Advertising Agency Suppliers Beware !

Suppliers to agencies, here's a disturbing question for you. When your agency contracts with outside suppliers, will the agency pay your bill if their client does not pay? The agency... right? Wrong.

In this type of scenario, the agency develops its contractual language to say that it is the supplier's responsibility to collect the funds from the ultimate client in case of default.

Why is this?

Well, over time agencies have evolved what we call an "agency of record" relationship. This means they act on behalf of the client as a purchasing agent. The agency represents the client in every way except they do not bear the financial responsibility for the invoice. The bill goes to the agency, but the agency pays the bill only after their client pays them. If the agency pays before the client, they only do so in full assurance their client will pay for the invoice.

This approach has worked well for many years with mass media. Media companies are structured to go after advertisers who do not pay their bills.

But large volume printers, service bureaus, digital service companies and lettershops no longer accept such agreements automatically. Market pressures have forced many suppliers to resist such arrangements by turning down the work.

What is most disturbing is that many agency service staff are unaware of how this approach stresses their supplier relationships. They often wonder why suppliers don't like to go through agencies thinking this is a client control issue.

It is partly that. But another significant reason for this stress has to do with the vague supplier invoice payment agreements.

My take? As the market improves, I suspect that suppliers will force change with this arrangement. And farsighted agencies and their clients will want to level out the playing field for their talented suppliers.

Dear reader, is this your understanding of the typical agency contracting arrangement?

Posted on February 5, 2010 and filed under General.