Treasury Today Country Profiles in association with Citi
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June 2006

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Editorial

Are you getting what you pay for?

Traditionally the phrase ‘getting what you pay for’ is used to describe the process of seeking a bargain and then finding out you have got a product or service that falls well below your expectations. We explain this disappointment to ourselves and to others as ‘getting what we paid for’.

However in a company context ‘getting what you paid for’ can have much more significance. Particularly if the question becomes, did you get anything at all? We call this counterparty risk – in other words, the risk that we pay for something and do not get what we want in return.

The banks have always been particularly skilful at recognising, measuring and (when appropriate) charging for this sort of risk. It is a core part of their business. Most companies also have some sort of system to recognise and place limits on this sort of risk; setting deposit limits with banks and trading limits for FX deals. Similarly, companies are very careful about the credit terms they extend.

However, there is another set of counterparty risks that gets less attention. That is the risk that arises on the supply side of the business. Once again, it is the risk that you pay for something and never quite get what you paid for.

Of course if you pay on account, after delivery of the goods, there should be no risk here. But is that really what is happening? In every case? Or has purchasing taken advantage of the attractive terms offered if payment is made on shorter credit terms? And what about other suppliers of services? Have you heard of the VAT agent who never quite managed to pay the money to the VAT authorities? And what about the company who negotiated a great price on energy costs if they paid (through the broker) in advance. Yes, you guessed it, the broker disappeared.

As companies, we spend less time controlling risk on the supply side. Luckily, with all the talk about managing the supply chain, this may all be about to end. What is certain is that any review should look at all the goods and services that are being bought and at all the counterparty risks that arise. It is surprising what you can find.