The Hidden Costs of Extending Contingent Labor Supplier Payment Terms

When businesses aim to cut costs quickly, a common area they target is vendor payment terms. At Guidant Global, we see this play out in an uptick in companies requesting extended payment terms for contingent labor suppliers.

Hoping to increase short-term cash flow, employers – often led by finance departments– might aim to move from 30 days to 60, 90, even 120 days. While such strategies seem like quick wins at first glance, they hold hidden costs that can have detrimental impacts on the business.

If your business is considering extending payment terms with contingent suppliers, this blog is for you. Read on to learn the full implications of payment term renegotiation, why collaboration with your managed service provider (MSP) and staffing partners is essential, and how you can strike a balance between short-term cost saving measures and overall business health.

Hidden costs of extending staffing firm payment terms

Employers often forget that staffing firms, unlike traditional suppliers, must pay talent weekly or biweekly while awaiting payment. When faced with extended payment terms, staffing agencies must float more capital for extended periods to cover payroll. We estimate that for every 15 days of extended payment terms, costs to the staffing firm increase by about 1.5%.

Because longer payment terms create hardship for contingent talent providers, they are forced to make difficult decisions, including:

Loss of choice customer status or partnership. Customers that have attractive payment terms, such as those that pay at 30 days, are more desirable to contingent labor suppliers. If you propose payment term extensions, staffing agencies will immediately assess whether you are a worthwhile customer. They might decide that you’re no longer a customer of choice or they might end the partnership if the terms just don’t make financial sense.

Service levels and delivery. Organizations demanding extended payment terms may find themselves served by second-tier recruiters or lose access to top talent altogether, possibly impacting critical business areas.

Bill rate increases. Contingent labor suppliers won’t float money for free. Future placements will include the cost of capital. If you’re on a rate card program, your bill rates will increase as soon as new contracts are signed, offsetting perceived savings.

Elimination of cost-saving benefits. Finance departments who propose extended terms might not be aware that their procurement team or MSP have negotiated low bill rates or markup conditions with certain suppliers. These could be rendered moot once new terms are in place. Additionally, staffing firms will be less likely to agree to other cost-saving levers, such as volume rebates or tenure discounts, once you’ve subjected them to extended terms. This could be the tipping point for certain suppliers to walk away. Finally, organizations should consider the cost of retraining required if vendors with business knowledge and skills leave the program.

Cost and business impact of extended payment terms

Changing payment terms isn’t just about a supplier’s willingness to sign a contract. It’s about the people doing the work so you can achieve your business objectives. If those folks go away, what will happen?

Determining how different scenarios mean for your business requires an analysis of business impact and cost. For example, which suppliers will play ball with extended terms for their specific contingent labor programs? How will that affect outcomes and pricing? At 90- to 120- day terms, your top suppliers might not participate. But perhaps at 60 days, they will.

Breaking down the cost of extended payment terms

Cost of extended terms = Invoice Amount × (Annual Interest Rate) × (Days Extended / 360)

Item	Value
Invoice Amount	$100,000
Annual Interest Rate	10%
Days Extended	60
Cost of Extended Terms	$1,66

If you're a large client, the vendor might absorb this. If not, it may show up as bill rate increases, weakened service levels, denial of other discounts, and loss of choice customer status or partnership.

Collaborate with your MSP and staffing partners

There is a fine balance between cutting costs and keeping top talent and suppliers. If extending terms is something your company must do, collaborating with your MSP and staffing partners is vital. To keep top suppliers, consider pushing to 60 days instead of 90 or 120 days, or consider foregoing volume discounts or tenure.

Keep in mind that staffing firms are more willing to extend payment terms for larger programs that guarantee a certain volume of business. For example, a $300 million program will be more likely than a $30 million program to keep suppliers and top talent if they extend payment terms. The smaller program risks losing important suppliers that could be essential to critical business lines.

Before undertaking payment term renegotiations, you must grasp the complexity of labor in your industry and market. Your MSP can help you see the bigger picture. They know industry standards and can help you remain competitive when it comes to attracting the best staffing firms and top talent.

By collaborating with your MSP and your contingent labor suppliers, you can ensure you don’t lose access to top talent for business-critical initiatives or see big increases in bill rates on the back end.

If you’re considering extended contingent labor supplier payment terms, Guidant Global can help you assess the true cost implications and business impact. Reach out to learn more.