American Electric Power Leverages Dynamic Discounting to Bring New Efficiency and Innovation to Buying

Transcript of a BriefingsDirect podcast on how both buyers and sellers can benefit from a cloud solution to discounting.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: Ariba, an SAP company.

Dana Gardner: Hello, and welcome to a special BriefingsDirect podcast series coming to you from the recent 2014 Ariba LIVE Conference in Las Vegas. We’re here the week of March 17 to explore the latest in collaborative commerce and to learn how innovative companies are tapping into the networked economy.

Gardner

We’ll see how these companies are improving their real-time business productivity and sales, along with building far-reaching relationships with new business partners and customers.

I’m Dana Gardner, Principal Analyst at Interarbor Solutions, your host throughout this series of Ariba-sponsored BriefingsDirect discussions.

Our next innovator case study focuses on American Electric Power and how they’ve been improving their financial processes and operations using Ariba Dynamic Discounting. We’ll learn how a real-time business-process approach to billing, ordering and settlement terms between buyers and sellers benefits both American Electric Power and its vendors.

To learn more about agile business services, please join me now in welcoming our guests, Drew Hofler, Manage Cash Solution Marketing Director at Ariba, an SAP company. Welcome, Drew.

Drew Hofler: Thank you, Dana.

Gardner: We’re also here with Rick Gray, Senior Treasury Specialist at American Electric Power in Columbus, Ohio. Welcome, Rick.

Rick Gray: Glad to be here.

Gardner: First to you, Drew. What are the pressures now? We’ve heard a bit about Dynamic Discounting in the last couple of years, but I’m wondering what's the new impetus? What’s changed that makes Dynamic Discounting more relevant than ever?

Hofler: The fundamentals around Dynamic Discounting that drive it are the buyers, their not having a lot of cash on hand. Not getting return on cash hasn't changed a whole lot in the last few years. Companies still have a lot of cash, but the Fed funds rate is still very low.

Hofler

On the supplier side, one thing that has changed for them a little bit is that the actual credit crisis has thawed a little bit, but not completely. The thing that's really changed for suppliers, and it was more of a gradual change, is that they all see longer payment terms now from their buyers. In the old days, before 2008, net 30 was your base term. Now, net 45, net 60 is standard, and many suppliers are facing longer terms than that.

Dynamic Discounting offers the great relief valve for that. It allows buyers to use their cash and earn some great return on that cash, and it allows suppliers to access early payment and lower their days sales outstanding (DSO) when they want to.

Evolutionary growth

The other thing that has really fundamentally changed, and I’d say it's more of an evolutionary growth that makes Dynamic Discounting more relevant than ever, is that what makes Dynamic Discounting possible is e-invoicing and the ability to get invoices approved very rapidly, so there's an opportunity for that early payment.

E-invoicing has really grown in the accounts-payable world, both in the US as well as abroad. E-invoicing has become more standard, More and more people are coming into it. It's not a leading practice anymore. It’s a best practice, but there is a long way to go.

But as those invoices get approved very quickly and suppliers have visibility into them, it becomes very natural for a supplier to raise their hand and say they would really like to get paid early, maybe to reduce DSO, maybe to increase cash flow, whatever their reasons, but the confluence of e-invoicing and that network visibility is really driving Dynamic Discounting.

Gardner: For any of our new listeners and readers, why don’t you quickly define for us what Dynamic Discounting is, and then also tell us what the benefits are and to whom? Now that this has been in play for a while, are there any unintended consequences about who is getting value from it and why that's increasing the uptake?

Dynamic Discounting simply puts the tools in the hands of the paying customer, to use their cash and earn something, and it puts the tools in the supplier hands to accelerate payment.

Hofler: Dynamic Discounting, at its very root, is an early payment on an invoice that is funded by buyer cash. What makes it dynamic is that it allows suppliers, on an automatic or an ad-hoc invoice-by-invoice basis, to essentially raise their hand on a Dynamic Discounting platform by clicking a button and say they would like to get paid early, and in their control, accelerate their payment.

Dynamic Discounting simply puts the tools in the hands of the paying customer, to use their cash and earn something, and it puts the tools in the supplier hands to accelerate payment.

I like to call it the bringing together of opportunity, visibility, and capability, where you have the opportunity created by e-invoicing and where now you have an early approved invoice.

Visibility is through a network that allows the buyer to see where they have an opportunity to pay early and a supplier to see where they have the opportunity to be paid early. Then, there’s the capability on that network to click a button and make it happen, so that they have money in their account a couple of days later.

Gardner: And the other part, what’s been perhaps an unintended or unexpected consequence that’s benefiting the chain here in such a way that more and more people are doing it? What’s fueling the uptake?

The business network

Hofler: I wouldn’t necessarily say that it was unintended, because I think we intended this to happen and we saw it. But I would say that what's really fueling it again is the rise of the business network.

As I said, it’s the opportunity, visibility, and capability, and it’s that visibility element, where now more suppliers are used to seeing their invoices on the network. They’re used to seeing them approved very early, and then they can take advantage of it.

But one of the surprises that I see is in who offers a discount and who takes the discount on the supplier side. Logically, you would think it would be your smaller suppliers, with not much access to cash or not much access to credit, and in general, they do very much take it up.

The beauty of Dynamic Discounting is that you don't have to know what your supplier is going to do or why they’re going to do it.

