During our attendance at VMSA East 2020, we naturally engaged in a variety of informative panel discussions. However, one of the biggest windfalls at conferences such as these is the chance to interact openly with peers, clients, MSPs, and even competitors to learn about shared pains and opportunities across the industry. For example, one topic that dominated side conversations involved the persistent issues with misclassifying staff augmentation as Statement of Work (SOW) engagements. Another major theme that emerged was the importance of payrolling solutions in an era of new regulations and legislative crackdowns on independent gig economy talent. Yes, we’re looking at you, California AB 5. But with that comes another set of obstacles we don’t mention often: the growing push among workers for on-demand pay at a time when clients have extended supplier payment terms to 90 or even 120 days. 

On-Demand Gigs, On-Demand Pay?

PYMNTS.com, a news organization dedicated to covering payment and commerce trends, noted that the payrolling space hasn’t experienced much disruption since the introduction of direct deposits as a means for accelerating workers’ access to wages. “But a new generation of workers is now driving monumental changes in the way businesses employ and pay talent,” PYMNTS.com clarified, “with their participation in the gig economy a key driver of those shifts.”

One significant behavioral shift created by the sharing economy is how it’s shaped workers’ attitudes toward pay. Supporting platforms such as Uber, gig talent have grown accustomed to receiving payouts daily—or even multiple times a day. They’ve quickly realized that with the on-demand nature of their work has come the benefit of on-demand earnings. PYMNTS.com explained the situation in greater depth:

With data automation and faster payments, technology is now at a point where professionals no longer have to wait for a paycheck once or twice a month. On-demand access to wages is quickly penetrating the payroll space, and Paylocity CEO Steve Beauchamp says employers are only just beginning to get used to an idea that young millennial and Gen Z workers today consider the norm.

“We are definitely seeing an increased demand for faster payment cycles,” he told PYMNTS, noting that this younger generation of a workforce came into adolescence and adulthood within the proliferation of the gig economy.

“To someone who is just graduating from college, gets a job and is told that they will be paid twice a month, that worker may think to themselves, ‘That’s not necessarily the way I live, that’s not the way my expenses come in,’” Beauchamp said. “That doesn’t make much sense to them. They might have experience in college or high school working in those gigs with faster payment cycles.”

Apart from the complexities of redesigning payrolling systems to accommodate this new need, enterprises are moving staffing and payrolling companies in the opposite direction by drawing out payment terms from Net 30 to Net 120, in too many instances.

Show Me the Money...at Your Convenience

Logistically and contractually, there are countless hills for MSPs to climb before they begin a new program or unseat an incumbent. Their negotiations don’t end with appeasing a client’s needs. They must strike an equitable balance between the customer’s objectives and a supplier’s incentive to participate.

Supporting the supplier population, the lifeblood of performance and delivery, is imperative. We often believe the loudest grumbles erupt during negotiations, when MSPs and suppliers haggle over contractual terms and conditions, volumes, tier status, margins, rate cards, service level agreements (SLAs) and more. Few people seem to consider the tolls that extended payment terms exact on staffing providers.

The move toward Net 90 and Net 120 payment terms highlights how the nation’s biggest companies continue to build on the aggressive cash management practices they adopted in the wake of the recessionary credit crisis. What began as a way to preserve cash when markets dried up has become a means of freeing capital to fund expansions, buy back stock, and support dividend payouts in periods of lackluster sales growth and shrinking profits.

“The tactic has gained in popularity ever since an affiliate of 3G Capital put it to use after it bought Anheuser-Busch in 2008,” wrote Stephanie Strom in her 2015 article for the New York Times. 

“In the past,” she continued, “extended payment terms often were a signal that a company was experiencing worrisome cash flow problems, but these days big, robust companies are imposing new schedules on suppliers as a business strategy, analysts say.”

“Eventually,” said V. G. Narayanan, chief of the accounting practice unit at Harvard Business School, “the additional financing costs that suppliers incur because they aren’t being paid promptly work their way back into higher prices for consumers.”

