The War on Payment Terms
Blair sees non-standard payment terms as a two-sided issue, where agencies should be creatively leveraging terms more to their own benefit as opposed to just defending themselves against procurement departments who impose onerous terms.
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David C. Baker: Blair, when you were young, 60, 70 years ago, did you ever watch Mr. Smith Goes to Washington?
Blair Enns: Yes, that's Jimmy Stewart, right?
David: Yes, and he's on a high horse about a bunch of stuff. If I said Mr. Enns goes to Washington or Mr. Enns goes to the ProcureCon or something, your rants get better and better the older you get. It's just fun. I just put my feet up and just read. It's just so much fun watching.
Blair: I don't want to be the ranting old guy. It's too late but I guess you're right. I've decided this might be a bit of a crusade issue. Am I really turning into that cliché? All right, I'm out. I'm out.
David: No, no, no, we're going to finish this recording. As if the procurement people, the things you've called them in the past and they're cheap anyway. They hired the hit team from, I think it was Norway or something. Nobody's all that afraid of the hit team from Norway. They have switched out to it's a Russian hit team. Make this your last big stand here. This is yet another rant, but this one's on payment terms. I'm going to be on board with this one. Give us an intro after all that.
Blair: Okay. Wrote a post on this recently. I've been talking about it on LinkedIn. It's been bubbling up on my other podcast, 20% The Marketing Procurement Podcast. That is the trend to increasingly onerous payment terms being imposed on agencies. It's not just agencies. It's worth pointing out. That's one side of the coin. My post is called "Payment Terms, On Your Terms." It talks about the two sides of payment terms. On the positive side, independent creative firms should be going to nonstandard payment terms more often I think to get tricky deals done in certain situations, we could talk about that.
On one hand, I think we're not thinking creatively enough about the use of non-standard payment terms to help a client with an affordability problem get a deal done. On the other hand, you have this trend, it's been going on for years now. I think it goes back 10 years, but it just keeps getting worse and worse. The trend is that the largest marketers and advertisers in the world are moving the 30-days payment terms goalposts out to 60, 90, 120, and now 360 is the latest, most egregious example of onerous payment terms being imposed on agencies. On the one hand, I think listeners should think more creatively about using these non-standard payment terms to get some of these deals done with the right clients, and we can talk about that. On the other hand, there's this trend that is not good for anybody and we need to fight back.
David: Well, we know without any research, it's not good for us. One of the points that you make here is that it's actually not good for them either. Two big things here. What's the big distinction between when you should be open to creative payment terms and when you shouldn't? It's the nature of the client and what's the big difference?
Blair: The big difference is it works with an entrepreneurial client, and it works in specific situations or can work in specific situations. Where the client basically says to you, "Hey, I'm not saying that your price isn't fair or that I have a problem with the price. We're just in a position where we can't afford the price." They're not objecting to the price because in relation to the value to be created, they see that it's fair. They're just saying, "We just can't afford that right now," for cash flow reasons, whatever their situation is.
That's a really good objection to hear as far as objections go because that's one where you can reach into the toolbox and the first thing that you would typically pull out is terms. You don't have the money today, but your business is cash-flowing. You can pay over time. Let's explore the idea of paying with time. In situations like this, when you do arrive at something, it's almost always something that's mutually beneficial. For example, if the client needs some financing over time, they're often in situations like this willing to pay some sort of finance charge.
Even in my own business, I've been involved in deals where the client didn't object to the price and just asked if they could pay over an extended period of time. We without thinking explicitly in percentage rates, we end up working something out where the client pays over longer payment terms but they end up paying more. We're taking some risk. They're paying more, but we're making it more affordable. That's a win-win scenario. In the other situation where owner's terms are being imposed on you, there's no win-win. It's just value claiming as they say in negotiating. It's just taking, taking, taking.
