Thursday, April 06, 2006

I'll Gladly Pay You Tuesday

Morgan McLintic has delivered a favorite among PR bloggers this week with his how-to list on ways to be a bad client. His last point, on paying late, is one I was just discussing with a friend in another service business the other day. He does foreign language translation work, and he runs into the same problem - companies that think it's okay to pay their bills whenever they feel like it.

It seems that late-paying is an accepted evil of the commercial world and we were wondering just why that is. I can't be two days late with my credit card bill, or not only will I be charged for late payment, but it will appear on my credit record and I will have future problems.

Businesses seem to be maybe half as worried about prompt payment - especially when it comes to services.

Maybe the lack of concern for late payment abounds because when it comes to services, because nothing physical leaves the supplier's "inventory" and enters the customer's facility. Perhaps there's a sense that the supplier hasn't diminished anything with a finite supply, and so there's less perceived urgency. Of course, our hours are in fact in a finite supply, but hours don't have shiny buttons or get packed in fun-to-play-with bubble wrap. But there are plenty of companies that sell product that deal with late-paying businesses too.

So maybe businesses pay late simply because they can get away with it. And it's not irrational to say that if they can, they should. They earn extra interest on their money and can delay paying it on anything they would have to borrow. So as long as the provider isn't diminishing the quality of the offering, it's actually quite rational - especially if they're not charging significant late fees - because, hey, low interest loans are great! Businesses also deal with small companies more often than the average consumer - and small companies are less likely to arm themselves with the tools required to threaten the credit record of a commercial enterprise.

Moreover, in the service industry, smaller companies are forced to take on the risk of getting stuck holding an empty bag because they often feel they can't afford to alienate a client that might spend more in the future. It's usually less costly to keep a late payer (as long as they do regularly pay) than to go out and get a new client.

In the instances in which I've dealt with this issue, only a few times has it been because the company was struggling financially. Usually, it's because of an adminstrative bottleneck.

Sometimes billing departments work on a cycle of a duration different from that which the bills follow - i.e., they pay their bills on the 30th every month and yours comes due on the 15th. They're still gonna pay you on the 30th; they're not afraid of you.

Other times contacts don't route invoices promptly to their billing departments. Next thing they know, there are two of your invoices in their inboxes and they're a bit nervous themselves about dropping them both at once on their accountants. They're afraid of their own bean counters; they're not afraid of you.

So should you try to make them afraid? It's probably not worth it, either.

I've heard a variety of techniques, both stick and carrot, from offering attractive discounts for bills paid on time (euphemism for late fees), to halting work immediately upon a certain number of days without pay, but no magic bullet.

Smaller companies react better to the discount for late payment - but only sometimes. And in bigger companies, the contact often views it as chump change in the grand scheme of things.

Halting a program over debt is like saying you're going to hold your breath if you don't get your toy. Even if the client pays the debt in the end, you've lost ground on your program and the results are less likely to impress them enough to keep them paying you later. So you're the one who runs out of air in the end, not them. Sure, the client loses out too, but again, because they can't physically grasp what they're not getting as a result of a stop-and-go program, they often don't even realize the damage they've done. They figure they can always just go get another firm and start the cycle again.

So maybe that's what we need to do - help them understand what they're losing.

Clients need to understand that when they delay payment, they delay result, and not because of any consciously punitive decision by their firms. Late payers essentially are removing hours from inventory that were intended for the actual work of the account and throwing them toward administration that lends no value to their programs. Clients should see that it is not irrational for a firm to pay less attention to an account that doesn't pay on time.

In short, they need to understand that in most cases, they aren't really "getting away with it" when they don't pay. They're getting away without it.


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