The practice is often crippling for suppliers, especially smaller businesses that have little cushion. In Britain, the Marketing Agencies Association called on its member advertising agencies to “strike” in April against Anheuser-Busch InBev, the beer behemoth created by an affiliate of 3G, after the company began seeking new terms. Those included acceptance of a payment period longer than 120 days and a request for pro bono work.

Suppliers Feeling the Pinch 

A year after NYT’s expose, IndustryWeek’s Paul Ericksen illustrated the ongoing momentum, spotlighting an OEM “that was changing its supplier payment terms from 30-days to as many as 120-days. This news didn’t come from the OEM itself but from one of its large Tier 1 suppliers. The CEO of that Tier 1 basically said ‘no go’ and that he expected all customers to live up to their contractual agreements which, in this case, specified 30-day payments. Good luck with that!”

Around the same time in 2016, Boeing extended its supplier payment terms to 120 days. Fast forward to 2018. Kroger enraged its manufacturing suppliers by dragging payment terms out to 90 days. Then, of course, there’s the collapse of Carillion, a British multinational facilities management and construction services company that now enjoys the notoriety of being “the largest ever trading liquidation in the UK.” Previse CEO Paul Christensen summed up the devastation pretty well in his article for CTMfile:

120 day payment terms mean that a supplier that has delivered goods to Carillion has to wait four months until they are paid. Think about that. Imagine that when you ordered your coffee this morning, you said to the barista,  “send me an invoice and I’ll pay you in four months”, as you breezily walked out the door drinking the coffee. That’s how payments work in B2B.

Not only does the supplier have to wait for the cash it is entitled to, the longer the payment terms the longer the supplier is exposed to the risk that the buyer cannot pay. Carillion’s 30,000 suppliers have just seen that risk materialise.

Across industries, major corporations are trying to reduce the amount of cash tied up in day-to-day operations by extending their payment time to suppliers. These tactics, however, force ripple effects down the line. Companies that hold on to cash longer create deficits with suppliers, especially those confronted with having to obtain financing. Pitfalls of such decisions include dreadfully low engagement levels, unsustainable operating costs, attrition, and huge disadvantages in attracting exceptional talent. Even worse, 90% of small businesses go under for cash flow difficulties. And floating employee payroll for four months would certainly qualify as a cash flow difficulty.

MSPs in a Tough Spot When Clients Demand Extended Payment Terms

For disenchanted suppliers, blaming the MSP is a direct (albeit knee-jerk) reaction. Yet it makes sense on some level. The MSP is the party that oversees communications, and is the entity to which suppliers have immediate recourse. The truth is that MSPs are stuck in the middle, left to mediate between the client -- which actually demanded the extended payment -- and staffing partners who suffer as a result. The trapped-between-a-rock-and-hard-place adage seems particularly relevant in this situation. 

Does every MSP out there worry about the effect that extended payment terms have on suppliers? No. Offering additional discounts for early payment or stretching out remittance has very little impact on MSPs. The best of the bunch, however, understand the value of their supplier community. They harbor concerns about how their staffing partners will manage under the financial strain. After all, profits drive growth, performance, innovation and longevity. 

With all their overhead and statutory costs, suppliers need to realize a healthy margin to conduct business. Forcing staffing providers to bear the financial burdens imposed by floating payroll payments can lead to more harm than good for clients.

Of course, there are exceptional MSPs that take these matters seriously. A couple of years ago, analysts at some MSPs alerted their organizations about the coming trends in client payment terms. To remain competitive in their markets, many of their clients began requiring terms well beyond Net 30, 45 and 60 day standards. Today, our industry is witnessing a rise in 90-day terms as a new norm, most noticeably among Fortune 500 companies. With these delays, many staffing suppliers find themselves in the difficult position of 97-day abeyance periods from invoice to payment.

Even when MSPs continue to release payments to vendors within the typical 10-day period, the amended terms result in an average wait time of 90 days from the vendor’s payroll date, as opposed to 30. To work, several assumptions must be made.

• All vendors have established lines of credit.
• All vendors currently use their lines of credit to fund payroll during the accounts receivables (AR) period.
• All vendors can weather the additional interest expenses incurred by utilizing a greater portion of their available credit lines during the extended holding period.

