The healthcare company that was highlighted in this earlier article is pressed for cash, having lost millions of dollars in each of the last two years. While there is also longer-term uncertainty for this company (due to the recent US healthcare legislation), in no uncertain terms, this company needs cash and it needs it now. Enter a procurement transformation project and a newly hired Chief Procurement Officer. The opportunity for procurement is a “greenfield” and the scope of this transformation is very broad. One area that the team will focus on in 2011 is its payment strategy, something that has never been considered in this company’s long history.
Case Study: Payment Terms & Strategies
The group of procurement and finance leaders that I met with at this company believe that most of its negotiated contracts have payment terms that are “net 30;” but, the reality is that they have no visibility into invoice/contract terms nor their current payment performance. In the bigger picture, based upon a few AP “dumps” and some Excel manipulation and analysis, the team estimates that between 60% – 70% of the total indirect spend remains unknown and is presumably not under contract (which means no standard payment terms).
While it is unlikely that this company is making all of its payments within 30 days, the new CPO says, “I don’t think that we have a policy, and we’re not sure of our exact [payment] practice.” While it was clear that they “are [currently] lacking a clear idea of best practices in the structure of contracts,” they are focused on the issue and “want to pay contracts in specific ranges and bring more structure here.”
This could be a big opportunity for this team but there is much work ahead of it. I plan to check back in on this group in a few months and get an update on how things are going. A few questions that we discussed and/or I left for them to start considering include:
- What are you trying to achieve with the development of a new payment policy and why?
- How involved is the CFO and/or Treasurer in this process?
- Do you understand your company’s cost of capital and thereby, the benefits of extending your DPO (days payable outstanding)?
- Can you get a general sense of how quickly you are paying your suppliers today?
- Are there industry standards for payment terms, and how do you compare to them today?
- What percentage of your spend is for project-based or subscription-based services? How do you pay these contracts and is there an opportunity to analyze and extend how payments are made (i.e. milestone-based payments instead of up-front lump payments)?
- If you develop a new policy, how and when should it be implemented?
- Is there an opportunity to leverage technology in the implementation of the new policy and to what end?
- What types of electronic payment platforms should be evaluated?
- What capabilities (i.e. dynamic discounting, integration, etc.) will be required to support the new policy and what kinds of payments are needed?
- If you deploy technology, what is your supplier enablement strategy?
- Do you understand how different suppliers will react?
- Will your new payment policy make you a less attractive customer than you are today? Do you or should you care?
- Will your suppliers pass on their new financing costs to you and will you be able to tell?
Happy Thanksgiving!
