I have been busy shaping up my work on what makes an Elegant Business (which started with my little chat at TEDx Porto on Elegant Business). Basically, a framework to help companies deal with the world they inhabit. A key part of this work is to shape up a variety of metrics to measure the level of Elegance in a Business.
One potential metric is something that reflects the relationship between a business and a supplier. A business could be dealing with lawyers, marketing services agencies, providers of parts or raw materials. The list is endless. So that makes matters a little tricky. How could I measure the Elegance of a Business when it comes to their dealings with different suppliers?
Here is one: the length of payment terms that businesses place on their suppliers. Seems ok to me (let me know what you think). Not a full reflection of the relationship at all, but one piece in the puzzle.
I do find it quite extraordinary that companies (usually large ones) dictate to the providers of goods or services when they will get paid. However it is how it is. And up til recently it was pretty straighforward. Supplier invoices. Client pays in NET30 days.
Now sometimes companies pay later than agreed. Over the (almost) 10 years running citizenbay I have both been a victim and culprit (not by plan, more by incompetence). I have had a couple of non-payers, but the vast majority of my clients have been utterly brilliant, incredibly fair, very elegant in that respect.
However, over the last few years the marketing services industry has seen a clear shift in the payment terms between clients and agencies, with terms of payment lengthening from NET30 days to NET45 days to NET60 days and climbing.
As Debbie Morrison of ISBA UK, in conversation on Twitter with me, said:
we've seen it develop over the last 2/3 yrs, it's led by the very top of co's CEO/board level not proc or marketing initiative.
Proctor & Gamble have announced that they are pushing the payment terms out to 75 days. The Chief Purchasing Officer offers this reasoning:
The working capital program will focus on moving to longer payables with our external business partners. We completed months of external benchmarking in 2012, and realized that we were out of line compared to our competitive peer companies on payables.
So because others are getting tough, P&G are following suit. (Would be interesting to know how they drew up the benchmark list on that one!)
But according to Rick Hughes, the CPO of P&G, they have the suppliers' interest at heart:
Our objective is to address this in a phased approach. Rather than a simple “mandate” which we believe could be punishing for our small/midsize partners, we have developed a solution with pre-selected partner-banks that will enable us to offer a financial product called ‘Supply Chain Financing’ (SCF) that can create a win-win-win for our external partners, P&G, and the banks. This approach not only will help mitigate some or all of the negative impact on the working capital of our external partners, but in many cases will create value, by enabling access to low cost capital for reinvestment.
A big company trying to find a solution to help the small company is very laudable. Check out the wonderful Small Business Saturday work of Amex, for example. However, in the solution proposed by P&G, they have partnered up with 'pre-selected partner-banks' to offer a solution. But hold on a minute.
First, the P&G solution is one that aims to solve a problem that P&G have themselves created for their suppliers.
Second, 'pre-selected partner-banks'? Where do you start with that one? Are these 'partner-banks' the same banks who have drained economies of cash, and done little or nothing to support start-ups and small businesses with all that cash that governments had laid at their feet? Now they are going to help out suppliers, while P&G holds on to their cash for a longer time? Hmmmm, not convinced.
Mr Hughes then sums up with this:
This solution demonstrates P&G’s commitment to drive sustainable value through improved productivity for P&G and our business partners.
I have a feeling that some might disagree with that statement.
However, P&G is by no means the worst of the bunch (hence I guess their reference to the benchmarking). We are seeing NET90 days and even NET120 - AB-InBev is reported to have moved to this payment time-frame.
This of course has a wider impact. If the agencies are not getting paid until up to 4 months after invoicing, then spare a thought for their suppliers, especially the freelancers.
In this more fluid and flexible working world, many freelancers, consultants and small businesses can do without having to face even longer delays on payment - the impact on their cashflow will be expontially tough.
Clearly, large companies are making a massive contribution to the economy and they are right to consider all routes to ensure long term success for their business.
However, the marketing services industry also contributes considerably to brand health, and will be ever more important as companies navigate the world. So you would think that the last thing a business would want to do is penalise the very community who can inspire, create and generate incredible long term customer value and trust for businesses. Instead, you would think that companies would want to inspire the marketing services industry even more.
I came across this fascinating little piece on the potential role that the Big 4 Accounting firms are playing in this move to longer payment terms. Aside from walking the walk and moving their own payment terms to longer ones (yeah right), maybe the Big 4 are seeing themselves as the new source of innovative creative thinking for brands. From creative accounting to brand innovation.
I might be wrong. I might be being unfair on big brands, and the piece might have it wrong on the Big 4. Yet, it does seem that extending the payment terms to suppliers beyond NET30 days to 4 months, seems inelegant to say the least. At worst, it will negatively impact on the long term health of the client's business and that of the agency suppliers.
That's not good business sense for anyone.