The challenge is that MSPs can’t always deduce with certainty whether their staffing partners will have the necessary cash flows or means to obtain credit for bankrolling their weekly payroll during the AR waiting interval.

Because the supplier population is critical to the success of any program, a select number of MSPs have launched financing programs using their own banking relationships. One MSP I’m aware of designed a Net 20 payment term to suppliers, allowing them to remain in the program without significant impacts to their funds or operations. This also prevented potential disruption to clients.

Others have proposed separate invoicing batches. Staffing partners are partitioned into two groups. The first includes suppliers that have the available funds or credit to handle the delay. The second includes those groups facing hardship. Despite noble efforts, these circumstances push MSPs into the difficult position of finding creative solutions that honor their clients’ wishes while supporting their staffing partners. And this is where a service like FinTech opens a new world of possibilities.

FinTech, the Next Phase of Financial Services

A new type of financial services provider broke ground in the 21st century, and experts believe it has the power to transform global supply chains. Multinational giants such as Apple, Dell, Kellogg’s and Siemens have already engaged these financial technology companies—FinTech, for short—to help finance growth initiatives, penetrate untapped markets, innovate new products or services, and access capital previously unavailable in their supply chains. 

“When fintech emerged in the 21st Century, the term was initially applied to the technology employed at the back-end systems of established financial institutions,” Investopedia explained. “Since then, however, there has been a shift to more consumer-oriented services and therefore a more consumer-oriented definition. Fintech now includes different sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management to name a few.”

The fascinating aspect of this development is the tremendous potential it could hold for outsourced contingent workforce programs. Among all the complex issues an MSP must iron out with its staffing partners before launching a seamless program, payment terms are the sore spots we seldom talk about. The advent of FinTech could signal the next big industry solution.

The Dawn of FinTech in Supply Chains

As Dale Rogers, Rudolf Leuschner, and Thomas Choi described the potential of FinTech for supply chains in their 2016 article for Harvard Business Review: “Financial technology companies act as intermediaries in facilitating transactions between a company and its suppliers. They enable both the buyer and supplier to improve their working capital by making it possible for the former to extend its payables and at the same time accelerate payment to the latter. This provides both sides with benefits, including greater liquidity and less variability in the timing of payments.”

• FinTechs are Internet companies that streamline financial systems and optimize the efficiency of funding supply chains.
• They work with many partners: online procurement platforms such as Ariba, financing organizations like PrimeRevenue, and traditional banks, among whose members are CitiGroup and HSBC.
• The majority of FinTechs operate as cloud-based platforms that enable procure-to-pay systems. These incorporate purchasing and accounts payable functionality.
• Once invoices are approved, suppliers may choose the time when they will receive their payment. In some cases, payments can be distributed within two days rather than the 90 to 120 day limits organizations now prefer.
• “The buying firm,” the authors noted, “benefits through longer payables, which positively impact its working capital.” 

FinTech therefore acts as a sort of broker between parties for the transaction:

The supplier gives the buying firm a discount on the invoice amount at the buyer’s lower cost of capital. For example, when a supplier elects to receive payment for a $10,000 invoice in 15 days through the FinTech and the buyer submits payment to the FinTech 90 days after it approves the supplier invoice and buyer’s cost of capital is 2%, the discount that the supplier gives to the FinTech is only $41 (i.e., the supplier gets $9,959 of the $10,000).

FinTech to the Rescue? 

Right now, most FinTechs seem to target direct client-vendor relationships in various types of supply chains, with an emphasis on manufacturing and materials. However, these services are relatively young and could easily spread to services supply chains such as human capital, where the procurement function is deeply involved and influential. For staffing firms that support direct clients, a FinTech could easily be utilized. Given the nuances of an MSP program, adoption could be more complex.

Time will tell whether the FinTech model has a role to play in our industry, yet the potential and positive implications are intriguing. More VMS providers are seeing the need to expand the capabilities of their offerings, which now include elements of SOW and services spend, independent contractor modules, and integrations with online recruiting platforms and freelancer management systems. If they eventually develop connections to interface with FinTech software, they could hold the key to overcoming a longstanding hurdle for clients, MSPs, and staffing suppliers.

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Image by Nattanan Kanchanaprat from Pixabay