Collins | Finding The Win-Win For Media, Ad Agencies

Mary Collins

In the many reboots of Star Trek (currently re-invented for the streaming age on CBS All Access), the term for a no-win scenario is a Kobayashi Maru. In the world of collections, the conflicting priorities inherent in the relationship between advertising agencies and media credit departments can also feel that way.

Developing an understanding of the ways each entity works, and a sense for which lines are best left uncrossed, can lead to a win-win.

The Stakes

First, it is important to understand what is at stake. In 2018, U.S. traditional media ad spending totaled $114.84 billion (net of digital buys). An estimated 85% of all U.S. advertising spending is managed by agencies that belong to the American Association of Advertising Agencies, commonly referred to as the 4As. The 4As recommends that their members adopt a sequential liability position. This means the agency is only liable for payment of media invoices when the advertiser has paid them.

On the other hand, most media companies advocate a joint and several liability position. This means that all parties are liable for the payment until the media company has been paid for the advertising schedule it delivered. Media companies support this position, in part, because they see payment delays and a lack of transparency about when and how payments are made to the agencies.

John Sloan, a former executive director of credit services for Turner Broadcasting, has taken a deep dive into the pros and cons of enforcing these liability positions in an article for the March/April issue of MFM’s member magazine, The Financial Manager (TFM), entitled Fantasy or Reality?, and subtitled, “A clear-eyed understanding of ad agencies and their clients can impact how media companies are paid.” In this article, Sloan offers ways in which both entities can experience a win-win. He focuses on the opportunities for upside that include transparency, research and relationship management.

There is no question that the business of media advertising is extremely competitive. For that reason alone, it can be tricky for a media company to try to enforce payment from an advertiser, even when all parties have agreed to a joint and several liability position.

Imagine a case in which the client has paid the agency and the agency has yet to release payment to the media company. The advertiser is not going to want to pay twice for the same advertising. The relationship with the agency will likely suffer if it is required to pay for schedules for which it has not been paid. Sloan points out that such payment requests can injure relationships and make future business relationships difficult.

Due Diligence

No matter which liability position applies, a media credit professional must analyze the creditworthiness of both the agency and the advertiser. Unfortunately, as Sloan explains, advertising agencies generally object to having media companies contact their advertising clients. The agencies explain that they have already done the credit check. Further, having multiple media companies contact an advertiser is burdensome for the advertiser and can damage the advertiser’s relationship with its advertising agency.

Despite this, there is an upside when the media company develops a connection with the advertiser. Sloan says it reduces the likelihood that a media company’s credit team will pursue the ad client for payment when they know the agency has been paid. Additionally, because advertisers often require detailed billing and police their agencies to make sure media is paid on a timely basis, the media collections team has a natural ally.

Agencies that cooperate with the media company by providing financial information about their clients can also benefit, says Sloan. “If the media provider approves the advertiser, who then fails to pay the agency, that agency is more likely to get help from the media entity to resolve the problem,” he continues.

Media Sleuths

In those instances where the media company cannot obtain information from the agency or the advertiser directly, they will have to do their own investigation. Sloan says this can be straightforward if the advertiser is a publicly traded company. In this case, the SEC’s Edgar database, which is searchable by company name or ticker symbol, will include quarterly and annual financial reports.

Information about privately held entities is available from commercial credit reporting companies. MFM’s BCCA subsidiary, the media industry’s credit association, offers a number of such reports including Media Whys, which combines media industry data with trade payment information from D&B or Experian. BCCA is also able to integrate reports with automated order to cash systems to enable media companies to efficiently manage credit risk and decrease their collections liability.

Sloan offers tips for things to look for when reviewing company financial statements. In his experience, the primary focus should be on the liquidity ratios from the balance sheet, as these indicate the customer’s ability to meet its current obligations. He also warns readers to pay particular attention to clues in financial statements provided by non-public companies.

Sloan advises that the credit professional check to determine who prepared the statement(s), determine whether the statements have been audited (and by whom), and ensure that such statements follow generally accepted accounting principles (GAAP), before accepting them at face value.

As he says, in cases in which “statements were not prepared following GAAP rules by an independent party, then the information in them is suspect at best and misleading or fraudulent at worst.”

Internet searches and Google Alerts also enable credit professionals to get specific data on the company being tracked. (Don’t overlook the alerts included with a number of BCCA reports, including Media Whys.) Sloan sees the goal as gradually building a company accounts receivable portfolio. He also offers suggestions to keep the process manageable.

As credit managers compile financial dossiers on advertisers, they may run into clients who are high risk, or on the verge of insolvency. At that point, it is imperative that the media company fully understand the financial arrangements the agency has with the advertiser. Since most agencies are paid on set fees, Sloan recommends a frank discussion with the agency about its financial management of any advertisers in question.

In spite of best efforts by all parties, some customers will slip through, either filing bankruptcy or going out of business. In such cases, the parties will need to decide whether, and how, to enforce liability terms. Sloan advises that it is best if the agency and the media group cooperate in efforts to recover any amounts due.

The article concludes with the note that media’s relationship with advertising agencies and advertisers continues to evolve. Proper research is imperative for media companies to protect their interests and to avoid a Kobayashi Maru, or no-win situation. The March/April issue of TFM, which includes John Sloan’s article, will be available on the MFM website for a few more weeks.

For More Information

Scheduled sessions for this year’s Media Finance Focus 2019, the 59^th Annual conference for MFM and its BCCA subsidiary, include full track focused on media credit issues. Among the topics planned are a look at “Dealing with Advertisers in Trouble,” “Legal Issues of Credit,” “Revenue Management” and “Using Technology to Speed Payments.” We hope you will join us in New Orleans, May 20-22, where we will be focused on Big Ideas in the Big Easy.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at [email protected] and via the association’s LinkedIn, Twitter or Facebook sites.