But you will also often see very large suppliers with very large invoice discounts -- I mean in the six digits sometimes -- that will do it on occasion, because they have the opportunity and the control to do it when they want to. They will do it for other reasons, such as end of quarter to reduce their DSO or as accounting window dressing to get receivables off their books.

And the beauty of Dynamic Discounting is that you don't have to know what your supplier is going to do or why they’re going to do it. You offer them the opportunity, give them visibility and the capability to do it, let them make the choice, and you will often encounter some surprises like that.

Gardner: Let’s to go to Rick at American Electric Power. Tell us a little bit about your organization and how you came to be using Dynamic Discounting?

Gray

Gray: American Electric Power is an electric utility, one of the largest investor-owned electric utilities in the country. We’re in 11 states, and we have five million customers. We have gross revenues that were over $15 billion last year. So, we’re pretty well-sized.

We started to look at our expenditure cycle, the whole purchase-to-pay (P2P) process, and had an independent consultant in to look at that and to give us some strategy on how we can improve. Part of it was to do the e-invoicing, the e-purchase order.

So we were looking at different tools and companies to provide that, and Ariba was the one that came out, and we selected them. Part of the justification for that whole project was the increase in early-payment discounts. That’s what got the ball rolling.

Gardner: And to what degree are you using it?

A lot of use

Gray: Quite a bit. When we started looking into it with Managed Services help, we saw that we had over 150 different payment terms. We looked at our days payable outstanding (DPO), which is the number of days it takes to pay our suppliers.

It was shorter than the industry average, which means we were paying sooner than our peers in the industry, which caused us a little concern in that we obviously weren’t being overly prudent with our cash or gave that appearance.

So part of the effort was to look at our payment terms and standardize them, and we decided to extend them a little bit to get along with the industry average.

Gardner: Rick, what about this notion of a business network, transparency, and having more data at your fingertips in order to benefit other processes, other financial issues in your company? Do you see this as an accelerant to the use of network information and transparency and perhaps building less risk into your overall financial situation?

Gray: Absolutely. And because we were looking at our working capital and our liquidity and extending the payment terms and consolidating them, we wanted to provide our suppliers with a tool for them to be able to then give them that relief valve that Drew was talking about. So if they did need the payment sooner, that’s fine. We could give them that opportunity without losing the benefit to ourselves in the process.

Part of the effort was to look at our payment terms and standardize them, and we decided to extend them a little bit to get along with the industry average.

It became really important to get the buy-in throughout the company. We realize that some suppliers need the money sooner and that’s fine, and here’s the process to do that. The tool then allows the suppliers an easy way of accessing that and getting their money sooner if they need to, without reaching out to our accounts payable department or our procurement department and calling around. This was a more streamlined process for that.

Gardner: One of the things that’s really interesting to me and why I think this takes off so well is that it benefits both sides. There are more information and terms available. Negotiation positions all work to their mutual benefit. Do you have any metrics of how this has benefited your organization? Do we have some opportunity to look at where the rubber hits the road? What do you get for it?

Gray: There are a couple of things. This past year, we extended our days payable outstanding by two days, which doesn't sound great. On the other hand, with $1.2 billion in average daily accounts payable, that’s two days we didn’t have to borrow $1.2 billion. We even had a holiday where we didn’t have to borrow one day, but gradually that turned out. So we reduced our borrowing for that much.

On the other hand, we also saw increased early payment discounts that matched that business case that we talked about later. So in that regard, we’ve done pretty well.

Gardner: Let’s go back to Drew. What’s coming next? What have we gained from the news here at Ariba LIVE? What are you hearing from the attendees, and what should we look for in terms of next steps in making Dynamic Discounting even more powerful?

Continued buildup

Hofler: What comes next is a continued buildup of the transparency and visibility in a network that allows suppliers to see what's going on and allows buyers to tie that in together.

We’re seeing that companies are looking at these things, not as disparate processes anymore, not just the invoicing, not just Dynamic Discounting, not just procurement, but are looking at the realization that each of those is a link in a value chain and they need to be linked together

We’re seeing people going from where they’ve started and expanding onto a platform that allows them to grow and link these things together. You’ve got suppliers, for example, that may have just been PO or may have just been a contract.

We really see the tying together, not only of the desire to be paid early, but then the actual mechanics around the settling of that payment.

Now, they move them into the invoice on that. Or, it may have been invoice and just contract. More and more suppliers are finding more and more reasons to come to the same network. That increases the pool of who is there to discount.

The other thing that’s tied to it, and not discount specific, is the idea that it’s early payment when they raise their hand. We’re now seeing this area of what we announced at LIVE in AribaPay -- not only to allow the supplier to raise their hand to receive their payment early, but to be able to be paid in such a manner when they do that, they have full visibility into everything that went into the final dollar that comes into their account, with every invoice, every line item, every PO, so that they can reconcile it easily and quickly identify discrepancies.

So we really see the tying together, not only of the desire to be paid early, but then the actual mechanics around the settling of that payment

Gardner: And for global companies that are concerned about currencies, jurisdictions, and tax issues, this can be a big deal.

Hofler: Absolutely, it can, and particularly if they have multiple invoices around payment, keeping track of the differences. You get one lump sum and it accounts for 100 invoices that might have 20 line items each. That becomes a big issue to maintain, and the more global you go, the more complex.

Networked economy

Gardner: Of course, a recurring theme at Ariba LIVE was the networked economy -- and also the fact that you are, as part of SAP, using HANA and other analytics capabilities to bring more insight across the activities of the Ariba portfolio.

