Payments scandal tarnishes Telstra and Rio Tinto

Two of Australia’s largest public companies have been branded ‘greedy’ and ‘despicable’ over their treatment of suppliers.

Telstra chose the supplier “payday lending” option, which involved a supplier financing their invoices at an annualised rate of more than 7 per cent.

“Despicable behaviour”, “not good enough” and “greedy”.

These are some of the words used to describe two of Australia’s biggest companies in their now-abandoned attempts to charge their suppliers for prompt payment of their invoices.

Rio Tinto and Telstra this week spectacularly dumped their payment schemes after The Australian revealed the companies had taken extraordinary steps in regards to paying their thousands of suppliers across the country.

Both Rio and Telstra had partnered with Taulia, a company registered in the US state of Delaware, to create a new online payments portal, which involved suppliers taking a haircut to their bills if they wanted prompt payment. Rio would have a $200m windfall if all its suppliers had signed up, while Telstra boasted it had “liberated” more than $500m in cashflow.

The two companies were using two different Taulia products. Rio opted for “dynamic discounting”, which cut about 2 per cent off a supplier’s bill if it wanted to be paid earlier than 30 days. Telstra chose its supplier “payday lending” option, which involved a supplier financing their invoices at an annualised rate of more than 7 per cent. In other words suppliers were borrowing money that they were already owed.

What suppliers didn’t know was that their business data, supplied while tendering for different projects, was being used for other purposes. Taulia negotiated discounts of behalf of Telstra and Rio and had a range of tools at their disposal — including big data and artificial intelligence — to calculate a supplier’s willingness to discount its invoices and how much of a financial hit it could take.

Taulia data insight boss Vincent Beerman suggested the data, and Taulia’s systems, could also be used to decide which suppliers could be pushed from dynamic discounting into using more expensive supply chain financing options, such as that provided by controversial global financier, Australian-born Lex Greensill.

“For buyers looking to unlock this cash and put it to work, there are many different tools and strategies available, from extending payment terms to securing financing for receivables. But in practice, many such initiatives fall short of their targets,” Mr Beerman wrote in an article published on Taulia’s website.

“Companies may also lack tools sophisticated enough to adapt in line with evolving business objectives/market conditions and can struggle to gauge the ­impact of working capital programmes on their suppliers. This is already changing. At the cutting edge of development in this area, leading vendors are using technologies such as artificial intelligence.

“By doing so, they are giving buyers a far more detailed understanding of the potential benefits of enterprise-wide working capital strategies, and of how different techniques can be deployed to achieve the company’s goals.”

The use of such data to squeeze suppliers attracted widespread criticism, and Federal Small Business Ombudsman Kate Carnell put companies that engaged in such behaviour on notice.

“These types of reverse factoring products that vary based on how desperate the supplier is are being closely looked at as part of our ongoing supply chain financing review,” Ms Carnell said.

“Small businesses have raised their concerns with my office about the use of artificial intelligence and big data to determine and target discounts.

“It’s clearly not OK for big businesses to use their dominant ­position and greater access to technology to further squeeze small business margins.”

A day after The Australian revealed the use of AI to squeeze suppliers, Rio announced it was tearing up its “dynamic discounting” scheme, one year after its launch. Telstra followed suit late on Thursday, two days after The Australian revealed the telco spent more than a year plotting to unleash supply chain financing on its small and medium suppliers, while at the same time extending their payment terms from 45 to 62 days.

Rio suppliers said they were facing lengthy payment delays from the mining giant, with one saying it took five months for a $100,000 invoice to be paid, while another said it was costing more than $20,000 a month to be paid on time, triggering an investigation by the competition regulator.

Telstra had maintained its smaller suppliers were still being paid within 30 days, in line with its commitments to the Business Council of Australia’s voluntary Australian Supplier Payment Code. But it ditched its supply chain financing scheme in the ­aftermath of a series of questions from The Australian.

The Australian was preparing to publish a report that revealed Telstra had been exploiting a loophole in a voluntary code of conduct to avoid paying small companies on time.

The BCA scrapped its definition of a small business last year after a review from former Australian Competition & Consumer Commission chair Graeme Samuel. But the changes only applied to new signatories, with companies such as Telstra, which signed up in 2017, allowed to adhere to the old conditions. This meant Telstra still defined a small business as one employing fewer than 20 staff.

“We have made the decision to stop enabling a supply chain financing option and are working through how that will occur in a way that doesn’t disadvantage our suppliers,” a Telstra spokesman said late on Thursday.

“We are also considering our payment terms and what defines a small business. We use the ABS definition, which was also the original definition in the BCA code.”

The use of supplier payday lending, or supply chain finance, or reverse factoring — the result is the same — also attracted criticism from influential proxy advisory firm Ownership Matters.

“In too many cases the auditors of listed entities appear open to a ‘why disclose’ approach rather than ensuring the financial statements present a true ­picture of an entity’s financial performance and position,” co-founder Dean Paatsch said in December.

Meanwhile, Moody’s said supply chain finance contributed to the collapse of the British government contractor Carillion, which imploded in early 2018 with debts of £1.5bn ($2.29bn).

Perhaps Telstra’s former chief financial officer John Stanhope, who supervised 30-day payment terms to all suppliers during his time at the company, said it best.

“In a world where corporate trust is low, the only way to improve corporate trust is to not only do things right but to do the right thing. And to do the right thing, you don’t hurt relationships with all stakeholders — customers and suppliers,” he said.