Dell and Others: The Business Dilemma of Pushing Out Payment Terms (Part 1)

I'm sorry, but I could care less about the moral dilemma of pushing out payment terms, as many paint the payment term rationalization argument. I personally believe all that matters is the business dilemma of whether or not such logic makes sense based on the balancing act of improving working capital and keeping your suppliers in business and therefore wanting to work with you. There's the start of a good discussion on the topic over on Supply Management's blog, where a commentator notes that she does not "envy Dell's suppliers" who have just been told that their customer "is extending its payment terms from 50 to 65 days."

As anyone in procurement or A/P knows, simply extending payment terms is not an arbitrary or binary thing. Some companies may have Net 50 terms but pay suppliers in 66 days on average. Policy may be policy, but practice is what counts. Some suppliers may actually prefer longer payment terms if they know they will actually get paid when they're supposed to. Others such as commentator David Brown of new payment upstart Oxygen Finance, who is quoted in the same post, suggest that an early payment scheme in exchange for a discount may be a more fair answer.

But the problem with early payment programs is that so few suppliers are usually able to take advantage of them. By the time an invoice is in the system and approved, the chance of getting paid in days or weeks, in most cases, is often long-gone. Moreover, when companies enable such programs with technology, it's rare that more than a small single digit percentage of suppliers participate. I laughed recently when I saw a PowerPoint from one of the biggest players in the space, that claims it's worked with dozens of customers and has facilitated over $8 billion of early payment financing discounts. Why? Many large companies have more than $8 billion in payables in a single year. In other words, this top player is barely scratching the surface for its customers.

I'm personally excited for the potential transformation of A/P and early payment discount programs in general. But we'll need to see entirely new approaches that capture the potential of the majority of a supply base to participate if such models are to make a difference. Perhaps for this reason the much-maligned payment strategy of pushing all spend to a P-Card might not be such a bad idea after all in the future, if it will be possible to get the restrictive and unnecessarily high APRs down.

- Jason Busch