I was struck when Rick mentioned that he could compare the industry standard for payable terms and therefore adjust accordingly. Are there other metrics, analysis, or even predictive value that, as an aggregator of Dynamic Discounting terms, with all privacy, security, and anonymization brought to bear, more value add when it comes to being smart about how you do this?

Hofler: Absolutely. I couldn’t be more excited about potentially having all of the 15 years now or more of data on the Ariba Network of POs, invoices, and payment terms and early payments. All of this is brought together in such a way that we can do just that. We can take all that big data and turn it into information that’/s actionable.

There is so much there, not only from the aggregate standpoint. As you mentioned, we never, ever share which supplier we discount how much, but on an aggregate basis, what are some of the trends, what are some of the indicators that a supplier would be more willing to discount? Just on the data that I’ve tracked outside of HANA, not nearly as powerful as that, you’ll see certain patterns, end of quarters, end of certain seasonal cycles.

It’s not really that complicated. So that's not too bad. The challenge is getting the suppliers on and getting them engaged.

Having the ability to see that for a buyer or a treasurer to then make maybe more cash available for that particular time and plan for that, they can make more cash available to handle the spike in volume of discounting. There’s just tremendous potential there.

Gardner: Rick, any advice for other organizations that perhaps haven’t done Dynamic Discounting, but are evaluating it? Is there anything that you can offer with 20/20 hindsight that they would benefit from?

Gray: A couple of things. One, it’s not that bad of an integration. There’s not a whole lot of movement there. It’s not really that complicated. So that's not too bad.

The challenge is getting the suppliers on and getting them engaged. We actually purchased the software right when Ariba was rolling out Managed Services, so we were sort of grandfathered in prior to that and didn’t utilize the Managed Services when we implemented. We saw that our adoption rate was well below our target.

Six months or so afterward, we engaged the Managed Services, and within three or four months, we had reached the original target. So that was a big help and something I would strongly encourage. Listen to and use the partners. It’s not that we’re not smart enough or don’t want to work hard enough to do it. It’s just that we just didn’t really have the time and resources.

Gardner: Would you say, Rick, that this has paved the way for a different type of relationship between you and your suppliers? Has it increased collaboration and communication in any way, maybe a stepping stone towards more transparent and even more mutually beneficial business negotiations and relationships?

Next target

Gray: Yes, and we’re working on that, as far as a long-term contract is going into place. That's our next target right now with the smaller suppliers, with immediate need. Now, we’re looking to make sure that that’s the culture within the company. These are the payment terms and this is the tool to utilize going forward. We’re sticking to our guns, saying that there are no exceptions. Everyone goes through this, and that’s been beneficial.

Gardner: Last word to you Drew. How does this integrate into other things? You’ve already mentioned AribaPay. We’ve talked a little bit about analytics and visibility. The whole greater than the sum of the parts is where a lot of business services and those that avail themselves of cloud models can go. Where does this integrate into next? Where is the bundle? How do we make this a value add?

It’s very helpful for folks who are looking to get some technology to help them drive business process reengineering and to improve their business processes.

Hofler: It’s just a natural bundle for anything that has anything to do with P2P,  Ariba Collaborative Commerce, and Ariba Collaborative Finance. If you look at it as a process, classic process, everything ends up with an invoice to be paid.

So we bundle it in when the invoice is a part of any type of business process re-engineering that a customer is doing. We point it out to them as a natural next progression when they are going there.

Rick made the point earlier that it really drives the business case too. It’s very helpful for folks who are looking to get some technology to help them drive business process re-engineering and to improve their business processes.

Sometimes, efficiency isn't enough in terms of savings to get that raised to the top of the project pile. Dynamic Discounting is a great way to add significant return on investment (ROI) to that business case, so that they can get their overall project approved. We’ve seen that happen time and time again. So it’s a great part of the bundle.

Gardner: Very good. I’m afraid we will have to leave it there. We have been talking about how American Electric Power improves their financial processes and billing operations using Ariba Dynamic Discounting.

And by examining a user's experience, in this case at American Electric Power, we’ve learned how a real-time business process approach to billing, ordering and settlement terms benefits both the buyer and the seller.

So a big thanks to our guests, Drew Hofler, Manage Cash Solution Marketing Director at Ariba, an SAP company. Thanks, Drew.

Hofler: Thank you, Dana. It’s my pleasure.

Gardner: And also Rick Gray, Senior Treasury Specialist at American Electric Power. Thank you, sir.

Gray: You’re welcome.

Gardner: And thanks to our audience for joining this special podcast coming to you from the recent 2014 Ariba LIVE Conference in Las Vegas.

I'm Dana Gardner, Principal Analyst at Interarbor Solutions, your host throughout this series of Ariba-sponsored BriefingsDirect discussions. Thanks again for listening, and come back next time.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: Ariba, an SAP company.

Transcript of a BriefingsDirect podcast on how both buyers and sellers can benefit from a cloud solution to discounting. Copyright Interarbor Solutions, LLC, 2005-2014. All rights reserved.

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Arlington Computer Products Simplifies and Speeds its Billing and Payments Using New AribaPay

Transcript of a BriefingsDirect podcast on how AribaPay is changing the face on online billing and payments, benefiting both buyers and sellers.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: Ariba, an SAP company.

