Sunday 18 January 2015

Who owns payment terms?

Dearest Finance 

Please stop acting as if payment terms are yours to be changed at a drop of the hat to help you meet your objectives. 
Please enter into a debate with procurement about the short, medium and long term repercussions of any changes, and to also understand the contractual obligations. 
Kindest Regards 
Procurement xx
Payment term extension seems to be about taking short term pleasure for extended, repetitive and sustained pain! The problem is the pleasure is seen in the accounts (managed by Finance) and the pain lies with the rest of the organisation who have to manage the repercussions of extended payment terms. 

Yet again another organisation is lambasted in the media for extending its payment terms. Which resulted in many procurement professionals tweeting their disgust - me included and had me also tweeting this:

Finance could be accused of manipulating its performance (and that of the organisation) by moving payment terms out by 30 days thus reducing the need for cash flow by 1/12th of a year - once. There after, once the first benefit has been achieved, the situation remains the same as it was! (Unless I'm missing something?). 

The problem is for Procurement it's not a single pain. Suppliers impacted by such decisions can and do let their feelings be felt, and rightly so.

When negotiating with a buyer suppliers understand the payment terms in place. These are taken into consideration when pricing is offered and during negotiations. Some suppliers even choose to offer concessions for improved payment terms. It's part of the negotiation and procurement very carefully assess the pleasure/pain (cost benefit) of accepting such offers. Once agreed, these payment terms are then included in the contract. 

The problem is a statement that payment terms are being extended unilaterally invalidates everything procurement has done. Procurement doesn't just negotiate price in isolation to everything else on offer - volumes, delivery, quality, service, total cost of ownership and other business requirements are weighed up and assessed as part of a whole package. These are included on the contract that gets agreed and signed on behalf of the whole organisation.

It's not Finance's place to renege on a contract - nor assume that procurement can obtain the suppliers agreement to such terms. Bullies generally get their comeuppance and whilst many suppliers might be afraid to say No directly they will find other ways of retaliating.

Alison Smith
Inspiring change inside and out - when what you're doing isn't working

Although perhaps this relationship with Finance is simply an extension of the lack of stakeholder engagement seen in many procurement departments and discussed earlier in the week.

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