Agencies in Catch-22 Over Client Finances


NEW YORK Chrysler's high-profile bankruptcy, its effect on BBDO and the prospect of General Motors following suit have created what one source called "necessary paranoia" at many agencies in their financial dealings with clients. And industry lawyers say shops must take steps to protect themselves legally and not fall prey to troubled clients' pleas for help or assuming risk.
"You can't be swayed by the pleas and the emotion, because you can't hold them to the promises" they make in return for agency concessions, said Joseph Cioffi, a partner at Davis & Gilbert in New York. For example, a client executive who vows to take care of an agency down the line may lose his or her job or reject such an agreement once a bankruptcy proceeding starts, Cioffi said.

To minimize financial risk, some agencies are now asking clients for up-front payment of production costs, which naturally can rankle client executives, regardless of their financial situation. Similarly, Omnicom Group has standardized the language in its agency contracts with outside vendors like production companies to underscore that those suppliers won't be paid until clients pay the agencies. What's more, Omnicom shops, citing a sequential liability clause in their contracts, won't assume liability for a project if a client doesn't pay.

Omnicom's move, which a company rep characterized as a reiteration of existing policy, stemmed in part from BBDO having to front the cost of a relatively expensive Chrysler shoot last year. Clearly, agencies are less likely to cut clients slack these days, given the risks involved and generally scarce revenue.

No one wants to be in a position like BBDO is with Chrysler, with the agency being the corporation's second-largest unsecured creditor, owed some $58 million for past services, according to the carmaker's Chapter 11 filing.

As the CEO of a New York shop put it, "Before, if you had a great, long-standing client, and they said, 'You'll get paid in a week, but we need to start the job now,' you would extend the credit as a courtesy. Now, that's not the case. You cannot afford to make any exceptions. It's a necessary paranoia with which we need to manage our business."

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