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Terms, Conditions, Trust & Judgment

June 10, 2010

Trust, according to Keld Jensen, CEO of MarketWatch, is at an all-time low. “It has fallen by 44% over the last ten years,” Jensen claims. And trust in multi-national companies is especially low – beneath even politicians.

Right at the top of the trusted list are NGOs – essentially, if you want people to believe you, it is best to be seen as relatively independent of financial motivations and to be linked to ‘a cause’. This is important to remember in today’s mass communication age; it is very hard for a large corporation to win in a battle with an NGO, regardless of the truth.

To what extent is this negative view of big business justified? Clearly, for many people, the financial crisis and debates over bonuses and executive compensation have seriously undermined belief in the integrity and moral standards of business leaders. It is disappointing that none are emerging to propose a new way forward – though perhaps that is an issue of newsworthiness (we must certainly not forget the role of media in this ‘battle for truth’).

But there are wider issues in corporate behaviour that rightly cause concern. A recent example arose at IACCM’s European conference. One session looked at the way negotiations have been impacted by the recession and highlighted the areas where terms and conditions came under greatest pressure. Payment terms was of course one of these – dominant companies used their power to impose substantially longer payment periods (for example, in the case of one major brewer, extending them to 120 days).

Actions such as this inevitably generated negative comment. At a time when small and  medium businesses were struggling to remain afloat, generally unable to access bank funding, the world’s top companies were busy making a bad situation worse by starving them of cash flow. The politicians then became interested; France passed a law banning such extended payment periods and the European Commission is not far behind.

Many would criticize leading companies for such behaviour, not only for its moral implications but also because it would seem self-defeating. How can a one-time cash flow boost be worth all the negative press, the supplier alienation, potential supply disruptions etc.? So one might expect that an audience of contract and negotiation experts would take the view that this step was ill-considered and not ‘good practice’.

But no. The reaction was instead of outrage that ‘freedom to negotiate’ was being undermined by regulation (no one seemed to ask what ‘freedom to negotiate’ actually means for most small / medium businesses). Immediately the audience fell to discussions about ways to circumvent such ‘unreasonable’ regulation. “We’ll move our payment centers out of Europe”, declared one, “And make our contracts subject to the laws of non-EU countries”.

I am saddened by such reactions, not simply because they question moral judgment, but because the audience did not seem willing or able to evaluate the underlying economics of the situation. Anyone spending a few minutes on this would realise that most of the large companies which extended their payment periods actually missed a golden opportunity to both raise their reputation and favourably impact their bottom line. The one-time cash benefit of a longer payment period is dwarfed by the potential for price reduction or other benefit that might have been negotiated by reducing the payment period. And think of the positive press such a step could have generated, the goodwill that might have made that company buck the trend of falling trust.

Trust is critical in winning business and developing collaborative relationships. At a time when there is pressure on everyone to show their value, contract managers and procurement staff must start to assess the true economics of their contracting practices and term and condition choices. If we don’t even do that, then what exactly is our purpose – simply to implement other people’s rules, regardless of how ill-advised they are?

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