Dana Gardner: Hello, and welcome to a special BriefingsDirect podcast series coming to you from the recent 2014 Ariba LIVE Conference in Las Vegas. We’re here the week of March 17 to explore the latest in collaborative commerce and to learn how innovative companies are tapping into the networked economy.

Gardner

I’m Dana Gardner, Principal Analyst at Interarbor Solutions, your host throughout this series of Ariba-sponsored BriefingsDirect discussions.

Our next innovator case study focuses on Arlington Computer Products and how they’ve been improving their financial processes and operations using the new AribaPay cloud-based B2B payment service. We’ll learn how an integrated and on-demand approach to ordering, billing, and settlement processes between buyers and sellers benefited Arlington Computer Products.

To learn more about how agile business services are entering into a new era, please join me in welcoming our guest, Arly Guenther, Chief Executive Officer at Arlington Computer Products in Buffalo Grove, Illinois. Welcome, Arly.

Guenther: Good morning, Dana.

Gardner: We’re also here with Drew Hofler, Manage Cash Solution Marketing Director at Ariba, an SAP company. Welcome, Drew.

Drew Hofler: Thank you, Dana. I’m glad to be here.

Gardner: Why are companies seeking to do things differently when it comes to paying and getting more digital and electronic in how they’re settling out their accounts?

Hofler: Dana, fundamentally, B2B payment is broken, in the sense that it’s very different from consumer payments. With consumer payments, you have the item that is being bought, and the information around the payment happens at the same time, at the point of payment, with the settlement of funds.

Hofler

With a B2B payment, however, the goods that are delivered or the service that is performed is done so 45, 60, or 90 days ahead of when the payment is settled. This disconnect in time between the information around the payment and the actual settlement of the payment causes companies to have a very difficult time reconciling payments that they receive. There’s a lack of remittance information around the payment, particularly when there are multiple invoices involved to settle that payment.

You have organizations that would like to pay with electronic payment because it’s more secure, cheaper, and faster. But the people being paid, suppliers, are struggling with that, because it often doesn't contain the information that they need to settle those funds.

So suppliers would like to get paid faster and electronically, but they need that information along with it. There has never been a payment in the B2B world that tied together net-term payment with all of the information that's necessary to manage and reconcile that payment. That’s where AribaPay comes in to try to solve that problem.

Gardner: Just for our audience, AribaPay was unveiled last year at Ariba LIVE and it’s a partnership with Discover, the financial services organization. Tell us about the general availability rollout. What’s going on here this week at LIVE, and why is this is a big bash, a big coming out for AribaPay?

First live transactions

Hofler: Last year, we announced our partnership with Discover and began our development process and design phase of building out the product. This year, we’re happy to announce that we've had our first live transactions between Discover and Arlington Computer Products.

Guenther

So, the first live payments have gone through the system, and the product is ready to bring out and it will be fully available to the general public in the second quarter of this year.

Gardner: Let’s go to Arly. Tell us a bit about Arlington Computer Products, about what you do, the size of your organization, and why AribaPay was interesting to you.

Guenther: Arlington Computer Products has been in business for 30 years. We’re an IT solution provider, servicing a broad spectrum of large enterprise customers. Last year, we did about $130 million in revenue, and we’re providing best-in-class IT solutions for our customers. So when we see a best-in-class solution like AribaPay, we really want to embrace it and use it ourselves.

We’re always looking at our business trying to get more efficient and drive cost out of our model. Customer satisfaction is our top priority, but at the same time, we need to be price competitive. So we’re always looking for innovative solutions, trying to get more efficient and more productive as an organization.

The space that we've been in historically has been very manual for us, very high touch. With AribaPay, we’ve been able to re-architect our accounting system to use a cloud solution, as opposed to a manual process.

We’re always looking at our business trying to get more efficient and drive cost out of our model.

As far as Discover, we've done business with Discover for more than a decade. They’re an outstanding organization, using best-in-class technology to drive their business. If you combine that with Ariba, which is a top-notch software firm, you’re really combining two great organizations. So we were really comfortable going forward with the pilot.

Gardner: As Drew pointed out, there are numerous benefits that come with  moving to an electronic-settlement process and using an integrated approach across the partnership or ecosystem like Discover and Ariba. For you, Arly, what were the top problems or top issues that you wanted to resolve by going into this new model?

Guenther: It has been really a very manual process for us. We would generate an invoice. We had to put it in an envelope. We had postage expense and envelope expense. We’d mail the invoice out, sit and wait for a payment, a check, to come into a lock box. We’d wait for the check to clear so the funds are available.

If we followed up after 45 to 50 days, we occasionally might find that the customer didn't even receive the invoice. So we’d have to resend an invoice. It was a high-touch, manual process. Now it’s an automated process. So there are some big productivity savings for us.

Ancillary benefits

Gardner: Arly, while expanding this across more of your accounts, do you see any ancillary benefits in terms of process refinement, analysis, or productivity  insights? Is there going to be perhaps an additional payback when you scale this up?

Guenther: Absolutely. We were in the pilot. As I mentioned, we’ve done business with Discover for over a decade. They’re a fabulous customer of ours. We’ve used Ariba with Discover for a number of years, just not AribaPay. Now, we really want to take it and use it across the board in our accounting system for our customer base.

Gardner: Drew, tell us a bit more about AribaPay for those who are intrigued and want to learn more. What does it actually do? What are some of the details, and how would you go about bringing this into your organization?

