Agencies Say Rise In Client Non-Payment Makes For A Scary Proposition

(MENAFN- PRovoke) NEW YORK - When a two-year client stopped paying its monthly bill, the owner of the company's PR agency gave the client - a midsize organization with a worthy track record - the chance to make things right, reaching out to his contacts to see whether they needed more time.

But the agency owner's overtures were futile. His calls and emails went unanswered; The company's CMO went dark.

By December of last year - four months after the client disappeared - the $80,000 in lost income ($20,000 a month) started to hurt the boutique firm. The agency worked through holiday break to pursue new leads and put hiring on hold. The year's 2022 profit dropped, as did the owners' take-home pay.

“I can understand the inability to pay. I can. For me it's the lack of communication that's dumbfounding,” said the agency owner.“It's just very odd behavior.”

This story, however, is not the anomaly we'd like to think it is, particularly when it comes to the basic premise. There's a spike in clients stiffing their PR agencies, leaving owners to deal with the unexpected fallout and putting business as usual at serious risk.

“It really hurts,” said Michael Lasky, founder & chair of New York law firm Davis + Gilbert's public relations law practice.“There are founders really worried about meeting a payroll, all the good work they have done in a given year going to be for naught because of one non-payment or bad debt.”

Lasky said the phenomenon is hitting agencies across-the-board, from small firms impacted by the loss of, say, $20,000 or $30,000 monthly retainers to the industry's largest agencies taking seven-figure hits when big-name clients like, most recently, Bed, Bath & Beyond go belly up.

Smaller firms, though, are more likely to be seriously affected. With smaller coffers, small firms find "it's almost never worth it to pursue" recovering money in court, as legal fees can easily match - or top - what they are owed.

“The last thing you want to do is litigate against someone who is better resourced than you,” the agency owner said.“These are very well-financed, let alone well-managed, companies. So they know what they are doing.”

While it's not unusual to see collections cases rise during tough economic times, the current wave of non-payments is notable not only because there are more of them, but also for the wide variety of reasons clients are finding to withhold their cash.

Dissatisfaction with an agency's work is among the most common, though industry watchers question the credibility of these claims.

A small tech agency, for instance, was blindsided last year when a client refused to pay a six-figure bill, citing sub-par work despite having never mentioned a problem before severing the relationship.“All of a sudden you're $150,000 or $200,000 behind and for a small business that's a scary proposition,” the owner said.

Other factors clients cite for withholding payment: confidentiality breaches, which can again seem a little dubious, according to Lasky, given that they might cover
information shared during involuntary data breaches. Changes to the account team and the slow pace of work also are used as reasons to severe ties.

In addition, the shift towards paying PR firms monthly retainers versus annual AOR contracts gives clients more early exit opportunities. Non-payments due to bankruptcy rise in tough economic times.

Another problem cited by Lasky: agencies agreeing to client-crafted contracts rather than creating their own with safeguards to protect themselves from clients' financial ill will. Forging self-protecting deals is also becoming more complex as agencies expand their capabilities, adding new offerings that go beyond the scope of the proforma contracts that are often in use.

"Smart PR agencies are trying to do more stuff," an agency leader said. "We want to do more than earned. Doing that opens up to different standards when it comes to contractual obligations."

Agency leaders (particularly those who have been burned) are, in turn,
getting tougher with their contract terms.

The agency owner who lost $80,000 last year has since tightened up the termination clauses in his contracts, meaning the firm will let clients go for non-payment after 30 days versus 60, and is considering requiring deposits.

The tech agency leader also toughened his terms, so that the firm collects money in advance and has a stringent accounts payable process. Going 15 days past the payment due date is now considered late, giving the firm the opportunity to pause its work for a client or severe ties altogether, albeit not without trepidation.

“It's a scary thing to do in an economy where everyone is not rolling in new business and deals are harder to come by,” he said.

All of which, Lasky said, warrants the industry taking a more stringent look at their client agreements, with an eye not only on the nuts and bolts, but also on what types of relationships they want to forge with the companies they work with.

“I strongly believe the client contract should be a communications document,” Lasky said, adding that the terms of deals should reflect a partnership between agency and client.“It's totally appropriate to talk about expectations in a thoughtful way.”



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