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Tangled in the corporates' own dodgy red tape

Sun, 3rd Jun 2007

COMPANIES ARE quick to complain about the 'regulatory burden', a phrase that conjures up a Yes Minister vision of rules and form-filling that would be comical if it weren't so frustrating.

This is to trivialise it - globalisation and climate change make regulation, in the sense of directing the market towards beneficial rather than harmful goals, critical in the years ahead. Yet there is one kind of regulation that is indeed unnecessary and cramping - the kind that organisations bring on themselves.

Exhibit one is the conditions that big utility companies are currently trying to impose on their customers. Many, for example, add a surcharge of up to pounds 5 a month for those who prefer not to use direct debit. They also charge for late payment, for sending bills by post rather than email and, in BT's case, for switching to another supplier. Mortgage companies have attracted ire over mounting termination fees, while after an FSA ruling on excessive late-payment charges for credit cards, banks have been submerged by a wave of customer complaints about overdraft and other fees.

And it's not just bank customers - a recent survey by YouGov found that 69 per cent of consumers had complained to a company during the past year, many of them receiving no response. A recent report said that 15 per cent of mobile phone users were on the wrong tariff (that is, one too expensive for their needs) the European Parliament has just ruled that operators must cut their sky-high roaming charges.

But let's reverse the roles and look at how big companies treat their suppliers. When they're the customers, it's a remarkably different story. Graydon UK, a credit information agency, polled 500 suppliers to large firms to ask about their payment experiences. A whopping 57 per cent of them reported their big customers had unilaterally altered their credit or payment terms in the past year.

Typically, the changes involved extending payment periods from 30 to 60 days (but sometimes to 90 and in one case 120), or demanding a deduction on invoices received. According to Graydon managing director Martin Williams, this is particularly prevalent in the fashion trade, where Matalan, Marks & Spencer, New Look, Debenhams, Arcadia, Alexon, and Mosaic, have all unilaterally changed supplier rules of engagement in the past year. Matalan reportedly wrote to suppliers saying that in future it would simply deduct 2 per cent from all invoices received.

In their annual reports, such behaviour is concealed in the neutral language of financial management. Here's the 2006 Debenhams directors' report, for example: 'Since the business was taken private in December 2003, there has been a strong focus on cash generation. This touches all areas of the business for example, in improved supplier terms, shorter buying lead times, lower stock investment, a "clear as you go" markdown policy and the robust management of cost.'

Of course, one company's 'improved supplier terms' is another, usually smaller, one's markedly worsened ones.

Retail is a particularly fertile ground for imaginative ploys that allow companies to say they pay on time when, in fact, they don't. Of greatest concern, says Williams, is the practice of 'pay and deduct', where retailers pay on time but deduct a proportion of the invoice, with a follow-up debit note explaining why. For suppliers, especially small ones, resolving disputes is difficult and time-consuming - particularly when, as in the case of Tesco, supplier helplines have been offshored to India. Special pricing arrangements - for instance, for special offers or favourable shelf placements - and hand-offs between buyers and financial departments are also fruitful sources for delay. Among the supermarkets, only Waitrose escapes supplier criticism for such practices.

How do they get away with it? 'It's part of the business culture in the UK - much more so than in Germany or France,' says Williams. 'And it's getting worse as the big firms get stronger.' And, as at Debenhams, the pressure for cash generation in companies that have been restructured by private equity can only increase. Williams estimates that across the economy as a whole up to 50 per cent of bills are overdue, and at any one time pounds 30bn of suppliers' money is sitting earning interest in big customers' accounts.

There's no other way of describing this than as abuse of power - and probably no way of combating it except via legislation that puts the onus on the abuser rather than the victim. In theory, creditors can demand interest from late payers, but who's going to risk offending their biggest customer?

By making life more difficult for the legitimate as well as illegitimate, overzealous regulation does indeed harm us all. But failing to recognise business's own responsibility for the tightening noose of red tape is just corporate social hypocrisy.

The Observer, 3 June 2007


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