Supplier payments’ “decades old” culture in desperate need of innovation

Fintech innovation is overhauling the supplier payments sector before another Carillion-style disaster occurs, according to Paul Christensen, CEO and founder of machine learning supplier payments firm Previse.

“The zeitgeist has changed. Slow payments are not acceptable socially, economically or politically. Yet we probably need to do more and really look at practical solutions because the problem hasn’t been fixed. Something needs to change or we will end up with more Carillions.”

Collapsed outsourcer Carillion was found to owe around £2bn to 30,000 suppliers, subcontractors and short-term creditors when it failed in January 2018 and went into liquidation. The firm was working on 420 public sector contracts when it collapsed. In the wake of the company’s demise, the UK’s House of Commons public administration and constitutional affairs committee found that fundamental flaws in the way public sector contracts were awarded forced contractors to take “unacceptable amounts of financial risk”.

“We’re changing a culture and a system that’s decades old, and that’s not easy,” says Christensen. “It’s a process. These organizations have hundreds of people in accounts payable departments checking invoices, it’s a very manual cumbersome process that often takes months. It’s such a huge global problem that has such a negative impact on millions of small businesses, yet at the same time, it’s actually very easy to fix.”

Last week, 17 FTSE 100 companies were suspended from the UK’s Prompt Payment Code. The code, administered by the Chartered Institute of Credit Management (CICM), mandates that signatories must pay 95% of their supplier invoices within 60 days. Among those suspended from the code are automobile company Rolls-Royce, telecoms firm Vodafone, and Interserve, a construction business undergoing a deleveraging plan agreed with the UK government.

CICM chief executive Philip King, in a statement accompanying the news, said: “The board is disappointed with the actions of a minority who continue to treat their suppliers unfairly, and has no satisfaction in having to name them publicly.”

Christensen says that he was surprised to see the CICM being so proactive. “It’s a good thing, clearly the pressure is ramping up on slow payers, but if you’re out of the code, that doesn’t actually mean anything, because it’s a voluntary code. So even being suspended, it’s a rap on the knuckles.

“There are two issues which cause this payment problem,” says Christensen. “One is that sometimes it’s a deliberate policy to have long payment terms. The reason for that is that when companies like Carillion have huge payment terms, running into 120 days sometimes, they are benefitting from a “free loan” from their suppliers. They can also (correctly) claim that they pay everyone “on time” because its in accordance withthe agreed terms. You might be on time, but four months is an incredibly long time for a supplier to be without payment.

“The other issue is process. Large corporates have bureacratic processes that have to be followed. It’s hard to chase invoices, find out where it’s gone, who in what accounts department has signed off on it. But in this day and age you don’t need hundreds of people manually reading hundreds of thousands of pieces of paper to check them. This is the perfect use case for machine learning and AI.”

Machine learning and data analytics, according to French firm AODocs, can save 15 minutes per invoice when used for processing. A company which processes 1,500 invoices monthly would save 375 hours during that period, it claims.

“Innovation does mean some risk,” says Christensen. “Innovation means doing something different and taking some calculated risk, which a lot of people are averse to. But if you take the right path, it is definitely a good thing.”

The Previse CEO says the industry doesn’t need any more “talking shops” to add bureaucracy to an industry already full of it. “We need additional enforcement powers for the small business commissioner and a lot of continued focus in the media.

“[Former UK prime minister] David Cameron formed a group in 2012, to support supply chain finance, because he thought that would be the solution to this problem, and there is a photo of the 10 CEOs of the FTSE 100 companies who were the first signatories to his initiative. One of them was the Carillion CEO. What they didn’t appreciate was that traditional supply chain finance only works for the very largest suppliers, and SMEs are left out. Traditional supply chain finance has been a means of protecting the very largest suppliers from the negative effects of payment terms extension, the full force of which is borne by the SMEs.

“There are some things that can be done in terms of giving the Small Business Commission more enforcement powers, the ability to impose fines, we probably should be looking at those things. To be honest there should be a carrot and a stick because there are lots of good corporations who are really, really good at this, and their behaviour should also be called out.”

A combination of awareness and pressure from below is the best way to get things moving in the right direction, according to Christensen. “My assumption is smart, progressive companies will look for technology and laggards won’t, as some will stick their heads in the sand and ignore change, and they will pay for it later. But when FTSE 100 company A is paying its suppliers on day one and FTSE 100 company B is still taking 60, 90 or 120 days, which one will the suppliers choose to do business with?”

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