David: There's been a very significant movement towards more monthly recurring revenue in our field. If an agency, somebody listening to this, has that sort of a monthly recurring revenue relationship with a new client, this wouldn't pop up, I'm presuming. We're talking more about a scenario where the normal expectation is an uneven payment term an arrangement where you pay so much upfront, whatever that is, and then the rest of it is paid according to certain terms. You're really only talking about the one, right? You're not talking about a firm that normally lets clients pay monthly.
Blair: No, I'm not talking about that. I'm really talking about a standard old-school relationship where we do the work, and then at the end of the month, we invoice for the work. The expectation is that we get paid within 30 days. Some of the largest advertisers in the world are now saying we won't pay you for 60, 90, 120. In October of 2022, Keurig Dr. Pepper set the new bar.
They did a pitch for a PR firm, and in the RFP it explicitly stated that your response will constitute acceptance of our payment terms, which are 360 days. We will pay you 360 days after the end of the month in which you invoice us. It's over a year. Of course, they put an option in there. You can go to our third-party finance company if you don't want to wait a year for your payment and you can finance it through them.
David: It's so gracious really of them to offer that.
Blair: It is so gracious. Leah and I, over on the other podcast, we've recorded a whole bunch of interviews with people about this specific incident and this larger topic. We'll have an episode dropping on it in a couple of months. We're actually taking our time on this and going after a big issue rather than just interviewing one person. I think we're going to look back on this Keurig Dr. Pepper 360-day terms as the moment when financial engineering "jump the shark." It's a bit of my personal mission to leave a bunch of people red-faced over this relentless pursuit of increasingly onerous terms. It's just absolutely ridiculous. The downstream effect on the marketing ecosystem is pretty pronounced. Whatever happened to 2/10 net 30?
David: I don't know. I have look it up.
Blair: Does anybody use that anymore where you get the 2% discount for paying in 10 days? Because when I was growing up professionally, it was everywhere. Everybody was on 2/10 net 30.
David: Here's a question for you. Do these same folks who want to impose these sort of terms-- by the way, they haven't said that they'll take a year, they've said 365. Apparently, that year is like a red line they don't want to cross.
Blair: Five days short of the year.
David: Are they doing this with anybody except the small entrepreneurial ones? Are they doing that when they have an SEM sort of an ad buy with Google?
Blair: Well, nobody's imposing payment terms on Google. Google's the elephant. They're the monster.
David: They're really just squashing the little guys, and that's your point.
Blair: They're trying to impose these terms on everybody. If you look at the large holding company-owned agencies, they're more financially sophisticated. They're not necessarily more profitable, but it's basically banks negotiating with banks. That's how I think about it. You got finance people negotiating with finance people. I had a client a few years ago, you worked with him too. He runs a small business. It's a small agency serving Fortune 500 companies.
He used to joke that his second business was lending money to some of the world's largest companies, and there were a lot of young upstarts in his space. He understood that because of his financial success and his ability to withstand these terms, that it was a strategic advantage for him. Because the younger upstart firms that were coming after his business, they couldn't put up with those terms but he could because of his massive financial cushion. You think of the holding company-owned agencies.
I'm not speaking for them because I know I've had some conversation with some senior people and some senior holding company-owned agencies. They don't like it either. They don't like it either. Everybody's trying to push back. When they're negotiating these massive global deals with these massive global brands and companies, payment terms it's just one more thing that gets negotiated in any other deal. That's something that they're more willing to move on away from 30 days than an independent agency is.
David: I've let your blood pressure rise prematurely. [laughter] Let's go back to the good side of this where you're saying it's not unreasonable to think of being open-minded about different terms. Let's say that a client comes to you, the listener, and you feel like this is a fit in every regard, and they actually aren't disagreeing about the value that you are providing. The only issue is just whether they have the cash to do this right now. You say this is a risk worth taking. We ought to just be flexible here. If that's the case, then how do you want them to think about that?
Blair: Before you start thinking about non-standard like overly generous payment terms, you just have to think about your own financial situation and does this work for you. Do you have flow-through costs that are high, people who have to get paid within 30 days, and then you're going to extend your client's payment out beyond 30 days? Is it going to put you in a negative position? You just go through that quick decision-making matrix fairly quickly and decide, yes, okay, this isn't going to be an existential risk for us. We can handle this. We've got the cash cushion, we can do this. No problem. Check the box, yes, it works for you. If it works for you before you offer it, you should trial close.
