Felix enterprise clients operate in an environment where they are critically dependent on third-party suppliers, contractors and consultants to operate safely, sustainably, and ultimately profitably. If a subcontractor becomes insolvent, the cost of failure on a job can be far greater than what they have been engaged for, and can sink an entire company or project.
When managing a supply chain that you’re critically dependent on, there are many areas of compliance to consider. While Felix helps navigate the complex maze of key risk areas, the financial viability process sits outside of traditional vendor management and compliance management.
This is a missing piece that allows organisations to know the financial health of their third-parties, and that’s why we invited our special guest speaker Patrick Connolly, CEO and Founder of Fiable, to educate our audience on the importance of financial viability and steps to put in place to ensure a financially stable supply chain.
Patrick explains that Australian business insolvencies are at a 25-year high. This is the highest level since ASIC started recording these statistics in 1999. Looking at the data, the main sectors experiencing record high insolvencies include construction, manufacturing, retail, accommodation and food industries. This proves that financial viability isn’t specific to one industry, it’s agnostic, and is relevant for all Australian states.
Earlier this year, the Fiable team conducted a study of Tier 1 construction and infrastructure contractors. The astonishing findings told that subcontractor failures can cost north of $500,000 in damages, delays and replacement costs every event.
And this is a conservative figure, as Fiable has seen costs of more than $20 million for large projects in the civil and infrastructure space.
Patrick shares that failure is not always a result of insolvency, when an organisation is struggling financially, there are so many elements that effect a project – which could also include reduced labour, cost quality of materials or taking corners on warranties. All of this combined can lead to the cost of failure and when you can understand this cost, you can start prioritising and put plans in place – and decide whether financial viability or credit monitoring is best, or both.
Patrick shares that both financial viability and credit monitoring are measures of mitigating insolvency risk in the supply chain, but the use cases are very different:
Patrick states that when you’re wanting to mitigate insolvency risk in your supply chain, putting in a plan that utilises both financial viability and credit monitoring is critical. Typically what most organisations do is set up internal business rules which govern when a financial viability assessment is required – for example, any contract value over a certain threshold, or when onboarding a new subcontractor that hasn’t been engaged before, or if a subcontractor asks for a large deposit. Every organisation is different, and it depends on the business and its risk appetite as to what those business rules could look like.
Patrick talks over a recent case study featuring a national civil contracting client of Fiable’s. This client had a long-standing relationship with a subcontractor and were about to award them a large, multi-million-dollar contract. On the surface and given the length of their long-standing working relationship, everything appeared okay. However, when the client engaged Fiable to conduct a financial health assessment, the subcontractor failed and just three weeks later the subcontractor went into insolvency.
While you can have strong relationships with suppliers, it doesn’t come at a compromise of risk and proper diligence.
Many organisations are conducting financial health assessments on their supply chain without the help of digital solutions. This ‘old way’ is manual and time consuming, with many different texts, calls and emails back and forth involved in a single assessment. When this process is multiplied by the 50 to 1000 assessments an organisation might be conducting at one time, process inefficiencies are obvious.
Digitising this process brings speed, automation and efficiency without sacrificing quality. Further, the Fiable solution supports organisations from the very start of the process, educating teams outside of finance with a base level of financial literacy. That way, when Fiable provides a recommendation during an assessment, this information ca be taken as learnings on how to manage the risk.
Hear directly from Patrick how Fiable can help mitigate insolvency risk, tune into the webinar from the 17.45 minute mark.
As already touched on throughout the webinar, supply chain visibility and risk awareness is a multi-faceted challenge. There’s a need to deeply understand your supply chain – know who your vendors are, forge strong relationships, and know where you’ve engaged them. Financial viability then allows you to perform a financial health check on a supplier at a particular point in time, providing a holistic view of supply chain risk.
The newly formed Felix and Fiable partnership allows Felix customers to uncover financial health risk in the supply chain, in the same platform where they are monitoring all other risk measures.
To learn more about how you can strengthen your supply chain with Felix and Fiable, you can visit our website or tune into the webinar from the 25.20 minute mark.
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Thanks again to Patrick from Fiable for offering his insights in this session. We had a number of questions asked throughout the webinar, which will be summarised in another post.
If you would like to learn more about how to further protect your organisation from third-party disruption and financial damage, please don’t hesitate to reach to us and we will put you in touch with the right person.