NEW YORK In another sign of the times, Omnicom — whose creatively driven agencies have always been favorites within production-company circles — risks straining those relationships with strict new enforcement of sequential liability clauses in contracts.
That’s the view in the eyes of many production houses now that Omnicom is standardizing the language in its contracts to emphasize that production companies will be paid when agencies are paid by marketers. More onerous to those smaller outfits, Omnicom agencies will no longer assume liability for a project if the client doesn’t pay. Known as sequential liability, the practice was put into place 20 years ago to protect agencies from unpaid media bills of troubled clients.
An industry uproar about the practice in the U.K. resulted last week in Omnicom suspending the requirement after its senior agency managers met with the local trade group Advertising Producers Association.
Commercial production execs said Omnicom is the first to tighten contract terms; reps at Interpublic Group of Companies, WPP Group and Publicis Groupe said the holding companies have not yet demanded sequential liability clauses in commercial production contracts.
Production houses typically receive 50 percent payment up front from agencies and the rest upon completion of a project or within 30 days afterward. In preparing a shoot they pay for costs associated with locations, equipment rentals, and actors and crew. Production companies are subject to labor laws requiring them to pay crews usually within 10 days of film completion. (Click here for a PDF of AICP’s “Economics of Production.”)
“This is a paradigm shift. Sequential liability was created as a safeguard and now Omnicom is using it to evade and avoid payment terms,” said Matt Miller, president of the Association of Independent Commercial Producers. “Production companies create a one-off execution and don’t have an ongoing relationship with marketers as agencies do. We don’t have the access or knowledge they have about their credit worthiness. Payments are coming in later and later now. Omnicom is saying we don’t want to take the risk. You can bankroll our clients.”
“People may have been reminded of the policy, [but] there’s been no change in our policy,” said Omnicom representative Pat Sloan. “Our agencies don’t pay production houses until they get paid.”
Production company sources said contracts within Omnicom vary and while they may have had sequential liability clauses in them, in the past they were often ignored or removed at the operating units. “It’s always been the case that Omnicom agencies were never supposed to be laying out money on behalf of clients,” said a source. “What has changed is that language has been made clearer, more explicit.”
According to Miller, in late September, Omnicom shop BBDO Detroit issued a re-wording of sequential liability that was much stronger.
Omnicom agency insiders confirmed the change in language in all agency contracts.
Said one production company exec: “In the fall, however, sequential liability took on a different significance. They put much more emphasis on what the clause represents. Now they’re using it to change the payment structure. So you can agree to all the terms in the contract, but if they don’t get paid, we don’t get paid. It supersedes anything else in the contract. How do we know when they’re getting paid by their clients so we’ll get paid? And if an agency client goes bankrupt, how do we know if the production reimbursement has been used for something else at the agency?”
Amid the severe credit crunch, Omnicom clients are extending their own payment terms to ad agencies — DDB Worldwide client Anheuser-Busch’s parent InBev is insisting on 120-day terms — and the holding company’s agencies are caught in the middle. Production company sources also said that Omnicom shop BBDO was caught out of pocket on an expensive Chrysler campaign that may have included the Ram Challenge spot involving RSA and director Tony Scott. (The agency was eventually reimbursed by the client.)
“We don’t comment on client business practices,” said BBDO representative Roy Elvove.
Rick Kurnit, a partner at law firm Frankfurt Kurnit Klein & Selz, said: “It’s unnecessary for Omnicom to put production companies on notice that it won’t pay if their agencies are not being paid. It’s always been the case since an ad agency is just the agent between an advertiser and production company.”
So the real issue appears to be Omnicom agencies’ previous willingness to assume liability for unpaid production costs and stretching out payments. The holding company is standardizing language across contracts and ensuring enforcement of pre-existing terms.
In a business of trust where projects — and the spending for them — commenced with a phone call from an agency, it’s causing stress in working relationships.
“Omnicom agencies have always been preferred partners because they’re good agencies,” said the head of a West Coast production company. “There’s a lot of goodwill toward them and they’re straight people. They think this is unfair to us.”
He suggested that “if an ad agency doesn’t want to pay us upfront, then they need to go to their clients and get payment upfront for us.”
In the current climate where everyone on that food chain is holding on to their cash as long as they can, that’s not a probable outcome in the near future.