War of the wages - sequential liability
Omnicom's proposals prove a thorny issue for the production industry
The recent proposal by Omnicom to introduce sequential liability clauses into its contracts with suppliers may now have been suspended, but the proposal, which would have seen all of Omnicom’s creative agencies (including TBWA, Abbott Mead Vickers BBDO and DDB) paying production companies, photographers and freelance workers only when they had been paid by the client, was enough to concern the industry at a time when cashflow has never been more important.
Such a move would have seen a major change to Omnicom’s current trading terms which see production companies paid half of their fee upfront with the final 50 per cent being paid within 28 days of delivery of the commissioned film – an agreement which is standard throughout the industry.
The issue was also brought into sharp focus in the Northwest recently when The Mob in Manchester recently turned the tables and contacted suppliers by letter to explain its new approach – similar to that of Omnicom – to pay suppliers only when they have been paid by clients.
In the letter John Brocklehurst, MD of The Mob, wrote: “Due to the economic climate, our finance department have decided that we will not pay any supplier until we have received at least 75% of payment from the client of that particular job, which I know has affected payments on other productions too. Clients are slowing up payments to us more so than ever before, so from now on you will be paid when we are paid, that is now our terms on every job and everyone will need to get on board with this.”
However, Steve Walmsley, MD of Newcastle production company Mere Mortals, says that any company looking to move the liability to another party is clearly out to protect its own business, adding that the situation of one party only getting paid if another gets paid can be fraught with problems. “I might produce the greatest TV commercial in the world and hand it on to the agency. The client might then have an issue with another aspect of the agency’s work that doesn’t impact on my commercial and it falls through due to that. So, it has nothing to do with my commercial, but the implication is that the production company will also lose out.”
Relief
Steve Byrne of The Gate Films in Manchester says that the change of heart by Omnicom is a relief to the production industry, which would have been hard hit had it gone through with its plan.
“We’re all glad that the Omnicom issue has been resolved through negotiations with the Advertising Producers Association (APA). Being a member we trusted in them to act in our best interests which they duly did and it should be said they kept us informed throughout. We never entertained changing The Gate’s payment policy as we rely heavily on the commitment and skills of our crew and suppliers to deliver a first class production service.”
Pete Levy, MD of production house Greenlit Media and chair of Bristol Media, believes that such a move would have been extremely disconcerting to production houses, especially smaller companies.
“With regards to actual production costs these can be quite significant and not just in ‘time’. As a small independent we need to have peace of mind that we can recoup quickly if not be paid in
advance,” says Levy.
“There is a school of thought that the current economic situation could play to the strengths of the smaller indies. We are leaner with more flexibility and are even more appealing to clients who still require creative and economic return for their pound while budgets are being squeezed.”
Simon Mallinson, managing director of MTP, admits to being perplexed by the issue as he does not feel that sequential liability would have been accepted within the production industry.
“I have a rough idea about the stability of their businesses and I keep an eye on the extent to which I am exposed. I have on three occasions lost money when agencies have closed and it was not nice but these things happen. I took the decision that the agencies were credit-worthy and I got it wrong. At least I knew who I was dealing with and I could make a judgement.”
He continues to say that the introduction of sequential liability would mean that an agency could take a new client and commission a production company to make an expensive commercial and if the client goes bust, the production company who has never met the client or done any searches on them, is liable for the cost of the production.
Insanity
“You couldn’t even expect the agency to be cautious – why should they be when they’re not liable? It’s also worth remembering that for every £1m of turnover, production companies physically outsource £800,000. Either I am missing something or this is pure insanity. There is no way the APA would accept it and there is no way that MTP, Mustard or Onward or any other production company would accept it,” concludes Mallinson.
“These things should be monitored and dealt with at industry body level by the APA and the IPA as it has been in this situation,” says David Reilly, managing director of Cask Productions, when asked how a recurrence of this issue can be avoided.
“What has to happen is that production companies should be able to come together when one of their clients haven’t paid them. There is a reasonable discussion to be had there. This would be like me being a supplier to ScottishPower, but because my next door neighbour doesn’t pay his electricity bill my costs go up.”
So, while a potentially explosive situation has been avoided, it is clear that production companies are in a vulnerable position, especially at a time when budgets are at their tightest.