4 strategies for media companies to reduce sequential liability risk

As the environment for advertising sales has become more complex, publishers and other digital media companies that work with multiple ad agencies or ad-tech vendors need to be vigilant about risks involved in contracts with those partners. Most if not all such contracts include some variation of sequential liability protections, which limit the liability of one party to the contract if another party fails to pay.

In the media and entertainment sector, sequential liability clauses typically protect advertising agencies from having to pay media vendors if their clients (the advertisers) fail to pay the agency; the media vendor can only go after the advertiser for payment. These clauses are common in advertising contracts because they protect agencies from the risk of nonpayment by their clients, which is especially critical for agencies that work with small or new businesses that may be more likely to default on their payments.

Publishers and other digital media businesses often lack the leverage to negotiate these contracts in such a way that reduces their exposure, which is yet another pressure on the sector during a time of ongoing revenue disruption and the intensifying battle for advertising dollars. Collecting outstanding receivables in a timely manner also continues to be an issue for publishers, contributing further to cash flow management challenges.

What can publishers and other media companies do to reduce their risk?

Publishers and digital media organizations will never eliminate their exposure to sequential liability relationships so long as those clauses continue to be a key feature of advertising contracts. In fact, the sequential liability clause is present in the Standard Terms and Conditions Version 3.0 document as laid out by the Interactive Advertising Bureau, the leading advertising trade association that sets industry standards for the digital advertising industry (in other words, this clause is unlikely to go away anytime soon).

However, publishers and digital advertisers can employ the following strategies to mitigate their risk and exposure to sequential liability:

1. Formalize client diligence processes. Establish a formal client onboarding process that includes a financial review of all organizations in the sequential liability chain before any contract is executed with a new client. Additionally, publishers and other media organizations should consider establishing formal financial review processes to complete on a regular basis for all material clients. This might include defining thresholds for review, timing, responsibilities and so on.
2. Enhance the relationship between finance and sales. Embed finance within the sales or sales ops organizations to ensure that finance is aware of the current status of key clients and bring additional perspective to sales. By linking finance and sales in this way, publishers and media organizations can improve their overall financial literacy and provide more timely, accurate and meaningful data to leaders of the sales organization, while also enabling finance to keep closer tabs on credit risk exposure related to customer relationships.
3. Ensure third-party ad-tech firms are subject to the same scrutiny as advertisers. In the current environment of reduced ad spending, publishers and other digital media organizations rely on an increasing number of ad-tech and programmatic partners to shore up ad revenues. While this helps publishers gain access to a wider audience of potential advertisers, by nature there is less visibility across the ecosystem into the financial health of all parties involved. Publishers should constantly reevaluate these relationships, implement a formal risk management program to evaluate their exposure across numerous partners, and make hard decisions about when the potential revenue upside is not worth the risk. This function is a critical piece of an enterprise-wide risk management program necessary for publishers and media organizations to consider as the economic picture continues to remain cloudy.
4. Establish a leading-class credit and collections organization. Publishers should build a sophisticated collections function, leveraging technology platforms that allow automation of collections; constantly evaluate opportunities to improve days sales outstanding metrics (e.g., with early payment discounts); and engage with collections agencies where necessary. The role of the collections function within the media environment has never been more important, and organizations that fail to realize and prioritize it will surely feel the impact if market upheaval continues.