Close-Up: Why vulnerable agencies are kicking suppliers

In a tough economy, production companies may have no choice but to accept redefined terms from networks.

In time to come, the contract confrontation between Omnicom and UK production houses may be nothing more than a drop in the choppy ocean that the world's communication companies are currently forced to navigate.

In truth, Omnicom's attempt to only pay production houses once ad agencies had themselves been paid by their clients could be seen as a little half-baked. And it wasn't a huge surprise when the group backed off once the plot was exposed on Campaign's front page.

With the three Omnicom London agencies - Abbott Mead Vickers BBDO, DDB and TBWA\London - all boasting prolific TV output, there's little doubt that the tough terms the holding company threatened to impose would have driven some production companies to the wall.

For now, it seems that some senior executives within Omnicom have recognised the folly of pushing ahead with the plan.

"It was a ridiculous battle to fight," one admitted. "To take on production companies at a time when your most important asset is your creative power, meaning that you should be working with the very best people you can, is just plain stupid. The group never thought through what the implications might be."

Nevertheless, it's indicative of the widespread vulnerability currently felt by the major groups to their recession-ravaged clients.

"We've a very substantial list of blue-chip clients," Bob Jeffrey, the JWT worldwide chief executive, says. "And every one of them is feeling the economic pressure."

At M&C Saatchi, Moray Mac-Lennan, the worldwide chief executive, says: "During the good times we compiled a debtors' report once a month. Now it's once a week."

Such heightened vigilance isn't surprising given that it may take only one wobbly client to destabilise an agency. Worse still is the suddenness with which a crisis can strike. The New York-based boss of one of the world's biggest networks tells how he spent weeks at the end of last year agreeing forthcoming budgets with one of his biggest clients. To his dismay, he later got a call from the client telling him the network's fees would be cut by 20 per cent from 1 January. This, the client added, was non-negotiable.

The diktat that stunned London's production houses appears to have had its origins in the US, where one of Omnicom's clients went bust with money owed to a production company, leaving the group to pick up the tab.

The incident seems to have concentrated Omnicom's mind on the implications of one or more of its big internationally aligned clients going belly up.

"Despite its creative reputation, Omnicom is a financially driven brand," an insider says. "Trying to tighten up contractual arrangements is just symptomatic of the nervousness about being exposed."

The financial plight of BBDO's Chrysler client, which has already received $4 billion in loans from the US government and says that it needs $5 billion more, might be thought to be provoking the biggest jitters.

However, Andrew Robertson, the BBDO worldwide chief executive, is eager to play down the impact of the car-maker on the business which, he says, accounts for just 2 per cent of the network's revenue. "Chrysler is big and it would be a pain in the arse were its account to disappear, but we'd certainly survive it," he adds. "It's those small agencies with clients accounting for 20 per cent of their revenue that have to worry."

The situation is being exacerbated by the problems encountered by companies in securing credit insurance on their media spends.

"The credit insurance business has almost closed down," an IPA source says. "Not only are there very few players left in the market, but those that remain are charging huge premiums."

At the same time, those clients who can get credit insurance are finding that the amount they get is being significantly reduced. One UK media agency chief reports that one of his clients had his credit insurance cover slashed from £5 million to £1.5 million.

"The issue of credit insurance is a massive one," the head of another media shop admits. "One answer is to require clients to pay money into an escrow account but these can result in some very complex arrangements."

A stark warning about the dangers posed by such a volatile business environment came last year when McCann Erickson Birmingham took on the MFI account despite the retailer's inability to secure credit insurance. The agency was reportedly saddled with £1 million of bad debt when MFI collapsed.

"It was a wake-up call," a senior UK media industry figure says. "It wasn't so much the debt as the effect on the industry's reputation when an agency was prepared to take on something that looked so risky."

To many onlookers, the MFI affair reinforces their belief that, when it comes to agreeing business terms with clients, it's the hard-nosed negotiating technique of the media shops that works better than the less disciplined approach of their creative counterparts.

"Of course there are agencies - both media and creative - that are prepared to take a risk," John Ayling, the chairman of John Ayling & Associates, admits. "But media agencies are generally much better at negotiating business terms.

"Recovering money is at the heart of every well-run media agency," he says. "We work on low margins so it's vital we keep the cash coming in. Also, our clients pay us to be good with money."

It's different at creative agencies, he argues. "They collect their fees but there's no pressure on them to pay out money. They aren't structured for regular money-chasing. It's not in their DNA and they struggle to ask difficult questions of clients."

With the future of even some of the bluest of blue-chip clients in question, it's hard to predict how the industry will conduct its business in future.

One top media man says that not only will the commission system finally pass away, but agencies will also have to agree terms with media owners, as well as clients.

"This may sound like heresy, but we have to recognise that we can't go on as we are and that it's almost unheard of in most businesses for standard terms of business to be the same for every customer," he says. "If my agency is spending £10 million through a media owner, why should I have to accept the same terms as another agency spending a fraction of that?"

In the meantime, there remains a festering frustration that the strict payment terms that media agencies enforce are far less common across the rest of the industry.

Penny Verbe, the chief executive of the post-production house Smoke & Mirrors, says: "Payment within 30 days is standard practice elsewhere but not in our business. Here it's more like 90 days and longer - 120 days in one case. It's just always been like that."

One agency boss complains: "Gordon Brown talks about helping cashflows for small businesses like ours, but it's total bollocks."

Meanwhile, people are still wary of holding company efforts to lessen their exposure to clients' financial insecurity.

Indeed, there is now speculation within Omnicom agencies that its confrontation with production companies may not have been as half-baked as people thought, but was in fact a "softening up" tactic and its withdrawal merely tactical.

Media lawyers agree the production houses would have no legal redress were they simply to walk away from any revised contract offered to them.

"What's to stop Omnicom coming back and calling for a 20 per cent rebate on everything it spends with the production companies during a year?" a senior manager at an Omnicom agency asks. "I wouldn't rule it out."