Today the Wall Street Journal published a great article by Angus Loten about a critical issue in successfully building a small business – getting paid. The article goes into great detail, but in a nut shell it says that companies are getting slower and slower when it comes to paying invoices. Small businesses typically have to wait 45 days for payment and in the article, they give one example of a business that waited 404 days. Over the years working at Intuit I spoke to thousands of small businesses and this was a frequent topic. Very small businesses struggled to stay on top of paperwork and invoice promptly. Once they did invoice, often companies wouldn’t pay on time and they had to remember to follow up (often several times) to get payment.
What the article doesn’t hit is that not only is slow payment a problem, bad debt is also a problem. As a small company, you can expect that some percent of your invoices will never get paid. This is a huge issue when you factor in the sunk cost in time, materials, payroll, and missed opportunities (customers you didn’t work for).
What really struck me when I read this article is that this issue never comes up when I talk to OnForce Pros… at least about the part of their business that they get from OnForce. This is a problem that dates back to the invention of credit. I love that the OnForce business model has solved this. Here’s some data on how OnForce compares to the typical experience that the WSJ describes:
- Zero unpaid work orders! During the last few years of economic turmoil several of OnForce’s customers have gone out of business. During that time not a single work order went unpaid due to lack of funds.
- Paid in 54 hours! Last check, on average, OnForce Pros get funds credited to their account 54 hours after they mark a job as complete. That certainly beats 45 days or 404 days.
- 99.97% of work orders paid in 30 days! As of right now, we have about 1.2% of completed work orders that haven’t been paid within 5 days. Looking out to 30 days, we have 0.035% of completed work orders not paid. That’s less than 4 work orders for every 10,000 completed. Each of these is actively monitored as we help the two parties work through the dispute.
We constantly hear stories in the press and on TV about small business lending and access to capital. While this is a critical issue, imagine how much easier it would get if businesses weren’t investing funds up front to pay workers, buy materials, and do work, only to wait for weeks/months after completion to get the revenue associated with that outlay of capital. Small business success will be critical to reviving our economy and cash flow is at the heart of how small businesses start, grow, and thrive. I’m happy that we can help in the IT industry.
Related: ZDNet covers the OnForce index of economic confidence
Guest blog post by Dan Shedd, President of Taylor Box Company
The only way that companies get to stick around in a competitive industry like ours is to evolve quickly with emerging customer needs and to never settle for second best. We’ve been in business for 126 years and counting and a key to our success is staying ahead of the curve and delivering quality customized boxes that make our customers’ products stand out.
Technology is a core component that supports all facets of our business. Our challenge is that we manage a mixed environment of PCs and Macs. Our PCs (8-10 of them) manage our ERP system and our design studio uses MacPro Laptops (3) and a MacPro tower. We’re growing (up more than 20% last year) which means that we’re bringing in more designers – and more Apple workstations to field new customer demand.
Back in December of 2011, I visited our local Apple Store retail location to talk to them about our company; the best way we could keep our current Mac systems on the cutting edge and what new hardware we should bring in house as our team expands. Based on the input I received from an in-store Apple associate, this is what we did:
- Purchased a new Mac Pro tower, with enough horsepower (Dual 2.66 GHz 6-Core Intel Xeon) and features to arm our design team with leading edge technology and capabilities that would keep us ahead of the curve and last us for years.
- Purchased a new Mac Pro laptop, also with abundant processing power and features.
- Found an Apple Certified technician through OnForce Services, who would help us set up, configure and integrate our new Apple technology into our environment and ensure that all our Apple systems (and software) were up-to-date and properly configured for top performance.
We managed our last Apple upgrade internally and it was a mistake – it took staff away from client work; the process took forever and the install wasn’t optimal. The process was incredibly complicated and challenging – especially considering our mixed PC-Apple network environment, legacy peripherals and software apps. This time we couldn’t afford to make the same mistake and risk a delayed update process and possible system outages. It was crucial to reduce the implementation time window as much as possible. The answer was to bring in an Apple expert to handle it for us. I was happy (and relieved) that the Apple store staff could now put me directly in touch with a technician through OnForce Services – at the same time they were writing up my order. The technician from OnForce Services was extremely knowledgeable and delivered tremendous value. He arrived on time, with the necessary tools and was able to manage our upgrade and implementation quickly and effectively.