Hofler: As I said, the fundamental problem with B2B payment is that disconnect between the information and settlement of funds. That’s what AribaPay corrects and bridges that gap. On the Ariba Network, our core strength is everything from sourcing all the way through to the invoice being approved and ready to pay. That’s all of the information that goes along with the payment. The invoice, the line items, the purchase order (PO) behind it, even the contract behind is all there and backing up that payment.

AribaPay then takes it the final step and, in that settlement process, connects a unique payment identifier with that and connects with the Discover network to leverage their core strength, which is secure trusted settlement of funds and the infrastructure to do that.

With AribaPay, the supplier can see where the actual payment is every step along the process

Then, Discover settles the fund in electronic manner, but that settlement of funds is now tied together with the information that came behind that payment. So a supplier receiving a payment through AribaPay can get an automatic feed into their back-end system or they can come on to the Ariba Network and see every line item that in the invoice that came behind that payment.

Hofler: More importantly, it will highlight if there’s a discrepancy between what they invoiced and what they were paid. Say they invoiced $100 and they were paid $90 because the buyer disputed an item or they thought the price should be lower, AribaPay will highlight that with the I-card and tell you exactly where that discrepancy is, so that suppliers no longer have to search through and find where the issue is.

Finally, AribaPay has a very cool feature, we call it track-and-trace for payment. It’s very much like when you order something online and you get a packaged shipped to you. You get a tracking number and you can see where that package is geographically as it comes to your house.

With AribaPay, the supplier can see where the actual payment is every step along the process, from the time the payment is approved, to the time that it gives its execution and the file is sent, to when Discover debits the buyers bank account, to when they credit the supplier’s bank account. All the way along the line, they can see every step.

That’s what it does. It bridges that gap of information, which gives suppliers the ability now to embrace electronic payments, get paid faster, and have visibility into it, because they now have all that information that they need.

Dynamic Discounting

Gardner: We’re really creating these data rich transactions, where the data follows a transaction and it allows for a much greater transparency. How does that line up with other services? I'm thinking perhaps the Dynamic Discounting at Ariba. Is there a synergy of any sort between some of these other services and what you can accomplish with AribaPay?

Hofler: There is a synergy. AribaPay is really that last step in the true P2P process. It is the second "P" in P2P, and it closes that loop and it does so in a way that gives the suppliers a certainty of payment.

With Dynamic Discounting, it's a great next step. Dynamic Discounting simply gives the supplier the ability to choose a different date for payment and offer a discount in order to accelerate that payment.

In a normal discounting platform, that choice of the supplier will be sent to the buyers back-end payment system, which will tell them that the supplier wants to be paid early. That’s the last visibility that the supplier sees and they just trust that the process will work and the buyer will then actually pay them at that time and for the amount that they are expecting.

It adds that extra layer of visibility and certainty to the choice that they have to get paid. That’s very synergistic with Dynamic Discounting.

With AribaPay, the discount choice can be tied directly to the execution of the payment. They can see with certainty that, yes, the buyer has accepted that; yes, the buyer has now executed on that. They can see when it's coming. It adds that extra layer of visibility and certainty to the choice that they have to get paid. That’s very synergistic with Dynamic Discounting.

Gardner: Arly, as you’re hearing Drew describe these services and capabilities, do you think it might alter the way that you relate to your accounts, to your customers? Is there a value-add with having this visibility, tracking, and data with the transactions that might allow you to increase your services? Is this something you can extend back into your market?

Guenther: Absolutely. From a process stand point, it's a game changer for us in terms of driving productivity and improving cash flow. Just like anything else, as you drive down your selling, general, and administrative expenses (SG and A) and your own expenses and you get more efficient, you pass those savings on to the customer. But we’re really a technology company, and so when we get a best-in-class solution like this, we really want to maximize the benefits.

Gardner: I know it's quite early in the game. We've just begun doing transactions but can you see any metrics of success, any measurement of how this would work? We are anticipating, as you mentioned, cost savings, but have we put any numbers to that yet, Arly, or is it too soon?

Guenther: We’re anticipating a six-figure savings just between handling expenses, postal expense, and supply expense, but the real wild card is cash flow. When you improve your cash flow, the opportunity cost on that cash can be pretty high. So from that standpoint alone, we know it's going to be in the six figures, but as we free up cash to do other things, that’s going to make a big difference for us.

Gardner: Drew, for those interested in learning more, how would they begin? What's a good way of starting a process where they could begin to understand and even execute on something like AribaPay?

Lots of information

Hofler: A great place to go to learn more about AribaPay is simply AribaPay.com. There is a lot of information out there, some data sheets and a form that they can fill out to learn more information and hear from us.

We have some value engineering models that can help customers, both buyers and suppliers, understand how AribaPay can help their business. That would be great for a start. One other point I neglected to make about AribaPay is that we've talked a lot about the benefits of suppliers, which is great.

It's a wonderful benefit for suppliers, but we shouldn’t understate the benefit there is to buyers of not having to manage bank-account information any more. One of the benefits of AribaPay in leveraging Discover is Discover’s infrastructure and network of merchant acquirers and the process of bringing suppliers on. They’re capturing our bank information managing it, bumping it up against all the asset control checks, all of the know your customer (KYC), and things that have to happen to verify that bank information and then keeping that bank information up to date.

No longer do buying organizations, as they do today, have to hold on to supplier bank account information, if they are going to pay electronically. That is a very big benefit, particularly in light of what we’ve see in the news lately about certain companies having had their data briefs and payment information, bank information stolen. So this eliminates that risk by offloading the management of that bank information into a trusted third-party like Discover whose business is managing that information.

