Agencies Should Cover Their Ads

No one likes to get stuck with the bill, and cash-rich advertising agencies are no exception. While the advertising industry is tracking the economy and enjoying its longest boom ever, the American Association of Advertising Agencies once again is advising agencies to institute "sequential liability" clauses in contracts with clients and media outlets.

Sequential liability, which many consider to be the fairest practice, ensures that agencies are held responsible for paying media outlets once an advertiser has paid the agency for ad placements. If the advertiser hasn't paid the agency, then the onus for the media buy falls to the advertiser. AAAA first began advocating for sequential liability in 1991, back when Madison Avenue was spooked by economic instability. Since then, the concept has become a controversial one, with media companies largely preferring a system of dual or joint liability. Under dual or joint liability, both the client and agency are held liable for media payments regardless of whether the agency has been paid.

So why is AAAA taking a stand now?

"We are restating our position on this now because there are a good number of undercapitalized companies," says Bill Nicholson, executive VP at AAAA. "But no one should be in a position where they have to pay a bill twice. It's just unethical."

According to AAAA, the problem with sequential liability is that many major TV networks refuse to work on a sequential liability basis, save for special situations involving a brand-name advertiser and a major ad agency. Generally, broadcasters prefer to hold both the advertiser and the agency responsible for payment; in essence, they don't care where the money comes from, they just want to get paid.

AAAA argues that its position is strengthened by the fact that brand-name marketers working with major ad firms largely haven't been getting their sequential liability contracts turned down. For agencies that can't get media companies to accept their terms, AAAA suggests that they refuse to place orders under any terms other than sequential liability, a move that isn't always practical. Few advertising agencies readily admit to having delinquent clients, but with venture capital money drying up and the stock market growing increasingly volatile, it's likely that ad shops are looking to protect themselves going forward, especially where dot-com companies are concerned.

Many agencies have asked that dot-coms pay for creative work and media buys up front, a practice that AAAA's position paper states "is becoming more widespread" and may be "a prudent path to follow." Some agencies are demanding that Internet startups without a credit history set up an account from which the agency can draw media payments, while others are going so far as to put a client's name on contracts with media companies, thus limiting their exposure to risk.

"Most dot-com business plans show red ink for their first few years," says Bill Croasdale, executive VP at Initiative Media, a Los Angeles-based media-buying company owned by Interpublic Group "It's too much money hanging out there only to find out at the 11th hour that they don't have the cash." But while the vast majority of dot-com companies have no true income, most are putting the lion's share of their investment dollars into marketing, which is why demanding payment up front is still, according to Croasdale, "en vogue."

Nicholson adds: "Most of the West Coast agencies insist upon advance payment, but in the middle of the country this isn't always understood. The bottom line is that agencies shouldn't be in the business of credit." Despite the advertising industry's recent prosperity, it seems that most agencies haven't yet forgotten leaner times in the early 1990s, and most are keenly aware that dot-coms, which benefited most from recent market highs, are also the most susceptible to economic lows. With many dot-com companies struggling to pay their bills, the liability issue once again becomes relevant. AAAA says it is re-emphasizing its position now because "the growth in marketing and advertising spending is from thinly capitalized companies, including dot-coms and other startups, many of which have limited probability of long-term, stand-alone success."

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