A trial close is really an if-then question that says, if I were able to do this for you, can we agree to move forward? If I could help with the affordability issue by extending more generous payment terms to you, would that be enough for us to agree on this proposal and move forward? It's a standard sales technique. If you don't trial close and you start making concessions without a trial close, you're effectively negotiating with yourself. The client will say, "Oh, yes, that's great. Fantastic." Then, "Oh, there's one more thing." There's always one more thing. Make sure you trial close, and then if it works go ahead and put together a deal that works for both parties.
David: We don't know exactly what will work for the other party, but you've listed a few things that might work for the agency in this case, what are some of the things you want them to consider?
Blair: Some variables absolutely should consider, I think you and I have talked about this before, I know we're in agreement on it. You should have a policy that says all new clients do have to pay something in advance. I have some ideas of what that something would be. I think at a minimum it should be 25% of the fee portion of the first phase of the engagement. Even 100% of the fee portion of the first phase of the engagement is acceptable. I think in these situations where you are willingly negotiating on payment terms, those numbers can go at the window. The policy or the principle should stay, meaning you do not begin work on a new client until they have paid you something
David: Because it costs nothing for them at this point.
Blair: It costs nothing. They need to make the investment and they need to psychologically part with money before they start working with you. That needs to happen. They need to wire those neurons, the equivalent of neurons in an organization that says, "Okay, we are in a paying relationship with this organization, this agency." That's the first one. All clients need to pay something in advance.
David: You want it in writing as well. You don't want this just to be verbal because there might be a situation later where you have to go back to something and you don't want people's memories to play a trick here, so written contracts.
Blair: It can be a finance contract or a finance clause in your existing contract. Just note that most finance contracts, all finance contracts, state the finance charge either in dollar terms or a percentage or both. Be clear on it. Even if there is no finance charge, if you're financing at 0% interest, make that clear. That's something that you are granting to the client, but the next point is you should consider charging more.
If in this situation where you have a good client, and you know it's a good client if they say and mean what they say that they're not disputing the value, they just have an affordability issue. Most good clients are willing to pay more. They'll give as you give. I've seen up to 20% more even higher in some cases depending on how far out something was being financed. Do consider charging more as you extend terms.
David: Are you open in these situations to financing this? Let's say the last payment is 30 days after the work is complete. Are you open to financing things even beyond that?
Blair: That's a personal question. Am I open to it?
David: I don't mean you personally, but do you think our client should be?
Blair: Yes, yes. I think it's on the table. Obviously, you're taking risk. You have to ask yourself, who are you doing business with? Have you defended yourself contractually? Part of defending yourself contractually is this idea, and this has been standard in the industry for a very long time, so it won't surprise anybody. All of your contracts should say that any intellectual property rights of anything that you create for your client, they only transfer once you are paid in full. That should already today be in all of your contracts. If it isn't, consult your lawyer. That's one of the ways you protect yourself in that situation where you're waiting for payment beyond the length of the project date.
David: I try to apply this now and whenever anybody wants to work with you or work with me they're going to ask this question, right? I'll just head this off at the border. I don't do this and I don't know if this is just my own emotional issue or what.
Blair: You don't need to do it.
David: Yes, I guess. I just find that some people really want to work with you and they don't question the value, just like you said, but it really is an issue of cash. In that situation, I say, well, we take credit cards. In other words, your financing company is a credit card. In other cases, people ask and it's just an instinctive ask where they don't really need it. This is just they ask all the time. They've got to have a deal on everything.
Those are the ones that I just don't even really want to work with. It's just weird but there's something about they don't run their businesses well, they don't tend to make really good sharp decisions. That's definitely a minority but I try to weed those folks out. I don't think that necessarily applies to a company, it's more sort of a person. It's just interesting as I try to think through this, how I would apply this just listening to this.