We have some value engineering models that can help customers, both buyers and suppliers, understand how AribaPay can help their business.

Gardner: Drew, looking to the future of maybe 12 months from now, the next Ariba LIVE or conference of note, what can we expect? Are there some added services or more analysis and analytical benefits that you can draw? Where do you expect this to go next?

Hofler: Right now, AribaPay is going to be launched in the second quarter of this year to general availability. It’s just the beginning. It’s first being launched to the U.S. alone. The very next thing for us is expanding that into other jurisdictions. So I would look for that, first and foremost in the next year.

Gardner: Well, great. I'm afraid we’ll have to leave it there. We've been talking about how Arlington Computer Products has improved their financial processes and operations using the new AribaPay cloud service. By examining an early users experience like an ACP, we've seen how an integrated and on-demand approach to ordering, billing, and settlement processes benefits both the buyers and the sellers.

A big thank you then to our guest, Arly Guenther, Chief Executive Officer at Arlington Computer Products. Thank you so much, Arly.

Guenther: Thanks, Dana. Thanks, Drew.

Gardner: And we've also been joined by Drew Hofler, Manage Cash Solution Marketing Director at Ariba, an SAP company. Thank you, Drew.

Hofler: Thank you, Dana. It's my pleasure.

Gardner: And also, a thanks to our audience for joining this special Podcast coming to you from the recent 2014 Ariba LIVE Conference in Las Vegas.

I’m Dana Gardner, Principal Analyst at Interarbor Solutions, your host throughout this series of Ariba-sponsored BriefingsDirect discussions. Thanks again, for listening and come back next time.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: Ariba, an SAP company.

Transcript of a BriefingsDirect podcast on how AribaPay is changing the face on online billing and payments, benefiting both buyers and sellers. Copyright Interarbor Solutions, LLC, 2005-2014. All rights reserved.

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Ariba Network Plus Dynamic Discounting Give Startup Mediafly Cash Flow Benefits, Help in Managing Capital

Transcript of a BriefingsDirect podcast on how cloud networking helps a small company work well with Fortune 500 enterprises.

Listen to the podcast. Find it on iTunes/iPod. Download the transcript. Sponsor: Ariba.

Dana Gardner: Hello, and welcome to a special BriefingsDirect podcast series coming to you from the 2012 Ariba LIVE Conference in Las Vegas.

We’re here to explore the latest in cloud-based collaborative commerce and learn how innovative companies are tapping into the networked economy. We’ll see how they're improving their business productivity along with building far-reaching relationships with new partners and customers.

I'm Dana Gardner, Principal Analyst at Interarbor Solutions and I'll be your host throughout this series of Ariba-sponsored BriefingsDirect case study discussions. [Disclosure: Ariba is a sponsor of BriefingsDirect podcasts.]

Our next innovator interview focuses on Mediafly, a startup company that delivers cloud-based applications for content management and distribution on mobile devices for Fortune 500 companies.

We’ll learn how Mediafly, through the Ariba Network, gained insight and control over its cash flow and found new means of managing capital and in aiding its ability to support ongoing operations, as well as to drive future growth.

To hear how they did it, please join me now in welcoming two executives from Mediafly, Carson Conant, CEO, and John Evarts, Chief Financial Officer and Chief Operating Officer. Welcome to you both.

Carson Conant: Thank you.

John Evarts: Thank you very much. Good to be here.

Gardner: Let me start with you, Carson. Tell me about the type of business you are. I think there's an interesting opportunity here to explore why buying and selling things works in an advantageous way for you. Tell me about the size of your company and why managing cash flow is so important.

Conant: Mediafly is the leader in the presentation platform market. What that means is that we’re the company that helps bridge the gap between large Fortune 1000 companies, their internal systems, and primarily mobile applications, but also things like Internet-connected televisions, and so forth.

Lots of video

Large companies create lots of video. It could be live broadcast, sales presentations, training videos, and TV and movie industry content. When they're trying to distribute that content to make it available on all of these emerging devices, particularly at that large scale, they need a provider like Mediafly. We’re a leader in the space right now.

Gardner: As a small company, what are you facing, when it comes to the financial pressures? Let’s go to you, John.

Evarts: As a small company, we often don't have a balance sheet that’s attractive to banks, among other things. As we seek things like angel investment or equity investment, we need to do things that are extremely capital efficient with those funds.

When we have an opportunity for revenue, especially revenue at large corporations, Fortune 100 companies, these are large contracts. As a small organization, contracting with larger organizations, it’s absolutely critical for us to manage that cash flow well and have visibility into the cash flow.

As we said, we’ve been growing very quickly. So our recurring revenue has grown by 3x over the last two years. As we grow quickly, we need to have that visibility into cash management, because it’s absolutely critical that we staff at the right time relative to taking advantage of opportunities that are out there in the market.

Gardner: So looking at this from an elasticity point of view, larger companies have a bit more wiggle room. As a smaller company you don't, but you need to grow fast. Help me understand what led you to do things differently in order to make this elasticity work in your favor.

Conant: We’re very fortunate. One of our largest customers is in the media entertainment space and we did a large seven-figure deal with them over a series of years. But the way that they do invoicing and transactions is through the Ariba Network. They said, "For you to get paid, join the Ariba Network."

