Working From the Roots Up
In our recently published blog posts “What is Multilateral Netting,” “Regulatory Issues in Netting,” and “The Technical Hurdles of Netting” we discussed the advantages of a structured netting process for businesses. If everything runs smoothly, this process is fairly straightforward: payables and receivables of all subsidiaries are reconciled, everything goes into one pot, and everything gets paid.
However, we also established that the reality can be far from straightforward. What happens if a company enters a receivable but the counterparty refuses to pay? Before you know it, you end up in a situation in which one company is waiting for their money while another is living off “borrowed funds.” For the treasury this means that the groupwide overview is clouded. Planning data becomes unreliable which in turn makes it virtually impossible to forecast accurately who will require liquidity and who has surplus liquidity. Such disputes can remain unresolved for a long time and cause a business serious harm.
The crux of the matter is that out of a sum of $5 million as little as $10 might actually be contested. Nevertheless, this prevents the subsidiary in question from touching the entire sum they’re due and the money is essentially “stuck.” At the same time, the reasons why invoices are left unpaid are often almost trivial: a company had misquoted the price; something wasn’t actually ordered; a shipment never arrived or an invoice simply didn’t get delivered. The sad truth is also that some companies do things in intercompany trade they’d never dare with a third party.
So what happens if two companies cannot agree: unfortunately, in a large number of cases the answer is simply “nothing.” Each party involved insists on their point of view and more often than not it comes down to the simple question of who’s now actually responsible. Worst case scenario is that no one feels responsible and conflicts are dragged out for months, simply because no one intervenes. The result is a real “email battle,” without any clear authority that would take charge. What businesses need in this context is a clearly structured dispute management process.
We therefore recommend a netting process in which all receivables are entered and must then be confirmed by the counterparty. However, what is even more important is establishing rules defining what happens if mismatches occur. It must be clearly stipulated who is responsible for resolving conflicts when two parties fail to come to an agreement. Ideally, the conflict is resolved at a “grassroots” level, i.e. directly between the two parties involved. After all, sometimes it is as simple as an undelivered invoice. Solutions such as chat functions or the option of uploading documents directly integrated into the netting system are of great help in this context and prevent endless emails back and forth. Each party can easily present their side of the story and provide the corresponding evidence (e.g. an invoice) which can help resolve the conflict.
This is why tm5 offers a netting process based on the so-called AgreementDrivenNetting principle: payables and receivables that match are automatically confirmed and a chat and upload function are available in case of disputes. Unlike with payables or receivables-driven netting, all parties involved have an interest in resolving the conflict as potential escalation threatens. Moreover, tm5 offers clearly defined escalation levels, e.g. based on specific time periods.
Unfortunately, not all conflicts can be resolved at this lowest level. Pre-defined escalation steps can then help to improve the process considerably. For example, it can be stipulated that a case is automatically escalated to the netting center if there is no payment or no reaction after 15 days. After 30 days lower management gets involved, and after 45 days upper management etc. Such rules essentially form a disciplinary process which prompts companies to meet their obligations.
The introduction of such rules can reduce the number of conflicts considerably, in particular when it comes to disputes involving small sums as well as conflicts where the reasoning behind the non-payment is rather questionable when considered objectively. The theoretical prospect alone of a conflict being escalated all the way to the management board has a positive effect on nearly all companies’ willingness to compromise. We even had a case where it was discovered long after the process had been rolled out successfully that the function for sending escalation emails was never actually activated. It seems this wasn’t even necessary as a credible threat was obviously enough to achieve the desired results.
Such a conflict management process also makes it easy to identify certain patterns. For example, if prices are frequently misquoted it might be worth updating the price list. Or when a specific company continues to cause problems, it might be a good idea to visit their offices to find out what is going wrong. Overall, a clearly structured dispute management process in which all parties involved have an interest in participating actively and helping clarify the matter is definitely worthwhile. Pre-defined, clear rules make sure conflicts are tackled straight away and someone always feels responsible. In addition, clearly defined escalation levels not only structure the process but also have a deterrent effect. And if all of this can be achieved directly from your TMS, then all the better!
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