Episode Twenty Seven: Prompt Payments - Levelling the Playing Field

The True Cost of Late Payments for Small Businesses

For big businesses, my message is very simple, just recognise the impact you have on your supply chain. Behave in a way that supports them and makes them sustainable.

The UK’s Small Business Commissioner, Philip King, joins us to talk about best practices for prompt payments, his work in helping small businesses and how the use of data and automation is changing the payment landscape.

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The Power of Data Podcast

Episode 27: The Prompt Payment Playing Field

Guest: Philip King, Small Business Commissioner
Interviewer: Louise Cavanagh, Communications Director, Dun & Bradstreet

Louise 00:00
Welcome back to the Power of Data Podcast. We're joined today by Philip King, who's recently been appointed as the interim Small Business Commissioner in the UK, working to ensure fair payment practices for the UK 5.8 million small businesses. Philip was previously CEO of the Chartered Institute for Credit Management, 14 years. Welcome Philip, and congratulations on your new roles.

Philip 00:20
Thank you.

Louise 00:21
To introduce you to our listeners. Could you share a brief summary of your career today and how you came to work in the credit industry?

Philip 00:26
Yes, I can. And it's an interesting story. Well, I think it's interesting. Having been out of school for about five years and done some driving jobs, I was looking for paid employment and asked a friend if I had any van driving jobs because I was at the time delivering and collecting laundry. And he said they hadn't but, they had got a job in their credit department, and it might interest me so could he arrange an interview? And he did. And I went for the interview. And I was told that my office background from my three years in civil service would be useful, but my complete lack of knowledge of anything to do with credit was a bit of a hindrance and they’d keep my details on file. Two weeks later, I got a call telling me that no one else had applied for the job. I was the only candidate. So could I start? And I did the following Monday, and that was in January 1979. And 41 years on, I'm still working in credit management, and I've loved every minute of it. So an interesting start.

Louise 01:19
That is an interesting story!

Philip 01:20
Yeah, having done that I was there for 10 years at an electrical wholesaler, cut my teeth there. Actually did the Dun and Bradstreet course in credit and financial analysis – was my first credit qualification, which I did, the correspondence course. And then I did the Institute Credit Management qualifications. And then I did an accounting qualification, then an MBA over the years, and I've worked for having moved on from the trickle wholesaler, I worked for Olivetti for six years, and then Vodafone for 13 years, all in different credit roles, and then the CICM for the last 14 years. I think that lot should add up to about 41.

Louise 01:54
Long and varied career. I know that your time at the CICM and you've long been a champion of the prompt payments and I know this is something you advise government on as well. Could you tell us a bit more about your work in that area and the inception of the prompt payment code?

Philip 02:09
Yes, sure. So in 2008-2009 when the credit crisis hit, Peter Mandelson was then Business Minister and called a number of roundtables with business leaders and large businesses, and so on, talking about late payment, and he asked us to write a series of managing cash flow guides, which would be short, punchy advice for small businesses on how to manage credit more effectively, and how to get paid and so on. So I wrote those for government and we published them. And then he asked us to consider setting up some sort of code whereby businesses could show that they were going to behave responsibly in the payment space. And out of that conversation was born the prom payment code, which was launched in 2009 and is still around. It's now got two and a half thousand signatories, the CICM as it is now, has supported that administered it and hosted it for government. It's always been government's code, but we've done the work for them. And we've used it as a way of encouraging good practice and in trying to educate small business about how to get paid more effectively. And one of the key things when we talk to people who complain to us about not being paid is that very often we find they've not done something basic they should have done, like quoting an order number or an invoice or sending the invoice to the right place or whatever it might be. So we've used it as a, on the one hand getting big business to behave better, on the other hand, to get small business to understand what they need to do. And in recent times with the payment practice reporting requirements of government, we've used that as a measure to indicate whether businesses are compliant with the code principles or not. And where they’re not, we've suspended from the code and we've worked with them to improve their practice and seen some spectacular results in doing that.

Louise 03:51
That's great. And have you found that businesses are open to sort of that advice and that those conversations, or is there, have there been some difficult conversations.

