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.”

Like Omnicom, some agencies are examining the language in their client contracts to ensure that they’re protected legally should a client not pay its bills.

Cioffi encourages shops to establish this up front with new clients and to insert provisions into contracts with existing clients if necessary. As a result, the roles of the agency CFO and counsel these days have become more important, particularly in new-business scenarios where “CFOs need to be more involved up front in the evaluation of the credit-worthiness of the client,” Cioffi said.

And when it’s clear that an existing client is heading into bankruptcy, “You can see what needs to be done,” Cioffi said. “The challenge is the obstacles that can be put up by the client, the resistance.”

Indeed, financial due diligence won’t spell the end of troubled clients playing on the insecurities of agencies who fear losing business, calling them “partners” and asking them to assume a portion of their risks.
 
Insolvent clients “will not have the ability to get credit, so they’ll be strapped for cash. They’ll pay for what they have to and take credit where they can,” said Rick Kurnit, a partner at Frankfurt Kurnit Klein & Selz in New York.

“Agencies need to be very careful about extending credit, and they need to go to the media [owners] and make it clear that they are not responsible for unpaid bills if a client goes into bankruptcy.”

Still, for agencies that can ill afford to lose any clients, the temptation to make concessions is strong. “Agencies just can’t give up the clients they have, and they basically give in because they feel like they’re never going to get another piece of business again,” said Robb High of Robb High Associates, a new-business consultancy in New York.