liquidity providers and as an industry, we do not even seem to see this as a problem. We treat this as the cost of doing business and almost never calculate it, but it is a big cost,” Naresh Gupta, Bang In The Middle.
He further says agencies are at a losing end unless they ask for advance payment.

Today, film production, social media influencer activities, and technology-driven work have an element of advances, but regular retainer businesses don’t work that way. The advertising business is a relationship-driven one. Many times a campaign is worked on and released without advances, purely on a trust basis. Sometimes it works, and other times it backfires.

Some ad executives have found that new-age companies which have no track record of working with advertising agencies usually end up paying their agencies late, mainly because their systems are always in a work-in-progress mode.

With larger corporations, even if there are delays, agencies are commercially safe.

In India, late payment is largely for one reason; “the client at the front end who has to start the process of payment does not do so. I have no idea why they feel that doing the commercial conversation is not a good thing. In almost all cases of delayed payments, the reason is this: the process internally has been delayed by the ones who need to start it,” observes Gupta.

Agencies getting vendor-zoned

Arun Iyer, founder and creative partner, Spring Marketing Capital believes that the problem is also the fact that advertising agencies are getting vendor-zoned. He says, “Marketers need to treat agencies as their partners.

"Issues like payment delays happen only when agencies are treated like just other vendors. There needs to be mutual respect. At the end of the day, agencies are also running a business, just like brands,” Arun Iyer, Spring Marketing Capital.
Sai Ganesh, an independent brand consultant and former head of brand at Dunzo, agrees with Iyer, but also says that the situation is improving. “We are seeing a lot of agencies becoming brand partners and marketers are giving them the freedom and compensation they deserve. Of course, there is a huge room for marketers to respect agencies’ time and effort,” says Ganesh.

Ganesh also points to cases where agencies have refused to participate in a pitch if they aren’t paid for the time and effort they put into creating ideas and strategies. Creative agencies also know how to charge a premium service now and know how to hold their ground on fair payment.

Still clients find ways to hold back payments. The issue of delayed payments can emerge because of cash crunch and financial crises. In some cases, payments are delayed or withheld because the client isn’t “happy” with the campaign results. “To be honest, that’s absolutely unfair. However, that happens when goals are not mutually discussed and put on paper," says a creative director of a digital agency on the condition of anonymity.

Streamlining systems and support

Over the years, industry bodies have stepped in and addressed payment-related issues to provide solutions to their members. For instance, the advertising Agencies Association of India (AAAI) helps its agency members by protecting their interests.

When a client does not pay the agency for the services rendered by the AAAI member agency, the matter is referred to the Client Agency Reconciliation Committee of AAAI. AAAI seeks the views of the client on non-payment. Thereafter, a tripartite meeting of the client, agency, and the chairman of this committee is organised. This committee examines all the aspects of the issues involved and an amicable solution is arrived at.

In addition, AAAI has joint committees with IBDF (TV), IAMAI (digital), IOAA (outdoor), and AROI (radio). “If and as needed, they also step in to help us recover the outstanding from faulting clients,” says Anupriya Acharya, president, Advertising Agencies Association of India (AAAI).

While the support from industry bodies like AAAI is helpful, their members are mostly networked agencies, bigger independent agencies, and a handful of other small shops. For non-member agencies dealing with clients that default on payments or pay late is even more challenging.

Bharat Chugh, a former Judge and advocate of Supreme Court of India, says, it’s high time advertising agencies have clear contracts laid down with precision. For instance, specifying the terms of the engagement, key performance indicators and concrete ways of objectively measuring results. “In our experience of representing many ad companies, we’ve seen that this part leads to the most disputes. Especially in the digital advertising space. It should be very clear what the expectations of customers are, the targets to be met, and how data is to be validated between the parties,” he tells Storyboard18.

Chugh also says it’s important to have clear payment terms, such as dates when the invoices are to be cleared and, if there are any disputes, the same should be escalated right after the service. It should also include a payment schedule and the preferred payment method, alongside a clause containing a late payment policy.

Agencies should consider adding a provision allowing payment from clients in installments. This will ensure that delayed payments don’t interrupt cash flow, thereby creating a middle path for both the service provider and the client.

What agencies can do: Bharat Chugh, former Judge and advocate of Supreme Court of India shares five legal tips

If the contract has an arbitration clause, an ad agency can pursue its remedies by initiating an arbitration against the customer to recover its dues.

If the agency is a Micro, Small or Medium Size Enterprise (MSME) (having registered as one) it may approach the facilitation counsel for a conciliation and, then if it fails, recovery, in the special remedy under the MSME Act.

If the agency is not an MSME and the contract (Or the invoice) does not have an arbitration clause, then the agency may have to file a civil suit seeking recovery of its amounts. The downside of a civil process is that it takes a very long time and there are many roadblocks to recovery in a traditional civil court process.

It can also - if its claims are admitted/undisputed, additionally, approach the National Company Law Tribunal, against the debtor company seeking initiation of a corporate insolvency resolution process against it. (This is usually a step that makes most companies pay up their dues. This is a remedy under the Insolvency and Bankruptcy Code).

It can also claim a remedy under Order 37 of the CPC which provides the person who wants to recover his money, the liberty to file a Summary Suit for recovering his payment dues, and Defendant is provided with only 10 days to defend the suit.

First Published on Aug 24, 2022 9:25 AM