When the Big Dogs Don’t Pay Up

How Seemingly Smart Procurement Practices Can Erode Employee Morale, Undercut DE&I Efforts, and Damage Work Product

Businesses– particularly large ones – depend on outside products and services to keep the company running. From raw materials to specialized consulting, the ability to partner with the right suppliers is crucial to an organization’s success.

However, in the efforts to maximize the value they receive from suppliers, some organizations wind up self-sabotaging, enacting overly stringent procurement policies that have a costly negative impact on employee morale, vendor goodwill, and ultimately, the work product itself.

For example, many large firms require that their suppliers adhere to 120-day payment terms.  While this (obviously) improves cash flow for the purchasing firm, it can create problems on the supplier side that ultimately radiate back to the purchasing firm.

In our work with several multi-national companies, as well as numerous smaller firms, we’ve observed three ways these types of overly aggressive procurement policies create very real, and very costly, off-balance-sheet consequences for the companies buying the products.

It undercuts well-intended DE&I commitments
It’s well documented that women- and minority-owned businesses have less access to capital. Often, smaller firms simply can’t afford the cost of doing business with large corporations.

For example, for a recent project with one of the world’s largest technology companies, we (a small, woman-owned business) had to front the cost of extensive international travel, subcontractor trainers, and training materials for hundreds of people. The total upfront expenses were well into six figures, and we didn’t get paid for 100 days, despite a pre-approved PO in place.

Ten years ago, we couldn’t have afforded to even take on this kind of negative cash flow. We valiantly attempted to negotiate better terms, but this was the multinational’s standard policy. Deviating would have delayed our project or forced our client to find another firm who could comply with their terms.

An analysis by Zurich determined that big companies are usually to blame for late supplier payments, finding that 53% of late payments owed to small businesses are from companies larger than themselves. 45% of small businesses waiting on late payments said they are forced to wait as long as three months to get paid, and 14% said they’ve waited a full six months.

These policies can be an unseen Achilles heel for organizations otherwise committed to diversity, equity, and inclusion. Shutting out smaller, less capitalized businesses causes an organization to miss out on innovative suppliers with unique solutions.

ACTION: Review your current terms and conditions; if your organization requires vendors to carry upfront costs for longer than 30 days, advocate for interim payouts. 

It dampens the actual work product
When large corporations negotiate contracts with each other, the teams arguing about pricing and terms are usually finance-to-finance peers; these procurement employees have one job: get the best deal. They’re not the people who are going to be doing the actual work. However, in smaller firms, the people getting beaten up on the contract are often the very same people who will be doing the work.  When the buying firm plays hardball, the emotional impact on the supplier has consequences. Beyond making the supplier less enthusiastic and less creative, they’re also forced to cut costs before the project even begins.

Sometimes these decisions are conscious, like putting less experienced (lower-paid) staff on the account. Sometimes they’re unconscious, like being less willing to hop on a last-minute call or go through another round of edits.

Plus, vendors talk; when a big company has a reputation for being difficult to work with, suppliers make decisions about what to cut (and what to up-charge for) before the deal is even presented.

ACTION: Ask your vendors to honestly assess how their team experiences your procurement process. Go beyond finance; ask your supplier’s salespeople and the people who deliver the work. Identify at least one point of friction you can eliminate or streamline.

It erodes the morale of your internal employees
Imagine a division leader has just chosen a vendor to manage his upcoming important customer conference. The vendor is excited about the project. The scope of work is agreed upon, but now, the division leader has to break the bad news. He says to his new supplier, “I’m looking forward to working with you, but I want to apologize in advance for our purchasing department. You’ll get paid eventually, but it’s a rough procurement process.”

This isn’t a hypothetical scenario. It happens regularly to one of our clients. He says, “Instead of capturing enthusiasm and momentum for working with us, I’m starting off negative. Over time, I’ve learned it’s easier to address at the beginning when people are most excited, rather than have it get ugly later. But it’s always awful.”

Front-line leaders pay an emotional price for the procurement policies designed by people far removed from the working relationships with vendors. Continually having to apologize on behalf of your organization erodes morale and engagement.

ACTION: Ask front-line leaders who regularly purchase outside, what impact does our procurement process have on your ability to work with suppliers?

Overly aggressive payment terms and stringent procurement procedures that make sense on paper can have an ugly underbelly. While the impact of these policies may seem to improve this quarter’s profit, over time, they are quite costly.