Blair: Well, we should do an episode one day on negotiating styles. We did one on buyer types. There's also a few different schools of thought on different negotiating styles. There are some people who just see every opportunity to negotiate as a game and they ask, ask, ask. The post I wrote on LinkedIn on this recently what's interesting about some of the comments, there's somebody on there and I forget who said he had a finance person in his agency who was like this.
He just pushed and pushed and pushed the agency's own suppliers. He says he now won't do business with clients who operate this way, so I guess he's kind of learned the lesson. He said he would just negotiate the longest payment terms possible, this guy, and then whatever they arrived at, let's say he tried to get 60, he arrived at 45 days, they wouldn't pay in 45 days.
David: Just to make the point.
Blair: They would wait until the client called and asked for the money. Then next time they would try to go two days longer. It was a game for this guy to try to increase the payment terms. I think that's effectively what's going on here in the larger world. I don't actually hold procurement departments entirely accountable for this. I think this is more coming out of finance.
From the listener's point of view, you're probably not making the distinction between whether it's your client's finance department or procurement department. I think it's just an understanding that longer terms are better or more favorable. They're washing their hands of the downstream consequence of imposing terms. Some of these people it's just a game. A big part of my job is negotiating the best deal I can get on everything.
Payment terms are probably right there below price and in some businesses even above price in terms of the important variables that will be negotiated in a deal, and they're just going to go get whatever they can. I think there's a lot of that going on here. It's just like, well, my job is to negotiate, my job is to get the best deal I can, I've done my best on price, now I'm working on payment terms. They're coming for everything else after this too, so give it a couple of years. [laughs]
David: We'll slap them down on payment terms. I'll come up with something else and we'll have to keep doing new episodes.
David: Unlike any other person in my orbit, you forced me to rethink what I think is just settled law. That's what I like about this. I remember one time we were talking about, you should consider offering a guarantee, sort of like everything is fine, there's a little bit of an objection. We'll pull this out of your pocket at the last minute, offer a guarantee. My first reaction to that was, "No, that just sort of inserts the doubt that, oh, why do you need a guarantee like that? Is it work not always really good?" and all that sort of stuff. I pushed back on that and you said, "No, really the point of the guarantee is that it forces you to make sure you can do effective work." I thought, "Oh, I hadn't thought about that." When I read your stuff and I have an immediate objection, which is very frequently the case. [laughter]
Blair: We both know it. Thank you for saying it out loud.
David: I think, oh, there's something I haven't quite understood here. This is one of this first half, the good part of all of this where you shouldn't just automatically take terms off the table in certain circumstances where somebody isn't trying to squash you like a bug, don't be automatically closed to the idea. That's very good. The second half was really about the squashing-the-bug kind of thing. I have allowed you to rant prematurely about some of this, but you have some more things to say, right?
Blair: Allow me, you've baited me.
David: [laughs] Yes. Okay. Let's say we are in the situation where somebody wants to squash the bug. How do you push back as the bug? [laughs] The foot is right over your head, what do you say back as a bug?
Blair: I see three major levers that an independent creative firm has, or an independent business of any kind has to push back on these onerous terms that are almost always coming from very large companies, much larger than your business. The first lever that you pull is you effectively play the small business card. I put some language in the post, I modeled some language, I'll just recite it here. I understand the trend for organizations like yours is to increasingly look to your suppliers to finance your operations, but we're a small business and we can't do that. Then I have this glib line. You'll have to get your banking done elsewhere.
You can insert as much attitude into this as you want, and then follow up with the main point we need to get paid in 30 days. You're saying, "Listen, I understand that it's your job to ask for this and you ask everybody, but we're a small business, you can't impose these terms on us. We need to get paid in 30 days." This is an important card to play or lever to pull that I want to speak to you directly because a big mistake that I think a lot of small agency owners make is they try to look bigger than they are. You know what I mean by that? I'm sure you see it too.
David: Yes. We've got offices in eight cities, and really it's one person working from home.
