Who are the real payment bullies?

Steven Jansch of Gilson Gray tells us why suppliers must act smart when dealing with big industry players.

A damaging disparity in bargaining power was suggested earlier this year, when suppliers to drinks giant Diageo were told in no uncertain terms that it was expanding payment terms from 60 to 90 days, principally so that Diageo could "improve cash flow and drive out costs".

Following it being forced to stage a u-turn in reverting back to 60 day terms, we must ask: does the small supplier have more power than it is led to believe? After all Diageo - with its global reach - requires a smooth supply chain so that it can cater for its customers effectively, perhaps a fact that many undervalue.

What is certain is that this is a more complex issue than many commentators would have you believe.  In fact, the industry minnow is arguably better equipped than ever to push back on the market leader.

Triggering an emotive response, the press coverage and general backlash following the letter sent by Diageo to its suppliers shed light on some underlying issues.

Diageo’s original letter stated that it is “continually looking for ways to enable us to invest in the growth of our great brands. This activity supports the long term sustainability of our business and yours”. So is there more to this than a multinational behemoth simply passing a cash flow problem onto its "vulnerable" suppliers?

Understandably and perhaps not unreasonably, empathy most often lies with the small player. After all, could a 30 day delay in receiving payment from its main, or even sole client, result in a small firm having to close down entirely?

Since the financial crisis of 2008, credit control teams have been ‘streamlined’ across the board alongside huge reductions in the usage of external practitioners.

These smaller teams often undertake the same, if not a heavier workload than the credit control teams did pre-credit crunch – inevitably impacting on the pace of debt recovery and credit control, explaining to some extent the reasoning behind the payment terms increase by Diageo.

This is an unfortunate set of circumstances, however Diageo was perhaps naïve to underestimate the emotive response the letter would evoke.  There is also the possibility that Diageo is underestimating the amount it relies on key suppliers.  A breakdown in the supply chain means that the customer suffers, at least in the short term, through increased prices or reduced supply (often both).  However, the backlash will have a negative impact on all parties involved.

Suppliers have the ability to make or break larger organisations. Take Zavvi for example.  It was only a year or so after the management team bought out Virgin Megastores from the Virgin Group, that Zavvi collapsed due to its main stock supplier’s own insolvency (the supplier was part of the Woolworths Group).

With the Forum of Private Business (FPB) claiming that such behaviour “threatens to break the backbone of the British economy” and politicians warning that Diageo could be removed from the Government’s Prompt Payment Code, Diageo staged a dramatic u-turn on its policy.

However, suppliers should not just sit back and bleat about being ridden roughshod. There is much they can do to counteract a potentially unhealthy and unbalanced relationship.

Firstly, winning a large contract with the likes of Diageo can lead to the business equivalent of a rush of blood to the head – a contract that leaves the supplier susceptible to sudden changes of terms. Always be clear that if you are accepting lengthy credit terms that your business model can sustain this.

Secondly, push back.  If you are confident of your product – or equally if you are worried at the impact a long credit will have on cash flow – you have to argue the case with your client.

We’d also recommend that you have a foolproof backup plan. With improved business structuring and more effective accounting and credit control, a business can better prepare for how it deals with a sudden change in operating conditions.  That can also be safeguarded by more intelligent and informed use of financing, such as invoice or asset factoring from firms like Close Brothers or RBS Invoice Finance.

Finally, incorporating a crisis plan can reduce stress and anxiety should trading conditions get to the stage whereby it is no longer viable for the firm to operate.

As long as SME’s that deal primarily with one large client utilise services and talent to provide a more equal footing with the industry giants and continue to be supported by the likes of FPB, politicians and the press - then these businesses should strive to maintain a balance, rather than succumb to the will of the "most powerful".

Since comingon to the law scene in 2014 as the biggest full service firm to open in Scotland in more than 100 years, Gilson Gray has been recruiting talent from across the legal sectors.

It has been able to develop a significant market presence and has recently acquired two financial advisory businesses, taking assets under management to a little short of £100m