Pay up! Why big players need to treat SMEs fairly...
Successive governments have promised to cut red tape for businesses and the fact that we have had yet another pledge to end bureaucracy suggests they have so far failed to deliver.
But what makes the latest declaration, from business secretary Sajid Javid, sound more credible this time round is a vow to crack down on an issue that runs to the heart of good practice.
The Enterprise Bill proposed in the Queen’s Speech contains measures designed to settle disputes between large and smaller firms over late payments. The message to the big players is essentially, when you outsource services, play fair and treat SMEs equally.
The Small Business Conciliation Service that it proposes is an important step forward in settling disputes, particularly when you consider the sums involved and the potential consequences for firms facing delays in payment. Recent research by Bacs Payment Schemes (Bacs) found SMEs are owed more than £32bn – almost £32,000 per business – compared to around £9bn in the case of large businesses. It leads to pay cuts, costs that could have been avoided, the risk of bankruptcy and the knock-on effect of late payment throughout the supply chain.
In many cases this is a reflection of the blunt, adversarial approach to supplier management that is still far too commonplace despite the fact that it’s clearly counterproductive. Good procurement practice is about building strong and constructive relationships with outsourcing suppliers that incentivise strong performance and create trust on both sides so that there’s flexibility when times are tough.
A few years ago I came across a prime example of this. A senior procurement director I know was managing his company’s relationship with one particular outsourcer entirely himself. This had garnered a few raised eyebrows. Why was someone on the board spending a significant slice of his time managing this one supplier, ensuring they were paid on time and that any contract issues were dealt with smoothly and quickly? But all became clear. This outsourcer was absolutely essential to the success of the business. They delivered a particular service that meant they had direct contact with their client’s customers every day. By managing this relationship at a strategic level, the procurement director ensured the outsourcer had no excuse but to provide top levels of customer service on a consistent basis. Customers remained very happy with their experience, sales increased and the outsourcer remained happy too.
Compare that approach with the dated tactics unearthed recently in a survey by the Federation of Small Businesses (FSB). Clawing back cash from suppliers via pay to stay schemes (where you’re charged a fee or risk being de-listed), introducing retrospective discounting or extending payment terms excessively are not the way to build those kinds of relationships. Smart price control and robust contract management are vital ways to generate efficiencies – but that doesn’t mean squeezing the supply chain at every opportunity in order to erode margins.
It’s a tactic that, at best, will deliver short-term gains and at worst, damages the performance of outsourcing suppliers and heightens the risk of legal challenges or even results in key contractors walking away or going to the wall.
But the FSB and Bacs findings, together with the action now proposed by government, highlight the fact that these kind of practices are prevalent and a culture change is required.
It starts by identifying who your strategic suppliers are and then building a partnership approach with them. Part of that is about altering the supply chain dynamic so that the suppliers an organisation outsources to are able to work with their client, not for them. The push to treat suppliers equally doesn’t just apply to issues around late payment, it’s across the board. Genuine, equally beneficial partnerships, built around fair contract management, joint spend analysis and the sharing of technical expertise, pave the way for client and outsourcer to work together to find longer term sustainable savings – far removed from one business putting the squeeze on another.
Whether or not the new government manages to cut red tape remains to be seen. But in challenging what is poor, damaging practice around late payment, it could open the door to a more enlightened approach to supply chain management that brings greater stability and innovation to all parties.
About the Author
Steve Malone has held the role of managing director of procurement and outsourcing group Inprova since August 2008, having worked for a number of major UK and European organisations. He joined Inprova as part of the MBO team and has led the business through a rapid period of growth, investment and change, shaping the procurement business significantly. He has often worked in turnaround and complex stakeholder environments and has a commitment for creating and delivering value.
Steve has 25 years of experience in supply chain and outsourcing. Having spent ten years with AAH Pharmaceuticals and Lloyds Pharmacy Group, he moved to a division of Hays Plc as Contracts Director, developing key public and private sector business and completing an operational turn-around programme in a number of sites. Latterly Steve has held a number of senior positions with A4e, ICS and 3M, leading on a range of high profile contracts, both within the UK and globally.
Steve holds a Master’s degree, is a qualified Chartered Director and sits as a Non-Executive on a number of third-sector organisations. In his spare time he loves to be outdoors, predominantly either golfing or walking.