Why you might find this interesting:
I’ve included this as a case study because it’s a good example of the massive financial impact that can be achieved in a relatively short period by grasping the nettle, applying simple controls and letting skilled negotiators do their work.
- Risk identification and treatment
- Stepping forward when others are stepping back
- Cash control
- Doing the right thing
- The value of an experienced commercial negotiating team
The Company
Rentalcars.com is the Transport Business Unit of Booking.com. Rentalcars.com is the world’s largest online car hire broker. Rentalcars.com work with the world’s best known car hire brands.
Based Manchester. 2000 staff. Part of Booking.com group. Serving customers in 160 countries
As a broker, Rentalcars.com connects customers with suppliers and, in simplest terms, earns a commission for making that connection.
The Summary
Challenge
Covid 19’s impact on the travel industry became apparent in Feb – Mar 2020. All in the industry faced immediate cash flow problems. We needed to recover cash owed from 2019 without destroying historic critical relationships.
Response
Take ownership of the problem. Create process and control in order to guide both commercial negotiation and finance action.
Outcome
A potential £ Double Digit Million loss was not just reduced but converted into a realised upside of £ Double Digit Million.
The Detail
Background
Covid 19 exposed existing lack of rigour and introduced massive new risk.
“Incentive years” in the of majority cases reflected the January – December financial year and contract renewals between Rentalcars.com and their Suppliers. Therefore by end of March, any Incentives from previous FY should all have been settled.
A number of factors contributed to the situation where only a neglible number of incentive plans had been settled:
Lack of process knowledge
Compared to FY19 where fewer than 10 incentive schemes were in place, FY20 saw nearly 100. Rather than a few senior level Commercial staff and Financial staff managing the schemes, dozens of staff were involved, many junior and most involved for the first time.
The same situation existed Supplier-side where most were new to the schemes.
Unclear ownership
Cash recovery classically fell into the cracks between two departments: Financial and Commerical.
Lack of focus on recovering cash
Not through neglect but from the usual “noise” that is ever present in a large organisation:
- Senior Management changes including a vacant CFO seat
- Incoming Chief of Commericial with a handover from an interim
- Commercial department re-org under new leadership
- Finance department focussed on an over-running SAP implementation
More about…
Marketing Incentives
Retailers, Brokers and Intermediaries often come to arrangements with Suppliers to carry out additional marketing of Supplier services in order to drive more business towards these Suppliers. An easy comparison is in supermarkets where Suppliers pay for the merchandising of their stock at aisle-ends or at eye level within the aisles.
Such arrangements are variously known as “marketing incentives”, “overrides”, “bonus” or “rebates”.
Some car rental companies (Suppliers) “incentivise” Intermediaries in the same way. These are often negotiated to judge performance on an annual basis with an annual “payment” of the incentive amount from Supplier to intermediary.
Who pays whom
This creates a cash receivable by Intermediary from Suppplier.
Cash flow
- Customer pays the Intermediary before the Supplier delivers the service to the customer.
- Intermediary remits payment for services provided by the Supplier. This is a lesser amount than that paid by the customer. The difference is the Broker fee / commission / service charge due to the Intermediary.
- This “Settlement” and remittance is performed normally on monthly cycles rather than on a transactional basis
Settlement
During normal times there is plenty of cash flowing so that annual incentive payments owed by Supplier to Rentalcars.com can be deducted from routine monthly payments to Suppliers immediately after the end of the “Incentive Year”.
Cash “deductions” are accompanied by an invoice, credit note, “request for payment” or whatever fiscal document is required to satisfy national tax authorites and accounting practices.
Then Covid 19 hit. Many moments of realisation.
A new reality…
By the middle of March 2020, cancellations from customers were outnumbering bookings. As with every travel business during C19, the situation only worsened during the following few months. By the end of March we were preparing to work from home -something that became a reality from the beginning of April.
… and a Realisation
As we were establishing remote ways of working, we were also considering ways in which to protect our business from a threat of inestimable magnitude. “Cash conservation” became a more often used expression and it was during Week 1 of April that the Commercial Leadership Team were first made aware of provisions in 2019 accounts for Double Digit £M of “incentive” payments owed to the business.
… while remembering …
… that, while our own business position is important, we only exist if we serve both Customers and Suppliers. Without both of them, we cannot exist. Therefore in solving our own problems we would need to tread lightly and be cognisant of greater stresses on Supplier businesses in particular.
How we approached the problem
We prevented the situation worsening
At the time we realised we had a problem we were still making our payments to Suppliers per the usual routine.
In fact we held internal discussions about actually accelerating payments or considering other cash assistance that we (a relatively cash healthy business) could offer to Suppliers that had demonstrated loyalty to us over the years and where we knew they were heading into a potentially existential struggle with Covid.
At the same time we realised there was no single list of all receivables due from 2020 nor agreed amounts due under each receivable. Amounts, even for those where accruals existed, were subject to some “variation in opinion”.
With neither a CFO nor a Financial Controller, we (in Commerical) decided to cease all payments until a full and clear picture could be established. From that point no single Supplier could receive payment without express approval by one of a few in Commercial.
That action allowed time to establish:
- With which Suppliers we had agreed 2020 schemes
- Our estimates of what was owed under each scheme
- Which amounts were (or would be) subject to disupte or negotatiation
A highly elevated sense of urgency was required for 2 reasons:
- We were about to furlough 50% of Commercial staff (risking the “furloughing of knowledge” of how individual incentive schemes were constructed)
- We wanted to ease flow of cash to as many suppliers as possible as fast as possible
The opportunity was revealed once our view of all receivables were consolidated. This indicated that that across nearly 100 schemes, if all were recovered then that would yield twice the amount accrued ie 100% upside vs forecasted. This represented approx 20% of 2019 net profit for the entire ground transport division.
We established the exact size of the problem.
This became an opportunity
We clarified ownership & accountabilities
Every receivable became owned by a single Commercial lead. The challenge in achieving this cannot be overstated considering the backlight of recent reorgansiation, the concurrent handovers between those being furloughed and those remaining in post plus the natural anxieties all felt as the first UK lockdown was extended.
We retained focus on Receivable Recovery by adopting it as one of the key measures of our success across the Commercial department (an OKR). The CEO was extremely interested and was briefed throughout each week on progress. Updates and chases were carried out daily with progress kept visible across the department.
We elevated and publicised the importance of the problem
We engaged in diplomatic, empathetic and firm negotiating
Our Commerical Managers at all levels (those in charge of both day-to-day and strategic relationships with Supply Partners) excelled in navigating difficult, sometimes legal and, often, emotional conversations with their key contacts at Supplier-end.
The Outcome
6 weeks after recognising the Risk, the amount at risk (the 2019 accural) was reduced to zero. Over the following 4 months our teams continued to negotiate and eventually recover twice the value which was originally at Risk.
The relationships with many Supply Partners were (perhaps surprisingly) deepened. Again this is testament to the historic and ongoing efforts of relationship managers at both Rentalcars-end and Supplier-end to achieve symbiosis.
Credits
Thank you to all of the following who contributed, negotiated and cared about our Suppliers. Really impressive!
Do get in touch if you would like your initials replaced by your name and a link to your LinkedIn profile, personal website or company website.
Commercial Managers & Negotiating Team
GJ, MW, MJ1, MJ2, SMc, DN, GP
Finance & Treasury
AT, RT, AC, SD
Commercial Leadership Team
MS, AB, TB
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