Philip 03:58
There's been some incredibly difficult conversations with businesses very uncomfortable with the fact they've been suspended. Because reputationally, that's not good. And many businesses think they're doing the right thing and think they're behaving well. And they're actually quite shocked when at the very senior level, they find out how badly they're performing. You know, this isn't something that's been on their radar, typically. So we've had some incredibly difficult conversations. But they've often led to really good conversations. And the way we've worked this is that we invite businesses to draw up an action plan on how they're going to become compliant with the code principles. So they’re suspended, they work through the action plan, and when they can demonstrate compliance, we put them back on the code. And off the 55 we'd suspended up to the end of December about 30 have been reinstated already. And that's an indication that there is an appetite to improve.
And in some cases, we've seen some transformational change. If I may share an anecdote which is Lego Rock, who probably one of the most difficult conversations we had when we first suspended them, they were very, very unhappy with us. And we met with them and we talked to them in July last year, July 2019, they reported 57% of invoices paid within 60 days. And that's the measure we've been using to measure compliance. They produced an action plan, we worked through it with them. And I've taught them several times through the intervening period. In December, they reported 93% in 60 days, which for me, is transformational. And that's a result of some changes to terms to some businesses, so they reduce the terms to make it easier to hit the target. But actually, that's only one part of the jigsaw. They've got now a Chief Executive Ray O'Rourke, who takes this really seriously and wants to reports every week on how they're doing. So it's got attention across the business from the top down. They've put automation in so that the suppliers can go to a portal and see when their invoice is going to be paid. That means they haven't got to have people manning phones answering queries, and therefore can be doing better things. They've put automation in terms of processing invoices more quickly, and cut out some of the sort of bureaucratic steps they had. They've educated their suppliers. So they get supplies in early doors and talk to about what they need to do to get paid. So there's an understanding, so we don't have this this gap of what has to happen. And they've done a lot of education internally around what the business needs to do to make sure suppliers do get paid. And what that means is that there's now a complete change of culture, within the business around how they treat their suppliers.
And for me, what's interesting about all these conversations, and there's lots of examples like that, is that part of this is around, you know, improving the payment process. But actually, it's more about how you work with your suppliers. So it's around the relationship rather than just the payment transactions. And what we see is that businesses that are good in the payment space are also good in the partnership space of helping them with the research and apprentices and shadowing people and all sorts of things where they work together. And that for me is the key. If we can get businesses to be working in partnership, and having collaboration rather than confrontation, then we start to win.

Louise 06:56
That's really interesting, it’s like that two-way approach and that really cultural transformation. It's not just about the processes and the invoicing department, it's much wider, organisation-wide. And it's interesting, one of the things he talks about there was automation. And I'd be interested to get your view on having worked in the financial industry and in credit for several years, what difference you've seen in the increased adoption of automated processes and what impact that's having on the sector?

Philip 07:21
Well, I think we're seeing much more automation, obviously, in the processing of paperwork, because that's where it's easy, isn't it? It's robotic, and you can replace human actions with machine actions. So we're seeing it there. I think we're seeing it much more in the sense of credit assessment and risk assessment. What I'm seeing from conversations with people is that they're trying to automate if you like, the routine, and the volume stuff, which means they’ve then got more time to spend with the key decisions that are much more important and much more impactful.
I've always said that, you know, you only know how strong the balance sheet is when you see how thick the dust is on the stock in the warehouse, because that tells you how long it's been there. And actually, if you want to have a serious relationship with a customer, looking them in the eye and talking to them is the best way of establishing that initial rapport. And you can't do that with the volume accounts. So if you can automate the things you need to do for the volume, then you've got much more time to put and devote to the really important areas. And in doing that, you then start to go through the process, which I believe credit management is all about, of adding value to the business, because you can spot the opportunities for growth. And you can find ways of building the sales operation, rather than just worrying about what is often perceived as restricting sales credit was only designed to deliver sales. Why else would you give people time to pay? And so we need to recognise its power in delivering that for business.

Louise 08:46
Thank you. Your new role in the office of the Small Business Commissioner to give some of our listeners who may be outside the UK or not aware of it's an independent body set up in 2016 I think, as part of the Enterprise Act. Can you tell us more about your remit at the SBC and what you're doing there to support businesses, small business.

