The adage “Good help is hard to find” has never been truer. The U.S. Labor Department reported 10.9 million job openings in September 2021, and among them are skilled labor positions that professional service firms require. Moreover, the high demand is making it hard for firms to recruit and retain talent. To overcome these challenges, more enterprises are expanding their use of independent contractors – and looking for the best ways to manage and pay them.
A New Type of Team Member, A New Payment Process
Unlike employees that pay regularly via payroll processing, independent contractors (ICs) are typically paid after they bill for the hours they work or projects they complete. In the best-case scenario, the contractor’s billing and the professional services firm’s billing line up, and the firm won’t have to pay the contractor before receiving payment from its client. However, this alignment is difficult to manage, and the IC’s invoice may be submitted before the firm receives payment, which can create cash flow issues. It can also create risk. If the end client disputes the bill based on the contractor’s work, the professional services firm may lose the money paid to the IC and be forced to cover the costs.
The optimal process is to pay ICs only after receiving payment from the client. The IC may agree to being paid within a certain period following payment to the firm. However, many contractors may only accept assignments with an agreement that guarantees payment within a certain time, for example, 15 or 30 days from the invoice date.
A firm with multiple contractors working on various projects will quickly recognize how challenging it is to track all projects involving ICs, contract terms, and pay-by dates and still meet their end of the agreements.
The Path to Managing IC Payments in SAP
While SAP S/4HANA Cloud doesn’t have specific functionality for automating contingent IC payments, it does have functionality that can be leveraged to create them. For example, S/4HANA Cloud allows projects – and even phases of projects -- to be coded for systematic identification. It also provides a way to solve the challenges related to paying contractors with a side-by-side extension. The combination of this core S/4HANA Cloud functionality and state-of-the-art intelligent robotic process automation (iRPA) enables a professional services firm to control when they pay ICs.
To use the solution, the firm provides codes to its ICs, who include them on their invoices. When the invoice is received, the charges are verified against the business’ records, and then the invoice is entered into S/4HANA Cloud, which can also be automated with SAP Concur or OpenText to scan, digitize, and upload information to an S/4HANA environment. The extension solution will automatically block the invoice for payments.
Periodically, the iRPA bot checks for payment from the end client and payment terms on the IC’s invoice. If the end client has paid, the invoice is released for payment. If the business hasn’t received payment, however, the iRPA bot checks payment terms set in the IC’s contract and, if those terms were met, processes the invoice.
The Benefits of Using an Elegant Solution
While this “Pay when Paid” solution empowers a business using contractors with automated management of payments, it also provides additional benefits. It allows the professional services firm’s accounting department to minimize time spent tracking projects and ensuring they pay IC invoices according to contract terms, giving them more time to focus on other responsibilities.
Additionally, the solution eliminates the need to add to the firm’s IT workload due to update-related issues. A side-by-side extension that’s tightly coupled to S/4HANA Cloud – but uses APIs rather than deep integration – won’t be impacted by an update to SAP.
Perhaps most importantly, however, the solution gives professional services firms the confidence to use contractors without taking financial risks or dipping into capital reserves. Firms can fill gaps temporarily while they search for skilled labor – or build long-lasting relationships with contractors that help them get projects across the finish line.
With labor shortages and IC use continuing to trend, a Pay when Paid solution allows firms to manage payments to the skilled resources they need.