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Opportunity Knocks

by Malcolm Wheatley

For businesses prepared to think outside the box, the credit crunch has a silver lining

These are difficult economic conditions. Scan the business pages and it’s almost impossible to escape phrases such as ‘credit crunch’ and ‘downturn’. Nor is this hyperbole: according to accountants Ernst & Young, the number of profit warnings from UK-listed companies in the first three months of 2008 was the highest since 2001.

Yet in contrast to 2001, businesses have a new weapon to help protect them from the impact of those adverse economic conditions. The question is—do they realise it?

The challenge facing the corporate sector is simply enough stated. As credit tightens, finance becomes both more expensive and (in many cases) more difficult to obtain. Banks that were perfectly sanguine six months ago are now taking a closer look at the risks that they are taking on. And those risks are undeniably greater than they were. A financial meltdown at one point in the supply chain can cascade profit warnings and writedowns far from the point of origin.

And even when the availability of finance isn’t an issue, the cost of it is fast becoming so. Interest rates are rising, and spreads widening.The cost of capital, in other words, is steadily mounting—after something close to a decade of steady falls.

Yet in trying to square this awkward circle, corporate finance functions face an unenviable task. As margins have come under pressure, thanks to globalisation and the arrival of new competitors, businesses have shrunk their cost base, paring head counts to the bone. In short, the resources required to navigate these troubled financial seas simply aren’t there.

Or are they? Take a look at the typical finance function, and it’s easy to spot a cadre of seasoned and knowledgeable employees bogged down with the minutiae of transaction processing. They know the customer base, they know the supplier base, and they’re close enough to the coal face to quickly spot the warning signs when payment periods suddenly extend.

What’s more, they’re also ideally positioned to probe the details behind the payment paperwork that crosses their desks. Are suppliers and freight carriers, for example, actually applying the volume discounts and preferential pricing deals that the purchasing function have negotiated? Do utility bills—such as telephone provision, for instance—accurately reflect the business’s current requirement footprint, or are charges being levied unnecessarily? And do the charges for services that the business receives—marketing support, legal, advertising and banking—reflect the work actually done and the value added?

But bogged down by processing paper-based transactions, finance personnel simply haven’t the spare capacity to devote to answering such questions.The blunt truth is that in all too many businesses, invoices for such indirect expenses are assumed to be correct, and simply processed and paid.

Suppose, though, that the burden of transaction-processing was lifted from these finance personnel. Suppose that they had the time and resources to probe the payments that the business makes—even as they monitor, day-by-day, the payments made to the business by its customers.

That’s the ‘triple whammy’ win-win-win proposition on offer to businesses that outsource their document transaction management to a specialist B2B e-commerce provider. If paper is replaced by electronic EDI-based feeds direct to the business’s accounting, purchasing and finance systems, a whole new payment processing
paradigm is possible. Indeed, it’s a paradigm that specially-commissioned research has highlighted can cut operating costs even as it is boosting customer satisfaction and improving trading partner responsiveness—gains cited by 86%, 78% and 65% of survey respondents respectively.

The administrative burden of payment transaction processing is slashed, for instance—both in direct cost-per-transaction terms as well as employee productivity terms. Efficiency is boosted, too, resulting in an enhanced ability to process transactions fast enough to take advantage—should the business choose to do so—of
discounts available for accelerated payment.

Receivables shrink; working capital reduces; and overheads and direct costs fall as finance people—freed from merely processing payments—are able take on the more strategic role of ensuring that those payments reflect the business’s actual requirements and contractual terms.

The prospect is alluring—and arguably one that wasn’t possible back in 2001, when the economy last faltered.

Yet the parallel is an uneasy one. Back then, even as pioneers of Internet-based commerce were re-writing the rule book, traditionalists were arguing that nothing had changed.Today, those traditionalists are history—or converts.

Paper-based payment-processing still has its adherents. But will they still be in business the next time the economy hits troubled waters?