Blair: Yes. They're trying to fake a much larger size, and so it's not intuitive to do the opposite and say, "Hey, we're just a little guy here. You're a big beast. You can't push us around this way. It isn't fair." That's effectively what you're saying. No good client, "good client" wants to impose economic hardship on their agency. You also have to understand that your good client is the person or the people that you're dealing with in marketing or communications or product development, whatever it is.
Their colleagues in finance or procurement don't give a shit. You need to push back on whoever you're negotiating with, but you should also think about looping in your good client and saying, "Hey, just so you know, your procurement person or finance person is saying that we don't get paid for 120 days." That's just absolutely a deal breaker. There's no way we can work under those onerous payment terms. We're a small business.
This is really unfair. We need to get paid in 30 days. What can you do for me on this? You push back directly in the negotiation, and then bring in that good client. Leah and I have had that conversation with procurement people and marketing people about this. This divide and conquer approach that you see in negotiating on the client side. The good clients in marketing they will go back to their procurement and finance people and say, "Okay, enough, don't do that."
David: Do the procurement people listen?
Blair: I can't speak universally, but the examples that we keep hearing are that they will listen. It's important to remember that these terms aren't cast in stone, although it feels like it when you're being told in the moment that it's 120 days. They're not cast in stone. They're a negotiating point. That is their opening position. They have all kinds of ability to move on that. It's pretty rare in my understanding where a large company would have a policy across the board that nobody gets paid in 30 days.
Everybody gets paid in 60, 90, 120 days. I know some clients and I'm not going to name names here, but I am in the more lengthy podcast that Leah and I do on this. We're going to throw some companies under the bus. I know some clients have gone public and said everybody pays in 120 days, but in that one company that I'm thinking about we have a client, large independent agency, that works with that client in various parts of the world. They're not on 120 days anywhere.
They're not on 30 days, but they're certainly not on 120 days. Even what these clients state publicly, everything's up for grabs in a negotiation. It's not law. The first lever is play that small business card. Say, "Hey, everybody understands the dynamics in a small business are different than the dynamics in a large business." The law of gravity is still there. The strength is just a little bit different. You can't operate under the same conditions that large companies can sometimes very easily operate under.
David: Yes. Then the second one there's a little bit of overlap here, but you're suggesting that folks think about playing the diversity card. In this circumstance diversity could be a minority-owned business, could be a woman-owned business. Is it also a small business? Is that part of diversity?
Blair: Yes. Let's talk about what everybody means today when we talk about diversity. It's gender, it's ethnicity, et cetera. The DEI initiative is taken quite seriously among large marketers and even their procurement people, if I take what I'm hearing from them on face value. I've also heard stories about this that lead me to believe that this is a serious issue in marketing procurement. It's really important to them, and it's probably even in policy in many companies that they, if not hire minority-owned agencies, at least give them a shot. Consider them when hiring a new agency. I think a lot of progress has been made on that front.
People other than myself have pointed out to the marketing procurement profession that you cannot preach DEI on one hand and impose onerous payment terms on the other hand, because most of these minority-owned businesses are in effect small businesses. If you're trying to level a playing field for somebody who's been historically underrepresented, then you can't say, "Okay, yes, here's a piece of business, or come to the table to compete for this piece of business. Oh, by the way, we're not going to pay you for 120 days." All of the examples that I'm aware of where somebody has push back on the diversity front, the terms go away just immediately.
David: It's almost like a red card, right?
Blair: Yes. As you point out, I think just small business in general, you're covered under this banner of diversity to a certain extent, not to the extent that other minority-owned businesses might be. Even if you're not a minority-owned business, you are a small business. I know for years, well before the DEI movement, well before some of the world's largest marketers had, if not a policy, they had an ongoing practice inviting the odd small agency to the table to compete for their business. I was interviewing a marketer at one of those global marketing companies about one of my clients in a business development audit I was doing years ago.
