Factoring in when things go wrong

03-February-2010

Several contractors emailed Recruiter. One said he was owed 11 days’ pay, another said he was a month out of pocket. Several complained that the company had failed to warn them of impending difficulties.

While it could be argued that Albany is a one-off, the case has added to a growing sense of unease about whether the supply chain within the recruitment sector is fit for purpose, particularly in today’s still difficult economic times.

For Tom Hadley, external relations director at the Recruitment and Employment Confederation, the Albany situation highlights the need for greater financial transparency so that recruiters and contractors can assess the risk of dealing with individual master vendor of neutral vendors.

“We need to make sure that people, whether they are recruiters or contractors, are not left in the lurch when things go wrong,” he says.

Hadley suggests the creation of a group of second-tier suppliers, who could work together to encourage vendors to adopt a code of practice.

“This would provide reassurance to both the second tier suppliers and clients.” He says the American Staffing Association has been working on similar lines with its agencies after Chimes, a US master vendor, went bust.

Hadley argues that the neutral vendor type model is a relatively new one, but hopefully one that will mature over the next few years. “It’s in everybody’s interest that they are sustainable,” he adds.

Iain McIlwee, head of commercial development at the Professional Contractors Group, agrees that the more transparency the better for all concerned. “The supply chain from contractors up to all the end users needs to work together more closely,” he says.

Others working in the industry see the Albany situation as indicative of a wider malaise that threatens the health of the sector.

“The Albany story is just the tip of the iceberg,” says Frances Lewis, head of law firm Osborne Clarke’s recruitment sector team, who believes it is indicative of how worried the banks are about lending into the recruitment sector generally. “They feel there is a real cash flow problem,” she says. “Part of this concern is expressed by withdrawing funding when end users extend payment terms,” she adds - as happened with Albany.

She says the case raises concerns about the model whereby recruiters habitually raise finance on the basis of invoices raised.

“Recruiters are so highly geared and so dependent on invoice discounting that the recruitment sector has been hit particularly hard,” she says.

This has been exacerbated by ’pay when paid’ clauses in the contracts between recruiters and RPOs, which means that lenders are less willing to lend to recruiters because don’t have any debts to lend against.

“Funding based on the value of invoices works well in the good times, but far less well in times of financial stress,” she says.

Stewart Davis, managing director of Recruitment Vendor Solutions, adds: “’Pay when paid’ clauses are a massive problem that should be illegal.”

However, not everyone believes that too many lessons can be drawn from the Albany case. Matthew Sanders, managing director of temporary staff procurement company de Poel, says that Albany is simply one company that is going through financial difficulties.

Furthermore de Poel’s clients cannot just extend payment terms unilaterally as they have a contract with the company, he says.

While the Albany case raises wider issues, it is difficult to see a quick solution to address the underlying problems in an often long and complex supply chain.

Clearly, while banks say they are ready, willing and able to lend to the recruitment sector, the Albany case suggests they remain nervous.

It may well be that it is economic recovery and a more relaxed stance on behalf of lenders that oils the flow of cash on which this sector in particular depends.

Key Advice
Advice for Contractors

• How can I reduce the risk of working with managed service companies?
• Do your due diligence
• Keep your ears close to the ground
• Speak to other contractors
• Join a trade association
• Consider insurance
• Remember even after carrying out all the checks doing business is inherently risky