Philip 09:04
So the Office of the Small Business Commissioner was set up under the Enterprise Act. The first one was appointed in 2017, following the act in 2016. Its role is, its remit is to signpost advise and support small business, particularly in the area of payment and relationships contractually with their large customers and to mediate and investigate where that breaks down. So the team in Birmingham that I now look after, has collected 6.7 million pounds so far for small business by mediating and talking to suppliers. And of course, what we find is that when we talk to them, you know, it's a bit more powerful than the individual supplier talking to them so we get more impact and we often get a fast result.
But also we have the power to name and exploit and highlight bad practice. So we've issued a number of reports most recently with Bombardier back in February this year where we have it identified poor practice, and we then go public and report on that. And we do that for two reasons. One, because it's important that bad behavior is called out, then the second is that we want businesses to change. And it's a way of encouraging change and building better relationships. Coupled with that the Small Business Commissioner is now taking over the prompt payment code. And that was introduced and we the CICM always promoted that as a good thing to do, simply to get late payment measures in one place. Because we're a small business. It's really confusing to know where to go when you've got a problem. So the more you can create a one stop shop, the better. So that's now there as well. So we'll alongside the world we already do. We'll be looking at complaints from signatures about the payment code and investigating those as well.

Louise 10:44
And I know earlier you mentioned the legislation where large businesses in the UK are now required to report on how their payment performance and how they pay their suppliers. And this information is published on the government website. How is this data being used by government and by the SBC and is it having an impact on the behavior? And is it seeing an improvement in the fact that now it's publicly available information?

Philip 11:06
Well, any transparency in any reporting in public is good in your view. And I think one of the things we need to do is to get small businesses know it's there and go look at it. Because if they look at that, and business says it's standard terms of 30 days, and they're being asked for 60, there's no obvious question there, which is, Oh, hang on a minute, why can't I understand the terms you report as being what you do? But the other thing they can see is what their payment terms percentages, and what the length of time they take to pay is. And if you're a small business, and you're going to supply somebody, and the report tells you that on average, they're taking 120 days to pay their suppliers? There's a really strong question there, which says, Is this a good deal to get into? So it's a really strong warning bell. And I mentioned earlier that the SBC names businesses that or can name businesses that aren't behaving and one of the measures we use is to look at that. And when a business says to us, you know, this was a one off normally we pay on time, and they're reporting you know, 61% of invoices paid outside of the agreed terms, there's a disconnect there, which tells you that that's actually not the reality. So the prompt payment code is used over the last year to identify compliance with the commitments that are made under the code and will continue to do that. The Small Business Commissioner uses the data just to see when they get a complaint, what the general level of behavior of business is, to help us guide our thinking, and to work through that. And government is using it statistically, to look at how businesses are behaving. But certainly not from the payment code perspective that I've been personally involved in, we've seen as I was talking about Lego rock, we've seen some dramatic transformation in shifting and moving and improving. And that's good. And the test for me now is where we've seen an improvement, does that improvement continue in future reporting periods, or does it slide away again? And I guess what I'm saying is the change fundamental and real or is it just token lip service to get to a point where it seemed to be good.

Louise 13:00
And that's happening isn't it, across different industries in different aspects of business, really, that increased transparency and the reputational element of it all. But also, if things are more transparent and open, it puts that pressure on businesses to take a look at their own practices. Things like, you know, the small business lending data becoming available and things like that. It's much more, there's much more transparency in the industry as a whole, I think which for me, it seems a positive thing for businesses, especially smaller businesses who haven't necessarily got the comeback, and the visibility until it's transparent on a website.

Philip 13:30
Absolutely. And you know, you could argue that we put it on our website doesn't do anything. But you know, we've seen modern slavery, gender imbalance, all of those things that are going on. Now, climate change is a big one. And all of these things do have an impact on business behavior. And I think for me, paying suppliers on time making them sustainable, is no less CSR than turning the lights off or cutting down less trees. And we need to make sure that businesses see that and the value of that and the importance of that. And you know, for a small business not being paid often, it's whether they pay the mortgage next month, not whether or not some invoices are ticked as being paid. You know, it's this isn't around getting something off the ledger, this is around their livelihood and paying their employees or, you know, paying the mortgage or whatever it might be. And we have to recognise the huge emotional impact, late payment can have on businesses.

Louise 14:16
Yeah, we've done – Dun & Bradstreet has done a couple of surveys the last few years with small business leaders – and that's a key thing we've asked about is, you know, people have had to dip into their own personal savings or as family and friends and it's got a very real impact on their lives, as well as that their business in the future of those that work for them. So it's a big issue.