This person confided to me, he said, "We always invite an outlier agency to participate for the business. We hire Landor and Interbrand and all of these other agencies, but we always invite a small shop. The mistake that the small shop makes is they try to look big. What they really need to do is to lean into what makes them different, why we brought them to the table in the first place." I think that's just more insight into the client's mind and more ammunition from my statement that you really should embrace your smallness. People understand that small businesses need to do business on slightly different terms.
David: It just makes so much sense. The first two were play the small business card, second, play the diversity card, and then this last one is adopt a cash neutrality policy, which I really like. Just explain what this means first.
Blair: Me too and I think this is the spearhead of the battle to be fought here. I think this is the goal. I'd never heard the term before, and Leah and I were interviewing, I think it was Francisco Escobar, who's quite a accomplished and highly regarded procurement professional. He is now an independent consultant who brought up this point of cash neutrality. I'd never heard it before, I asked him to describe it. He used different language, but I've looked into it more. It's the idea that nobody makes money on the money across the entire value stack.
You've got the end client, the agency, the agency, suppliers, et cetera. That's the value stack. You've got money going from the client to the agency, to suppliers, to their suppliers, et cetera, all the way down the stack. If everybody's holding onto cash for a little bit and making money on the money, then the people at the bottom of the stack they're really hard done by. Everybody's passing the buck to them. Cash neutrality is the idea that nobody does this. I think the big lever that everybody should push is this idea of adopting a cash neutrality policy, which says, "We don't make money on the money. We pay everybody within 30 days, therefore you pay us within 30 days."
It's basically 30 days or less for everyone. What I like about this is when you implement a policy that says you will pay everybody within 30 days or less, now you have the moral authority to push back on a client who's trying to impose greater than 30-day terms on you. That should give you the steel in the backbone to say, "Listen, we're the adult in the value stack, the cycle of abuse stops here.
However you want to think about it, whatever language you want to use, no it stops here. We're no longer doing this to the people that we hire. You're not doing it to us". I think if you call out the client on their behavior by fixing your behavior first and taking ownership of the responsibility to fix this across the entire stack, who can push back on that?
David: In all of my work, everybody has to prepay the full amount. There's lots of reasons for that. I won't go into here, but I also whenever we get a bill from somebody like Marcus, our producer for this podcast, or Emily, my illustrator, and so on. I just pay it the very same day, but I never really connected those two. It'd be pretty odd, wouldn't it, if I required prepayment and then I didn't pay my people right away. Another argument you could use is, listen, do you want people who are just resentful working on your account, or do you want people who are really engaged and excited to work for you? I pay my payroll as soon as it's due. I can't go 180 days or 360 days. Our contractors, I pay their bills right away. It's just interesting to think about how much more engaged they are during all of this. Do you feel better? Do you feel any better at all?
Blair: I feel good about what I think is going to be the movement. The problem is we just haven't been having these conversations in public. Agencies can't really go after clients on this issue. Somebody pointed out to me that at the ANA Financial Management Conference that happens every year or every second year, I haven't attended. I keep meaning to. This is the ground where you've got the largest advertisers and the finance people from the largest advertisers, and the finance people from the largest agencies together.
This should be the forum where this conversation takes place, but this person pointed out that it doesn't take place because the agencies are there with their clients and they don't want to be seen as publicly skewering their clients. Somebody has to speak up. It's got to be those advisers to this space like you and me, and it also has to be the trade associations. Am I feeling better?
I'm feeling good that we're finally talking about this publicly. I want to make sure that the conversation gets louder and louder just like bad pitch practices. I think onerous financial terms should be called out. The KDP example again is that moment where it's jump the shark and I think it's like, all right, things have become ridiculous. Now let's talk about all the ridiculous behavior that's happening out there. I'm actually quite optimistic about our ability to make some progress on this front.
David: I am too and I'll just close this episode by saying, folks, you can't do this without some leverage and leverage comes from positioning and all kinds of other things, and there are probably 20 episodes where we beat this to death. They all just kind of go hand in hand. You can't just listen to one episode of 2Bobs and pull it off. You have to see the whole picture because this isn't going to happen without some leverage behind everything. Thank you, Blair.
Blair: Thanks, David.