So that was the first thing that got us onto the network. What was amazing is that once we got on there, as John said, it was unlike a lot of our other transactions with similarly large companies. In those companies it’s just like a black box. You've got a several hundred thousand-dollar invoice that goes out, and you may not know if that’s going to come in in two weeks or six weeks.

What was amazing to us with Ariba was the ability to know exactly where we were in that payment process. Ultimately we took advantage of this program they call "dynamic discounting," which allowed us to accelerate cash for a couple of basis points.

Huge ramifications

So for a fairly inconsequential amount of money to us, we were able to get paid in about 14 days instead of 60 days. It had huge ramifications on our business. What that did for us is allowed us to interact with them in a way that they preferred, but still have the nimbleness that we need from it as being a small company.

Gardner: So visibility and predictability are really important. In the past, people would generally go to a bank to get a line of credit and pay a high interest rate in order to have that accordion to manage their cash flows. You’ve found a way to do this, not through a bank, but through working directly with your customers and perhaps even incentivizing them to help you with your cash flow and visibility and your saving on the interest. It sounds like a win-win all around.

Evarts: It's an excellent opportunity for us to work with a partner and deepen that partnership with our vendors. We’ve found that, as Carson said, for a few basis points of a concession on the contract, we’re able to factor 100 percent of the contract value of the invoice.

When that occurs, the advantage to us is that we're able to immediately take advantage of it, as soon as it hits the system, to take 100 percent of those otherwise unknown collection periods. When we can reduce the collection periods from 60 days all the way to 14 days. We’re in a much stronger financial position, because we can take advantage of those dollars.

Gardner: Carson, what has this enabled you to do in terms of growing your company?

Conant: The first time we took advantage of dynamic discounting, it was relatively early in a development cycle for a security package that we were in the process of building. What that did allowed us to get access to cash to bring in additional resources to accelerate those featured enhancements.

It sparked additional Fortune 100 contracts. It was fundamentally game changing for us.

Literally, two weeks after signing this deal with one of the largest entertainment companies in the world, we were in the board room with one of the largest global banks in the world touting these new security features we had, which we otherwise wouldn’t have had for maybe 60 days.

It sparked additional Fortune 100 contracts. It was fundamentally game changing for us. We joke that it would be interesting if all of our customers leveraged something like dynamic discounting. It would be transformative for our business. It would drastically accelerate how we can deploy cash. Then you think about it in terms of what could it do for the economy.

If all these companies were taking advantage of this, it would boost the stability and the growth of their partners and their vendors. It would be something. That’s why we’re so vocal about it.

Evarts: As a small organization that is very nimble and trying to innovate, it speeds up and accelerates the pace of innovation that we’re able to generate. The new features that we offered to this first client, we were immediately able to turn and sell to one of the leading investment banks as the same security capability.

So when we’re able to quickly accelerate and bring new innovations to market, obviously everybody benefits. Mediafly benefits, and ultimately, our customers are going to benefit as well.

Level playing field

Gardner: And what strikes me is that this seems to be a level playing field between you, a small company, and as you point out, some of the largest media companies in the world. You’re playing with the same rules with Ariba being the arbiter, if you will. You can partake in those services just as easily as the big company. Is this a leveling of the playing field?

Conant: Absolutely. There are probably two or three technologies that we've taken advantage of that have just come into play in the last three to five years. One of them is cloud-based infrastructure. We don't have to buy servers anymore. That’s allowed a company of our size to outpace and out-compete companies that have been around for a long time and provide enterprise services to Fortune 100 global companies.

Then, you look at Ariba, and it's very similar. It allows us to interact with them the same way that they would interact with another large company. Doing business with us doesn’t feel different than doing business with another large company.

They get what they want, we get some additional visibility and some things that are valuable to us. But, these technologies have just come into play in the last three to five years, and it's really allowed a company like Mediafly to exist.

Gardner: A lot of times, analysts like myself focus on the technology behind the cloud, but it's really a game changer, when it comes to business processes and allows for the compression of what used to be latency in terms of business functions, monetization, and cash flow. Now, when everybody has visibility, when the level field is there for all participants, it's much more efficient and direct, and we’re just starting to pick some of the fruit of that.

These technologies have just come into play in the last three to five years, and it's really allowed a company like Mediafly to exist.

Evarts: And you touched on it. Creating scalable solutions is absolutely critical and it allows a small organization with relatively limited initial capital, first to be able to scale to a level, and participate in the Ariba Network, and basically have the same credentials as some of the largest companies in the world.

Folks who are transacting with Mediafly are doing it in the exact same way that they do with other Fortune 100 peers. To some degree, to us, it's a competitive advantage, and we feel that way. We feel that if we're on the system, we’ve been vetted, and other folks are using us on the system. It's an excellent credential for us to have and a nice reference for us.

Gardner: So it's also a go-to market strategy.

Evarts: Absolutely.

Gardner: Tell me a little bit more about Mediafly. What do you do? Content management, the mobile thing, is huge. You're using cloud to your advantage in a number of different ways. Maybe you can give us the elevator pitch about what you do, and why people should be interested.

Conant: One of the best ways is to think of an example. Think of all the TV and movie productions that are going on the studios. Those companies have thousands of video files that they're housing inside of their four walls. They're trying to expose that content to all of their executives and staff, everybody from the makeup artist that needs to watch the last three dailies to the CEO and the president.

