Who's Liable For Ad Sales Payments?

Hey All: Im' back but still on my back....Good to be home and sharing mnore assets with you...Dr. Philip Jay

By Mary Collins
TVNewsCheck, Feb 26 2010, 6:03 AM ET
While preparing for MFM's 50th annual conference, I was struck by the issues that haven't changed much since the first conference for the Institute of Broadcasting Financial Management, MFM's original name.

Many of the topics that are part of this year's "Media Outlook 2010" conference for MFM and its BCCA subsidiary are similar to the key issues that led to the formal incorporation of the association. They included such challenges as the correct way to recognize various revenues and expenses.

One challenge that was noticeably absent from the Association's 1961 agenda, but is a huge topic for MFM/BCCA this year, is addressing liability for advertising payments.

It wasn't until the 1970s that ad agencies stopped taking the liability for media buys they placed on behalf of a client. Up until the tough economic times that led to the downfall of the Mad Men days, agencies handled all aspects of their clients' accounts, including vetting these accounts and then presenting their orders to the television stations.

In fact, research shows that a standard contract developed in the 1930s by the American Association of Advertising Agencies (4As) included an agency "sole liability clause."

An article in Szabo Associates' Sept. 30, 2009, Collective Wisdom newsletter explains what happened next. According to Szabo, in 1991 the 4As changed its stance on payment responsibility from "sole liability" to "sequential liability."

In adopting sequential liability, the agencies took the position that they were responsible for payment only if they had been paid by the advertiser. MFM/BCCA (then known as BCFM/BCCA) immediately responded with a position of "joint and several" or "dual" liability; both the agency and advertiser were considered responsible until the media outlet had been paid.

Although the 4As' shift to sequential liability dates back nearly 20 years, it wasn't until fairly recently that agencies began to resist the use of joint and several liability, sometimes striking that language from standard contracts and replacing it with the sequential liability clause. What changed?

According to a number of credit and collections managers polled by MFM's The Financial Manager (TFM) magazine for our March-April issue, one factor has been consolidation within the agency community, which has led to agencies requiring a uniform adoption of the 4As' language. There is also a greater push by agency conglomerates to protect their own balance sheets as they experience a growing number of bankruptcies by clients, whose recent ranks have included such major advertisers as General Motors.

MFM opened the next chapter in the liability language debate earlier this week, with a Distance Learning Seminar entitled "Sequential Liability ... Now What? — Different Media, Different Treatment." The seminar was moderated by Scott Jenkins, director of customer marketing and sales within ESPN's controller's department and BCCA's representative on the MFM board of directors, and Bonnie Krabbenhoft, manager of credit and collections at Scripps Networks and president of C.A.S.H., a credit group for Cable and Satellite History. Their discussion began by addressing the two key reasons that have made advertisers more reluctant to accept the joint and several liability language.

The first argument is with respect to the payment itself. The agency doesn't want to agree to make a payment for the services that were rendered if it hasn't already been paid.

The second objection concerns its exposure. Since the agency is receiving a commission of, say, only some 15% on the media buy, it doesn't want to carry the entire liability. For example, a $20,000 campaign represents a $20,000 asset for a TV station, but at 15% commission it's only a $3,000 asset for the agency.

So what's a TV station to do?

First and foremost, our seminar moderators recommended that media businesses ensure that they have established a sound credit policy. This means the policy should encompass all aspects that affect credit, from liability to final approval.

The legal department should review the policy to ensure that it adheres to all legal requirements. In addition, the station's controller or business manager should be consulted to make sure that the credit policy is in agreement with company goals.

The moderators stressed that it is also very important to get the ad sales team's input and acceptance of any policies that may be enacted. In the view of MFM's BCCA members, their role as credit and collections managers is to help make the sale, and it is vital that they aren't viewed as putting up obstacles to the sales process.

Jenkins and Krabbenhoft stressed the fundamental role played by the inter-relationship between credit and sales in meeting the company's business goals. Credit managers rely on their sales staff to bring legitimate, creditworthy clients to the business. Account reps must not oversell clients beyond their ability to pay and need to alert their credit and collections staff when there are changes in the client's ability to pay....