Recasting internal relationships: silo or stakeholder? #trade

First published in Trade & Forfaiting Review, April 2016.

Michael Vrontamitis explores how banks and clients can work together to achieve internal stakeholder alignment

Conversations abound on the importance of ‘relationships’ in business, particularly in international commerce which crosses not only geographic but also cultural, linguistic, legal and numerous other boundaries.

Bankers speak of the distinction between transactional and relationship focus, and aim to be client-focused, however, the reality is that in many cases, these are little more than conversations – not even particularly serious discussions – with limited translation to specific actions or solutions.

In trade financing, the importance of relationships is perhaps decently appreciated because of the cross-border and cross-boundary nature of the business, and the global reach of the clients we serve, from the most mature multinational to the increasingly common start-up with immediate international aspirations.

The near-global shift to trade on open account terms, which led directly to the evolution of trade financing in the context of global supply chains, now commonly referred to as supply chain finance (SCF), and broadly viewed as a superset of traditional trade finance products, has motivated a holistic, ecosystem view of international commerce, as distinguished from what was generally a bilateral, one-buyer, one-seller view.

 It is in the context of global supply chains and their often complex web of commercial linkages that the practical, substantive and economically valuable nature of relationships comes sharply and undeniably into focus. So much so, in fact, that the deployment of certain types of SCF by leading practitioners has motivated a recasting of internal company relationships within large multinational buyers, particularly when they seek to develop an SCF programme aimed at providing liquidity to their strategic suppliers.

SCF providers (bank and non-bank) along with treasury and finance executives on the corporate side have come to appreciate the fundamental importance of breaking down internal silos between areas like finance, procurement, sales, logistics and IT among others, in order to achieve improved alignment of objectives and shared buy-in during the deployment of an SCF programme.

Figure 1: Stakeholders/silos in the supply chain

Breaking down silos

The process begins with dialogue and increased awareness of the respective activities of each ‘silo’, but ultimately in a best practices scenario, should extend to some level of consistency. This could entail alignment of key performance indicators (KPIs), if not at the level of each department, perhaps one level up, somewhat closer to an enterprise-level alignment.

Bankers have noted that the dialogue initiated with treasury and finance leaders in large corporate client organisations has led to scenarios where the financial institution has facilitated introductions across the silos, and enabled the discussion required, to arrive at an enhanced level of alignment and a better appreciation for the complementarity of activities when taking an enterprise view.

 While KPIs and performance incentives within a particular silo can be contradictory to those applicable in a neighbouring department, leading to scenarios where one department delays payment of approved invoices, and another advocates for accelerated settlement on the basis of ensuring the commercial health of strategic suppliers, a legitimate distinction to make is to consider the difference between a performance indicator and a key performance indicator.

Supply chain management best practices argue compellingly in favour of establishing a limited, manageable and carefully selected set of KPIs – aligned and shared across departments, while recognising that a layer of additional performance indicators may be necessary to assure the effective running of each silo or department. Leading practitioners advocate the use of the MECE framework in consolidating and optimising KPIs. This seeks to identify and retain KPIs that are ‘mutually exclusive, collectively exhaustive’, in a bid to eliminate overlap in KPIs and avoid KPIs that rely on the same underpinning data (suggesting that they measure outcomes that might at best be incrementally different).

One concrete illustration of the context in which internal stakeholder alignment – and KPI complementarity – is important, is in the context of relatively popular and well known payables-based SCF programmes, one variation of which is often referred to as supplier finance.

Implementing supplier finance programmes

In such programmes, a large corporate, often a multinational buyer ‘anchor’ or ‘network’ client, works with a financial institution to leverage the anchor’s credit capacity and established relationship to facilitate access to financing for (strategic/selected) suppliers. Supplier finance programmes can be complicated to deploy, not least because of compliance requirements related to the participating supplier community, but also because they require internal silos of the buyer to become stakeholders in the programme, and to align on success metrics.

Payables-based SCF programmes allow suppliers to request discounting and immediate payment of invoices approved for payment, whilst permitting anchor clients to extend their payment terms without adversely affecting the financial health of the supplier community.

Supplier finance programmes in the early stages saw limited take-up and usage by suppliers, with successful programmes reported to achieve usage rates in the 30% range only five or six years ago. Today, a successful supplier finance programme can reach facility utilisation rates in the 90% region at any given time. The growth and popularity of such programmes creates an imperative to ensure that the metrics and success criteria support the strategic objectives of the enterprise, with appropriate alignment across internal stakeholder organisations.

While the finance function may be driven to achieve balance sheet outcomes and to target a range of financial ratios deemed ‘healthy’ by the capital markets, for example, the procurement function may see it as critical to manage strategic supplier relationships for health and sustainability (and assurance of supply), with priority focus being on the mitigation of the risk of supplier failure.

A fundamental consideration in the recasting of internal relationships is to ensure that siloed views give way to a shared ‘bigger picture’, enterprise perspective, allowing for the selection and definition of a manageable set of complementary, aligned KPIs. Internal alignment, starting with communication and visibility, and progressing to aligned success metrics, strengthens the foundation on which a global ecosystem of commercial relationships can be developed, sustained and grown over time.

The discipline of recasting internal relationships is fundamentally important to achieving and sustaining a world-class global network of value-creation within the frame of a complex international supply chain.

Relationships do matter.