Philip 14:34
It is. I think, you know, the likes of Dun and Bradstreet have a really important role to play here in terms of the data that you put out there in terms of payment performance, and so on, which looks even more detail than some of the stuff they have to do publicly. And I think we need to educate small businesses about what's out there that helps them to have a guide and a warning about what they might see when they start trading to somebody. Not all business is good business. If you're not getting paid for it, you're just throwing money away. So you know, think about that before you start,

Louise 15:01
The thing we've heard from small business, as well as that they don't often have the choice. If it’s the big companies that aren't paying very well, and they say, well, actually, we know they don't pay very well, so we could choose not to supply them, but then we'd lose a huge amount of money. So it's kind of we're stuck between a rock and a hard place in a way because we want that business. But with that comes the risk of potentially not getting paid and having enough cash flow.

Philip 15:21
And that's very true. And that's a very true fear. I fully understand that. But I think small businesses often underestimate their own power. I guess it depends what you're supplying clearly. But at the point at which a large business says they want a small business to supply something they want, whatever it is, they're asking them to supply. And at that point, there needs to be a conversation. And this for me is around, you know, business being partnership, communications, relationships, all of those things. And generally, if a small business at the early doors has a conversation with the larger business, there are things that can be done, you know, there's always a quid pro quo. You know, if I give you longer terms, can I do less deliveries or bigger orders or, or one color rather than the five colors or whatever it might be. And those conversations need to happen. And I think there's a tendency for small businesses sometimes to think they really have no choice and not to even ask the question. You know, we need to encourage them to recognise that sometimes they do have some power, and they need to use it.

Louise 16:18
And the support of obviously, the SBC in the CICM can empower them to do that. And that availability of information, as you say, in the education of what data is available to help them have those conversations is really key. Excellent. Thank you. And that's sort of linked to my next question really was going back to your time as a credit manager yourself and with a CICM, what credit and finance teams can do to track and verify the payment performance to help mitigate that risk and make the decisions on who they're doing business with? I know, we've talked about that already, to a certain extent, but what sort of things you're seeing around credit departments, behaviors and actions that they are taking to mitigate that risk or to change behaviors?

Philip 16:56
Well, I think the data is absolutely vital. I mean, we all know that data is getting more and more important. And one of the challenges I always throw out to credit professionals is, you know, you know, who hasn’t paid you and you're chasing that and you get money in. But do you notice if you get paid one day later each month for six months from the same customer, and for me, the smart ones do, because that's a really telling sign. You know, and if you look at all the failures over the years, going back to Woolworths and comment and all of those, if you look at the Dun and Bradstreet data for those businesses over a period of time, you'll see that the payment trend deteriorated over the preceding 12 months before they collapsed. And that's not a coincidence. That's reality. And so professional credit, people look at this sort of data and trend it and watch it and react to it. If they don't do that, then they're missing a real opportunity. And often the best data you've got is your own data. You know, is it getting slower? Are more invoices being disputed, you know, all of those things that suggest there's some sort of tactic going on to either reduce the amount being paid or slow, down the amount being paid.

Louise 18:01
Thank you. I know we've got limited time today so I've got one final question. If I may, we always ask our guests, if there's one piece of advice you have for our listeners, for the business leaders or industry stakeholders that are listening, maybe in terms of payment performance, or in terms of business, your business experience in general, one piece of advice or something that you've had in your career that's really stuck with you that we could leave them with.

Philip 18:24
Can I hit two rather than one?

Louise 18:25
You certainly can do.

Philip 18:26
Okay, so for small businesses, my advice is recognise there's help available and that's what the Small Business Commissioner's office is there for, we're a free service. So come and talk to us if you're struggling to get paid, or you're getting frustrated by not being paid. For big businesses, my message is very simple, just recognise the impact you have on your supply chain. Behave in a way that supports them and makes them sustainable.

Louise 18:46
What goes around comes around, if you treat people the way that you'd want to be treated as a business.

Philip 18:50
True, yeah.

Louise 18:51
Excellent, Well, thank you very much for your time, Philip, it's been a pleasure today.

Philip 18:52
You're very welcome. Thank you.