Why Martin Sorrell is right to be worried about extended payment terms.
It probably went unnoticed by most people at Cannes, but an interview with Martin Sorrell where he said, “We aren’t banks”, highlighted a problem that could dramatically change the ad industry and affect its suppliers.
It’s been brewing for a while, especially in the US, but is now about to hit a number of big and small agencies in the UK and could result in massive job losses, unless it stopped now.
Late payments and extended payment periods – up to 120 days after invoicing – could be the finally straw that breaks the economic backbone of the industry, and not just ours. That may sound dramatic, but it’s not only the ad industry that is concerned, the Government, and many organisations representing other industries like print and construction, are concerned too. We are one of many industries who are victims of what is being branded “unethical financial practices” and “morally bankrupt” and one that could soon result in consumer boycotts of major brands.
Big brands or big bullies?
Mondelez (the new name for Kraft and owner of Cadbury’s) have hit the headlines because they announced they will be paying all their supplies from July on 120 days (4 months) terms. This has created a massive backlash and angry comments, including “unethical,” “immoral” and “bullying”.
But Mondelez aren’t the first to move to 120 days, there are many other big brands already paying extended payment terms, from 90 days onward, and many looking to follow. Some small companies have reported having to wait up to 200 days for payment which is why the Government is starting to take the damaging effects upon the economy of this malpractice seriously. ”Less than a few dozen Financial Directors are threatening the livelihood of millions,” was the comment on one article on the subject.
As of this month, the government has given all businesses in the FTSE 350 one month to sign up to new rules on paying their suppliers promptly or face being “named and shamed”. The Prompt Payment Code (PPC), has been around for 5 years now, but ignored by most big businesses. Will it be now?
Michael Fallon, the Business and Enterprise Minister recently said, “Cash flow is the lifeblood of small companies. Poor cash flow is how small businesses go under. £35bn+ owing would average out at around £30,000 per small company.”
To quote Debbie Abrahams, MP, who launched the Be Fair – Pay on Time campaign in June 2011, “SMEs across the UK are suffering acutely as a result of late payment, with many firms’ survival being put at risk by cash flow problems, and total outstanding funds owed amounting to £36.5 billion.”
Government initiatives, such as the Prompt Payment Code, was set up to encourage both public and private organisations to improve their payment terms and pay suppliers within 10 days. Yep, 10 days, which is 110 days shorter than some big brands pay.
“SME’s are the life blood of our economy, without them we have nothing and neither do the corporates, yet they continue with their smug bully boy culture seemingly oblivious to the fact that they are doing more harm to the economy than benefit cheats.” Comment on the Telegraph webpage by Brythonic.
So why the extended payment terms?
Well for all the spin big corporations try and put on it, it’s simply a way for them to make money from the money they owe. It’s all about profit, not about values, and demonstrates a lack of any respect for their suppliers. And because they are top of the food chain they know they can bully all their suppliers into accepting their terms. As one American blogger said, commenting on the similarities to gangster extortion, “At least the Mafia respects community, these corporations have no respect at all for people’s lively hoods.”
What they are in effect doing is using agencies for low cost loans. As Sorrell said at Cannes, “We aren’t banks”, but big brands are using smaller suppliers, and not just in marketing, as sources of cheap finance. But will Sorrell, and the bosses of the G5 agencies (WPP, Havas, Interpublic, Publicis & Omicom) do anything about it? Can they? Talk is cheap but real action is needed, and the worse thing the industry can do right now is to not stand up to a bully. Sorry, but “having a word with the government” is useless. Why not use the power of ideas and media?
Are laws the only real way to protect SMEs?
The Forum for Private Business (FPB) has been campaigning for years on this very issue, and has tried to persuade businesses to sign up to the Prompt Payment Code. However, maybe their more effective tactile is naming and shaming (see their Hall of Shame – http://www.fpb.org/page/531/Late_payment__Hall_of_Shame_.htm ). The FPB was instrumental in establishing the Late Payment of Commercial Debts Act, introduced in 1998, which granted businesses the right to claim interest on late payments, even if it’s largely ignore by big businesses. In fact they seem to ignore just about all rules, guidelines and legislation. Sadly they know that politicians are all bark and no bite.