We’re always looking ahead in our business, and I absolutely plan to tap Apple Retail and OnForce Services for our next upgrade. (In fact, I’ve already recommended the service to several colleagues and highly recommend OnForce to you). Simply put: get the right technology for the job (Apple); get a quick, optimal installation (OnForce Services) and get back to work for your clients (us – Taylor Box).
Every morning I make tea, turn on the TV for news of the world, and I pop into Google Reader/Twitter/Google+ etc. to see what’s happening in tech. This morning I came across an interesting article by Jason Hiner for TechRepublic and ZDNet. In the article he talks about the huge IT build up in the 90′s, the dot com crash, and the current situation. The thing that caught my eye is that he talks about the disruption of the traditional IT department and the resultant shift to independent consultants and outsourcing. He says: “We’re going to see most of traditional IT administration and support functions outsourced to third-party consultants.” At OnForce we see this trend in action every day and so I couldn’t agree more with the conclusion However, I think Jason missed an opportunity to talk more about the advantages and challenges of the new model. Change is opportunity, but it’s rarely easy.
Here are four key advantages of using independent contractors:
- Pay for results, not time. In field services, employees in large organizations generally average about 60% utilization – meaning that 40% of the cost of those employees is wasted. With independent contractors you can structure agreements to pay for outcomes and not time… and even if you pay for time, you pay until the job is done, not for the gaps between jobs. This is particularly important for businesses that have spikes in demand. For example, the retail industry has a real spike in IT work over the summer to get ready for the holiday selling season. If retail chains tried to handle this with internal staff, they would be faced with huge demand over a few months resulting in lots of overtime, extra hiring and training, or failing to fully execute. The only practical way is to leverage independent contractors.
- Geographic reach. With improved collaboration tools, video conferencing, and an increasingly mobile workforce, businesses have more locations than ever before. Whether that’s a result of acquisitions or a telecommuting plan it’s an IT challenge. Using local, independent contractors eliminates the need to pay employees to sit in airplanes watching Harry Potter and eating peanuts. One of our clients is in the business of providing medical devices in clinics and has hundreds of locations to serve. It’s frightening to imagine the travel schedule for an IT team to cover that territory – and even more frightening to think about gas expenses.
- Talent. With technology changing so rapidly (Google+, tablets, smart phones…) it’s increasingly difficult for an IT team to maintain expertise in everything. Specialization is increasingly important. By using independent contractors you can hire the right person for each job. Further, with the commoditization of some IT jobs, sometimes the best person for the job is the new grad just starting a consulting business and not the seasoned network engineer. By using independent contractors and matching the right expert to the right job, you end up getting a higher success rate on the job, reducing follow-up calls, and you can avoid overpaying by selecting the right talent level. Maybe the most important point about talent is that many of these independent contractors are real entrepreneurs and unbelievably skilled at what they do. I’ve spent lots of time meeting OnForce independent contractors and I’ve met some really impressive people with serious expertise and impressive resumes… and not one of these people would ever willingly work for a corporation on an IT team.
- Dealing with Economic Uncertainty. Just this morning, the Boston Globe had a story about a business owner who is optimistic about his business, but unwilling to hire due to all the economic uncertainty – compounded by fears that we won’t reach an agreement about the debt ceiling. We have been hearing variations on this theme throughout 2010 and 2011. Businesses were burned by the economic crisis of 2008 and layoffs are still painful memories that no one wants to repeat. Using independent contractors is a great way to allow your business to capture opportunities without committing to a high, fixed “burn rate” with lots of new employees, salaries, and health care costs.
And there are challenges when using independent contractors that don’t come up/aren’t as important with employees:
- Insurance: Using an uninsured independent contractor makes you liable for whatever happens on the job. Further, insurance is confusing. Often, a contractor will say they have insurance, but it may not cover the work they will be doing for you or their own sub-contractors that they bring in. The stakes are large. When something happens on a $1,500 job (and eventually, it will) you may lose your business if you don’t have insurance coverage.
- Contracting: You should make sure you have a clear legal agreement. Managing and updating agreements across hundreds or thousands of independent contractors can be a nightmare.
- 1099s: At the end of the year are you ready for a mountain of 1099s? Also, be careful in preparing them. The IRS is surprisingly efficient at doling out penalties for errors.
- Quality: If you need a contractor to convert your office in Akron to VoIP phones, how do you find the right person/company to do the job? How do you verify that they can do what they say they can do?
