Despite the Chitter Chatter, Enterprise Payment Terms Belie Indifference to CSR
Introduction to SignalsFromTheOP
Guide to episode
- Enterprise companies emphasize Corporate Social Responsibility (CSR) in a number of areas
- Then they essentially abuse small and medium size businesses with outrageous payment terms and procurement conditions
- They acknowledge the importance of SMBs in their procurement diversity - but demonstrate hypocrisy in their treatment
- In the end it probably costs them more anyway
Hi, I’m Ed Marsh. Welcome to this episode of Signals from the OP. In these periodic video blogs I comment on topics that I believe should be on the strategic radar of industrial manufacturers.
On today’s episode I’m going to stray a bit and talk about a social topic – don’t worry….not politics.
I hear a lot from enterprise companies about their robust corporate social responsibility programs. Topics that get lots of CSR attention include:
- Workplace equality
- Sexual harassment
- Climate awareness
- Brand activism
- Privacy & data
- Small and minority business supplier programs
- And ensuring that all suppliers in the supply chain adhere to the same standards as the procuring enterprise
All this makes business and social sense.
But there’s a thread of hypocrisy running through it that is going to become increasingly problematic.
Today I want to discuss what the issue is and why it’s going to become more of an issue.
The business systems and payment terms of enterprise businesses are designed to foist cost and work on small and medium size businesses which can ill afford the burden.
This is happening in several ways which may be familiar.
First, absurd payment terms are being dictated. It’s not uncommon for an SMB to receive a letter from an enterprise company’s finance or procurement department which thanks them for their important support of mutual success and informs them that they’re now going to accept terms of 3%45 days, net 90 or 120.
Second they’re enrolled in some sort of vendor management and procurement program – often SAP, Arriba or something similar. These systems are common in function, but often quite unique in detail for each customer. And in some particularly egregious cases the vendor is informed that they’ll pay fees for processing purchase orders and submitting invoices.
Finally, AP functions are often outsourced and invariably opaque. One needn’t be a conspiracy theorist to find frequent instances where immaterial or contrived discrepancies in documents are used to justify non-payment of invoices. And in those cases, there’s often no proactive information of an error – just no payment followed by a long, convoluted process attempting to reach someone that can explain what the issue is and assist with resolution.
These are all cost shifting functions – and the SMBs, whether $5MM small businesses or $250MM middle market ones – are certainly less well situated to bear the burden than the enterprises which deflect them.
Payment terms are designed to extract no cost working capital from SMBs. Purchasing systems shift the cost of labor for processing to the vendor, sometimes explicitly, and the differences and complexity introduce opportunities for error. And like the endurance challenge of pressing legitimate but stonewalled insurance claims, the challenge of collections consumes staff time and emotional energy.
Some of the costs born by SMBs are clear and direct. Some are less apparent and indirect. Labor costs dealing with convoluted purchasing systems and collections are direct. However, the sales groups that set prices in companies may not be closely enough aligned with AR, for instance, to understand the burden created by one-off systems for processing orders and invoices, or the time spent on resolving invoice discrepancies, searching for a contact that can help, and resolving past due issues.
Hyperextended payment terms create awareness and resentment – not only because of the onerous demands they make of business, but also because of the imperious way they’re often instituted. But the cost may not be well understood. Nearly every vendor that accepts these terms is bearing the cost of funds for the working capital of enterprise customers.
Not only do enterprise customers have abundant capital in most cases, but their cost of funds is generally much lower than an SMB with a typical commercial lending arrangement. Often carrying this accounts receivable is managed with a line of credit. And that’s not free. Not only does it have implications to the companies overall balance sheet, but it may impact covenants of other lending products, and there’s clearly a carrying cost.
Here’s where this issue is likely to become more pressing. The cost of funds has been generally low – but it’s rising. That’s going to create pressure for enterprise customers, emboldened by the lack of push back from their gradual demands for extended terms, to extend further. At the same time it’s going to create real cost for the vendors. There’s going to be a cost reckoning.
In many cases costs are simply shifted by vendors. The enterprise groups whose KPIs include vendors on extended terms often aren’t evaluated based on purchasing metrics around price. That means that often proprietary or specialized items – like the replacement parts of capital equipment that many of my industrial manufacturing clients sell – are boosted. Often substantially, in fact far more than the financial benefit that the customer realizes from extracting another 30 days of carrying costs.
In other cases both parties settle on intermediaries, like the 3rd party firms that manage MRO parts operations. The supplier often sells at the same price they did originally with their standard terms. The purchasing and logistics intermediary adds margin to cover their services and the extended payment terms which they accept as part of their Faustian bargain. In the end, the enterprise customer pays a substantially higher net cost – but the silo KPIs look good.
This is the stuff of Dilbert
But here are the reasons I’m discussing it today.
First, rising rates are going to change the willingness of vendors to accept this. As companies pay closer to 10%, and terms extend to 90 days or longer, the impact on margin becomes material. And as companies have a harder time hiring and retaining good folks – including efficient administrative types with the attention to detail required for accurate processing – that will be a growing pain point too.
Second, the enterprise hypocrisy is going to eventually be revealed. And this is the part that really drives me nuts as I hear companies out championing their CSR programs and efforts.
I don’t care how many programs you have to address various social issues – if you’re bludgeoning SMBs in the background, you’re defeating most of your efforts. Small, and particularly middle market firms, are the ones that create diverse, well paying jobs.
As long as enterprises abuse their vendors by shifting cost and burden, most public facing CSR will simply be lipstick on the pig.
And because the net cost they end up paying is often higher, this practice is deleterious to earnings as well.
I’m Ed Marsh. Thank you for joining me for this episode of Signals from the OP. If you enjoyed it, please share it and subscribe – either to my youtube channel EdMarshSpeaks.TV or at the related blog SignalsFromTheOP.com.