Improving cashflow or paying for what you should have?

I've just been reading an article about how the London Borough of Bexley (LBB) has introduced a system, within their procurement, to reduce late payments to suppliers -  Supplier Incentive Programme (SIP). Sounds excellent; particularly when we think a major concern for small to medium-sized businesses is cash flow and prompt payment. In fact, some businesses steer well clear from public sector work due to the stigma of councils and other public sector organisations, historically, being late payers. Cash flow is so important for a business, that late payments mean a serious risk. So, who would not want to work with LBB if they get paid on time? In fact, LBB say that, on average, suppliers get paid within 7 days! What's not to like?

There's always 2 sides to the coin (if you excuse the pun). The SIP is something that suppliers have to sign up to, in effect. The way of signing up is to offer a rebate (let's just call it what it is - a discount) in exchange for early payment. Suddenly, the shine starts to darken. Why should a small business have to, in effect, pay to, in return, be paid on time. OK, early is good but the concept of the SIP is to reduce late payments. Surely, suppliers should be paid on time, regardless. If LBB have the ability to pay suppliers on time, or early, then why don't they just do it?

These types of rebates, in the world of procurement and bids/tenders, are not new. These types of rebates can often put businesses off from bidding as they will see it as another "hurdle" that will stop them being successful. In fact, some bids will even give you a score your rebate. Some businesses see it as "well, a big business can, of course, offer a rebate. As a small business, we can't offer the same level of discount so there's no point in bidding.". Some businesses agonise over "what level of rebate do we offer? 1%, 2% or what?". Some businesses, when seeing this type of "incentive" will simply consider putting their price up, to then allow a discount to keep them in the running. So, will LBB actually be making any real savings at all, or is it just a picture they are painting?

So, the SIP - will it encourage suppliers or actually put suppliers off?