The European Commission is organising the Late Payment Information Campaign in the 27 EU Member States from October 2012 to December 2014. The aim of this campaign is to increase awareness amongst European stakeholders, in particular SMEs, and within public authorities on the new rights conferred by Directive 2011/7/EU.
A study of almost 10,000 business from Swedish credit management firm Intrum Justitia has highlighted just how serious the problem is across Europe, firms lost an estimated €350 billion due to overdue or entirely unpaid bills. In short, thousands of SME’s are paying a big bill to allow a few big businesses to pay late.
The practice of late/extended payments is seen by almost everyone as unethical and many claiming it’s blatantly dishonest, comparing those responsible to the seedy bottom end of the banking industry. “The practice of late payments is destructive and debilitating and is threatening the survival of SMEs,“ commented FPB head of policy Alex Jackman, adding, “Late and slow payment amounts to little more than supply chain abuse, that is big business bullying small firms to boost their own profit margins.”
While a few financial directors and procurement heads make an extra few quid on the side, the real cost to the industry could be devastating – bankruptcies, a massive loss of jobs and a loss of talent. To quote Reuters, commented on the effects upon the US industry, “This blatant exploitation is damaging the small business economic engine that drives half of the US GDP.”
For smaller and medium sized agencies and suppliers cash flow is king and 120 days payments after invoicing – and remember you can be working for between 30 – 60 days on a brief before you can get a PO and can invoice – may well force agencies to borrow money at inflated interest rates. Or a move to equally expensive factoring agencies. As many agencies are working on tight enough margins already, this will only reduce it further.
However, one procurement head, who commented on agencies needing to run their finances better (obviously not living in the real world) has suggested they could help agencies get loans to cover the waiting period. This is not a joke but for real! Try putting that proposition to the tax man, “Yep I know I owe you £100,000 but you’ll have to wait 120 days and in the meantime I’ll help you get a loan at 356% interest.”
For suppliers like photographers, illustrators, production companies, etc, there will be a knock on effect too, and not a good one.
In the US, many States have laws that force companies to pay freelancers (those self employed) within 30 days, which forces businesses like film production companies (who usually only employ a few people but lots of freelancers) to have to find large sums of cash. If they have to wait 90 – 120 days because the agencies have to, many will go bust.
An ethical backlash from the consumer.
It’s unlikely that FDs of these big companies care about the social consequences of their actions, but there’s a more powerful group that do – the consumer.
I predict that as consumers come aware of these practices, which are as morally bad as using sweat shops as it’s exploitation of the vulnerable, consumers will avoid and boycott big brands. You may think there’s a big difference between using child labour in Asian and putting small local businesses out of business, but to the consumer it’s Goliath beating up David. It’s an emotive issue and big brands know all too well that issue like this, once they get into the consumer mindset, are very damaging.
Consumer do not like bullies, and they hate big brands that exploit anyone. Add to that a UK press that likes any excuse to bash big brands and loves a David & Goliath story, you have a serious enemy.
A great example of how one human concerned charity forced the big retailers to back down was ActionAid’s legendary ‘WHO PAYS?” campaign.
The situation was that big supermarkets were offering consumers discounts on produce like apples to drive sales. But the supermarkets didn’t pay for the discount, they passed it on down the line to the farmers and eventually the people who picked the apples off the tree. Disgusting or what?
The WHO PAYS? campaign signed up over 40,000 shoppers within weeks, gained loads of publicity and forced a massive U-turn. That’s the power of great ideas that engage the consumer. (See the video here: http://www.youtube.com/watch?v=QzaqfLmUUCQ )
FDs of big brands may pat themselves on the back for making a few quid in the short term but with politicians, trade bodies, industry heads, journalists and the consumer all saying “this is wrong, this is unethical and it’s bad for business and society” it’s only a matter of time before they will be forced to U-turn. And with that could come legislation that will chain them to ethical payment policies for good.
Thatcher’s era of ‘Greed is Good” has been replaced by ‘Greed is Bad”. We now live in an era where social and environmental ethics is essential to good business practice. And just because you have a recycling policy and avoid using Asian sweat shops, doesn’t matter at all if the consumer sees you as unethical in the way you treat people at home. It’s only a matter of time before “how ethical are your payment terms?” gets added to the conscientious consumers check list.
Because FD’s have little connection with ethical policies, they are unaware of the fuse late and extended payments has lit. Or the explosion that could set their company’s reputation back years.