- Pricing: So, what should you pay for the project in Akron? How do you know what a fair price is? You probably need to get three bids to find out what’s fair. If you just get one bid, you expose yourself to paying too much. Of course, you should also be careful about choosing just on price. The cost of rework can undo any savings you might have hoped for.
- Management: Once you have an agreement, how do you keep tabs on the project?
There are huge benefits to using independent contractors and significant challenges. Visionary CIOs and service leaders are going in “eyes wide open,” addressing the challenges, and reaping the benefits. I’m excited to be a part of bringing this new way of business to the main stream.
I just read Elizabeth Dwoskin’s New York Times article on the challenges freelancers can face in getting paid. It is tough to read because she profiles two stories where non-payment causes significant personal hardship. In one case, Romulo Saldana collected $34k in IOU’s for back pay over the course of five years working in construction. So, with $34k less to spend, he made hard choices. He wasn’t able to send money home to pay for his teenage daughter’s middle school or pay for a caretaker for his 90 year-old father.
Historically, we’ve talked a lot about how OnForce’s innovative model helps buyers deliver high quality services at substantial cost savings vs. alternatives. It’s a great value proposition that allows service buyers to pay for IT or CE work 1 hour or 1 job at a time anywhere in the US or Canada with whatever skill set is required…. but it only works because there is a two-sided value proposition. If service providers aren’t excited about the value OnForce brings then the service buyer value would disintegrate. Both sides have to work.
So, what does this have to do with Elizabeth’s article? Well, while I was reading I couldn’t help but think about the benefits OnForce delivers to our service providers. There are three that are top of mind:
- OnForce guarantees payment to service providers. Elizabeth highlights how hard it can be to get paid and in the end, smart contractors have to price non-payment risk into their work.
- OnForce pays fast. Because of OnForce’s innovative model payments get delivered fast – this quarter we’re averaging 52 hours after completion of the work order. I know lots of small businesses that dream of getting paid in 52 days.
- When problems do occur and a payment gets delayed, OnForce has a team of people focused on getting to resolution quickly. Our platform software is very effective at making almost all transactions happen without incident, but sometimes, we need to intervene. Often a service buyer needs a part returned or some other follow up before they can release payment.
Really, the issue of non-payment or late payment is huge. It’s not just an unscrupulous business owner here or there – from what I’ve seen, that’s the small part of the issue. There are real economic issues that make payment issues common.
- Cash Flow: Obviously, this economy has exacerbated the issues with many businesses struggling for cash flow. The business you are contracting with is probably struggling with cash flow because some of the companies they are doing work with are slow to pay them. Even though they might be making a good margin, and have a theoretically healthy business, they can still run into real dry spells when it comes to cash. Another surprising reason for cash flow problems is growth. Winning new business is great, but it often requires up front investment that doesn’t pay back right away. Too much success in the form of new business can cause real cash flow problems.
- Bandwidth: Tied to the issue above we’ve seen companies working to make due with fewer employees. Too many companies had to lay people off in the last couple of years and this makes them hesitant to build up a big workforce again. One thing we see is an over-stressed accounts payable function that can often lose track of a stray invoice that needs paying.
- Lack of organization: Small businesses are often started by entrepreneurs who are excited about their business, not the drudgery of the finances of their business. I’ve visited many small businesses where the owner was a brilliant carpenter/ trucker/ technician/ lawyer… but upon inspecting the mechanics of the business I found complete disarray.
For all of these reasons, good people at good companies struggle to pay on time. The ability for an individual to set out on their own and create a business is an essential part of our economy and only getting more important. These payment issues are a drag on productivity that will continue to hinder our economy. It’s fun working at a company that is building an innovative product that makes a difference on an important problem for so many independent contractors out there.
I can’t open the newspaper or read cnn.com without being assaulted with opinions about the economy. In my first few months here at OnForce I’ve studied our historical business performance. It turns out that in recent months our growth rates for work order volume, revenue, and average work order value are all heading up significantly. So, our business is looking great! Further, I have been out on the road visiting some of our buyers recently and, although there are mixed results, generally I’m hearing about growth and new business.
I’d love to get your view. Is your business:
- Slow growth
- In Free Fall and Looking for the Parachute
Let me know what kind of business you have… are you a large national services company, an independent contractor, or what?
Thanks for the comments.
If you aren’t comfortable with public comments you can also reach me via email at bill.lucchini at onforce.com or on Twitter http://www.twitter.com/wapl