Agency executives decried moves by CPG giants Mondelez and Procter & Gamble to extend the amount of time they take to pay PR firms, marketing shops, and other suppliers. Both companies say the extra time will help them improve cash flow.
PRWeek contacted about a dozen PR agencies – some of which are working with Mondelez and P&G – about the move, but none agreed to on-the-record interviews. However, a number of agency leaders spoke on the condition of anonymity.
Some say the CPG linchpins' moves put an unreasonable financial burden on PR firms, especially small to midsize shops, given that staff salaries and rent, which is usually paid at least a month in advance, can eat up about 70% of revenue each month.
One agency chief said such a delay “could be a devastating blow” for even midsize firms and might force them to make staff cuts. Another top-level executive warns of the potential ripple effect it could have in that other major companies could adopt similar policies.
At the Cannes Lions International Festival of Creativity in June, WPP Group CEO Martin Sorrell, whose holding company owns and operates Burson-Marsteller, Cohn & Wolfe, and Ogilvy Public Relations, among others, criticized the changes in interviews, saying the marketing industry should stand up to what it deems unfair payment terms.
Contacted by PRWeek, Sorrell stood by his earlier comments but declined to discuss them further.
However, one agency CEO countered that P&G's move to a 75-day schedule is reasonable and a longer duration for payment is the cost of doing business with a major advertiser with big budgets. The agency boss also pointed out that while ad agencies typically have to pay much larger production costs, PR firms don't face the same upfront expenses.
In statements explaining their decisions, Mondelez and P&G spoke about being more competitive.
“Extending our payment terms allows us to better align with industry and make sure we compete on fair grounds, while simultaneously improving the transparency and predictability of payment processes,” Mondelez said in a statement sent to PRWeek.
Jeff LeRoy, senior manager of media relations in P&G's corporate communications department, said that “in benchmarking across multiple industries – from chemical suppliers, to packaging companies, to creative agencies – we know we are at a disadvantage in this area. This decision to change payment terms simply gets us to more industry parity.”
One agency leader tells PRWeek this is evidence that procurement departments are once again flexing their muscles, and it could further impact how internal marketing departments and agencies work together moving forward.
P&G, which extended the time it will take to pay invoices to 75 days from 45 days in developed regions and 30 days in emerging markets, has taken a nuanced stance toward marketing firms and other suppliers. Payment timing can also vary depending on existing contracts and local laws, explains LeRoy.
P&G will also honor existing contracts with agencies that stipulate payment terms. “This is a phased-in program over time,” he adds. “We have not put a timeline on this.”
LeRoy adds that P&G is willing to negotiate terms with its marcomms agencies.
“We recognize there are differences in cost structures across our external partners, and we are working on this hand in hand with our agency teams,” he says. “The process is about collaboration. We are having conversations with each external business partner about this program.”
For those that need to bridge the payment gap, the world's largest advertisers will also offer supply chain financing, through which firms can leverage P&G's credit rating to get bank financing at lower rates, LeRoy confirms.
All suppliers working with Mondelez in the US will be moved, effective this month, to a 120-day payment schedule that “has actually become our global standard,” says Valerie Moens, associate director of corporate external communications at Mondelez International, via email.
That means a PR firm working on Mondelez's business will wait four months to get paid after an invoice is filed.
“Obviously it might differ from country to country depending on local law, but the decision to extend to 120 days [was] also aimed at harmonizing our practices around the world,” Moens adds.
Supply chain financing is not an option for Mondelez's agencies, she adds.
Other companies have moved to a 120-day term to pay suppliers in the past. In 2009, Anheuser-Busch InBev made such an extension, although a source tells PRWeek the beer giant has since backed down from its stance.
Marianne Amssoms, VP of global communications at AB InBev, says that the company now considers a number of factors when negotiating payment terms with suppliers.
“Elements that influence the payment terms include price, quality, size of the supplier, type of product or service, and volume,” she says. “Payment terms are always set as part of commercial negotiations and established in mutual agreement.”
Risk to corporate reputation?
Since packaged goods companies have put CSR at the forefront of their brands, some agency insiders are speculating that this strategy could hurt the corporate reputations of both Mondelez and P&G. Government bodies in other countries have taken up the issue.
“This could become a very big CSR issue,” predicts one source.
In the UK this year, the government created a Prompt Payment Code, which is run by the Institute of Credit Management on behalf of the Department for Business, and then urged major corporations to pledge to it.
The Daily Telegraph, among other media, has kept tabs on which large companies have signed up for the code – and which have not.
Michael Fallon, the UK's minister for business and enterprise, has said he is “going to war” with large companies on the issue of late payments.
A similar “prompt payment” movement is now also underway in Ireland.