All Hail Indexes

Why global payment terms indexes are next

I am a fan of indexes; they are vital to macroeconomists, financial economists as well as any corporate or individual that needs access to a consistent and objective view on the market. Indexes are essential to assess long-term regularities in understanding the behaviour of other market actors and make valuable comparisons. 

Indexes are essential when seeking summary, accurate and rapidly available information on markets and industry sectors. 

The first market index to the best of my knowledge -  was a daily index published in 1884 by Dow Jones and Co’s Customer’s Afternoon Letter, the precursor of the Wall Street Journal. Today, more than 130 years later there are nearly 3.3 million indices focussing solely on the equity markets around the world, according to new research from the Index Industry Association (IIA).

 MSCI creates a vast number of indexes ranging from stock market and fixed income indexes to ESG (Environmental, Social, and Corporate Governance) and sustainability indexes as well as the Japanese empowering women index.

You have the Baltic Dry Index, first compiled in the mid-1800s that measures the costs, availability, and carrying capacity of shipping; Platts Commodity Indexes which provide valuable information on metals as just one example. I’ll go further and claim that the USD/EURO forex rate, the largest traded currency pair by volume, can be classified as an index and of course the PPI (Producer Price Index) which measures change over time in the selling prices received by domestic producers for their output.

Why do we rely on them and why so many?

Indexes in my opinion are our polestars for every market, commodity, or commercial process we are involved in. They are our “you are here” signpost on the commercial map we are navigating.

Take the USD/Euro forex as an example. Now you might be the old-fashioned type that prior to embarking on a European holiday you call up your learned Uncle and ask what exchange rate he received when he toured Europe 18 months ago, but you don’t really do you? You go to an accredited forex provider and get up to the minute data on the current exchange rate.

Treasurers in global multinationals do not call around the corporate market asking fellow treasurers what USD/Euro rate is; they don’t have to because in the greatest cooperative structure ever created aka “the market”, the information is right at their fingertips.

Yes, that’s right, entire markets composed of multiple competitors willingly contribute their data to provide signposts as to price, capacity, activity, and trend such that that the entire market has a bearing point… including your competitors. Indexes are SMART.

Indexes take the pain out of having to guess what the actual market can bear, what the market is bearing with respect to whichever commercial process you need to undertake.

And so; to the mystery which has baffled me for quite some time. When it comes to setting payment terms with buyers and suppliers there is no index or bearing point available for companies of any size in any industry in any region by which to measure your commercial negotiations on payment terms.

Why not? Is it not important enough?

Well maybe not, however, consider this from a working capital perspective. If you spend just $100M per annum with your supply chain at 45 days payment terms, while the market accepts 60 days, then that is a working capital difference of $6m in your favour. To make it clear, this is cash flow that is lying dormant, free to be picked up by your organization that you can use to invest in expanding into new markets, new products through R&D,  all resulting in competitive advantage

Technically this lack of a market index is easy to explain. Most, if not all corporates are still using Excel, PowerPoint, and email to collaborate and come to a position on payment term optimization.

Let’s be blunt. You will not, cannot, ever hope to operate in the era of the digitised market and take advantage of all that it has to offer when you are using 35-year-old technology Excel, email, and PowerPoint. It’s a hackneyed expression but it's true; Excel isn’t a database, it does not manage complex workflows, it is not collaborative nor scalable, well…it's over guys…. as much as we all love a good macro.

Imagine (if you will) data at your fingertips that provides your entire organization a real-time view on market-accepted average payment terms for this commodity in this industry, in any region in any timeframe based on market-fed, market-derived indexes on payment terms. 

Like every other aspect of commercial undertakings, both procurement and treasury can access platform-based digital data to get guidance on a critical negotiation point, namely payment terms.

Calculum created the ADA Platform with this index goal in mind to assist both Treasury and Procurement to become better aligned while it comes to this often-vexing discussion around applying and negotiating the best payment terms.

The basis of the networked world is contribution for mutual benefit.

Our view is that indexes solve pain and disconnection. Indexes deliver actual market behavior right to your screen and like every other market-based index you must contribute to reap the benefits.