In spite of all the recent media noise around late payment and its corrosive effect on suppliers, some public sector organisations are still struggling to make marked improvements in their payment performance.
Local authorities face significant difficulties around this issue because of the scale of their supply base and the volume of invoices – not to mention the legacy processes and systems that have long competed for investment and attention. This is in addition to their perennial quest to deliver excellent services with limited resources. Juggling financial priorities and organisational challenges means that procurement processes can be overlooked.
The reality is that, while re-engineering processes to pay suppliers promptly will be of value to councils, there also needs to be a clear commercial incentive. An early payment programme can create this by offering councils a significant financial benefit by applying a small discount on each invoice that is paid early.
Productive use of dormant cash
Fundamentally, it’s a highly effective means of putting what are often dormant council cash reserves to productive use, efficiently extinguishing existing liabilities while generating a fresh revenue stream that can be ploughed straight back into frontline services.
“We recognised that procurement was one area where we could relatively quickly tighten up processes and make better use of technology to deliver tangible benefits for the council and suppliers alike,” says John Betts, head of finance at Warwickshire County Council. The local authority has been operating an early payment programme with Oxygen Finance since 2015.
“What particularly appealed to us about Oxygen’s model was the absence of upfront costs and their partnership approach to delivering real change,” he says.
“Feedback from our suppliers is showing they hugely value prompt payment as a means of improving cashflow. The opportunity to unlock a new revenue stream is proving a real boon for the council, with our early payment programme generating £700,000 of new council income to date.”
Attractive to business
What is more is that benefits extend way beyond the bottom line for council coffers.
Local authorities typically commission services from thousands of suppliers, the vast majority of which are local small and medium-sized enterprises. As such, releasing liquidity into local supply chains enables businesses to focus on growth and innovation as opposed to merely keeping the lights on. This is a big win for councils, which are becoming acutely aware of the imperative for their patch to be seen as good place to do business.
The huge impact of late payment on SMEs needs no further highlighting, except to say it is very often the smallest micro businesses that suffer the most. Councils such as Warwickshire are going further to improve their community stewardship credentials by excluding their smallest customers from charges to access early payment through Oxygen’s Freepay scheme.
Looking ahead, realistically, we know procurement process improvement is unlikely to ever to reach the very top of busy council agendas. The fact remains, though, that it is an area ripe for innovation and offers unquestionable bottom line benefits all round. In our experience, once the incentives to change are fully understood, the barriers become less challenging to overcome.