Perfect platform

Now, they want to be able to do that on iPads, iPhone, Android, and on televisions connected to the web. We're the perfect platform, because there is so much that has to go on that so many gears are turning to make all that happen.

That’s a perfect solution for the cloud, and those companies now integrate with us so that that material is available to all the different stakeholders on all of these different devices. So we’ve dropped ourselves in and filled the gap between their in-house systems and all of these mobile devices.

Gardner: If I understand correctly, lots of content needs to be shared, and you're able to deal with the multiple panes of glass, the formats, the streaming, codecs, all these other technical issues.

Conant: Yes. Security is a huge thing, too. Think about the value of this content. It's their important assets. How do you move this thing around so that when it's on an iPad, if that iPad gets stolen or persons are let go from the organization, that they're not walking away with sensitive information.

We also provide that same service for documents for one of the larger global banks. So when they're training their sales force or their sales force is going on doing one-on-one presentations to large money managers, they are doing that with iPads. If that thing is lost or that thing gets hacked into, that content is protected. This comes back to that security suite. There is a whole lot of functionality we’ve added to really make this enterprise great.

We feel that this Ariba Discovery concept is extremely valuable to us as a small organization, as we look to scale as a lead generation opportunity and ultimately, as we’re transacting business.

Gardner: Now that we understand a bit more about how this is important as a function, let's revisit this notion about the cloud as an enabler. Ariba calls it the networked economy. That really gets to what we've been talking about -- that there are multiple levers that incentivize all the players to contribute. But then they all get something out of it, including that great visibility and control, when it comes to money, as well as business processes that can make all the difference.

Let's go one more time into this notion of the networked economy. We’ve touched briefly on how this could be a go-to market for you. Let's expand on that. How in providing a discount incentive to cash flow, and using the Ariba Network, does that end up getting you more customers?

Evarts: One of the tools that we’re just trying to tap into is this concept called Ariba Discovery. Discovery allows you to self select a series of industries, what they call commodities. That allows you to say, "These are the services that we offer." Then, large companies are able to go on that system and say, "These are the services that we're looking for." So it's really kind of a matchmaking function.

While we’ve only scratched the surface -- we feel we're relatively new to this system -- we feel that this Ariba Discovery concept is extremely valuable to us as a small organization, as we look to scale as a lead generation opportunity and ultimately, as we’re transacting business.

We feel that as a small vendor, if there are a number of individual companies that are looking to leverage this system, we're happy to make a light concession, obviously, for the right amount of basis points and just for the right timing. We're able to then take advantage of that, accelerate cash in. When non-financial companies, at the end of third quarter last year, had $3 trillion sitting on their balance sheets, you know that there's a ton of liquidity out there that will be invested, and is going to be invested in different ways.

One way that folks can take advantage of it is using a system like Ariba in order to support the supply chain, investing in their current partners.

Of, for, by the cloud

Gardner: So you're sort of of, for, and by the cloud. When it came to moving toward Ariba and using some of their services, did that work as an off-the-cloud service, where there wasn't anything on premise or you didn’t have to have your IT people involved in? How friendly a cloud player did Ariba turn out to be?

Conant: Extremely friendly, relative to some other more manual processes that some of our other customers leverage. The best example that is our ultimate discovery of the dynamic discounting program. Our controller noticed a checkbox in our interface. It's a web-based interface and he asked John, "This looks interesting. Should we take advantage of it?" We said, "Yeah, let's try it on our first invoice."

This was not some training that had to happen before we understood how to use this system. It was a couple of checkboxes, and now we are getting paid earlier.

To me, that's really what the cloud is. A company like Ariba, in my opinion, has done a really good job of abstracting, so you're left with just an elegant functionality and it's in the cloud. It's all web-based. There's nothing we had to deploy on premises.

We're a cloud company. So it feels natural. I can't even imagine how simple it must seem to somebody who's used to using things on premises.

Not only can we now take full advantage of their entire cloud-based infrastructure, but it was very easy for us as a small vendor to get onto this system.

Evarts: One of the key elements for us was the ease to get on the system. When a customer whose that large asks you to join, and you're as small as you are, you say absolutely, how quickly and when. Ariba was absolutely fantastic in helping us to get onto this system and then ultimately helping us navigate, within the course of a couple of hours max, to have been fully integrated into the system. Not only can we now take full advantage of their entire cloud-based infrastructure, but it was very easy for us as a small vendor to get onto this system.

Gardner: On the other side, the flip side of the coin, these global Fortune 500 companies were familiar with Ariba. You didn’t have to drag them along and convince them. There was already the established trust and credibility.

Conant: We’re still scratching the surface, as more and more companies are moving this way. It seems like a lot of the people that we’re talking to are moving into cloud-based procurement solutions, things like Ariba. As more time goes on, more and more of our customers will be on Ariba and leveraging dynamic discounting and so forth.

What's great is that each one that is using Ariba is already set up. It's just a matter of them attaching our profile or however it happens behind the scene. But there are not a whole lot of additional process. That’s what's neat about the network effect. Once multiple parties are on a network, it's just a matter of connecting the two lines together.

Gardner: I am afraid we’ll have to leave it there. We’ve been talking about how Mediafly, through the Ariba Network and a dynamic-discounting program, gained insight and control over its cash flow and found new ways of managing capital to support ongoing operations and drive future growth.

Join me in thanking our guests. We’ve been here with Carson Conant, CEO of Mediafly based in Chicago. Thank you, Carson.

Conant: Thank you, very much.

Gardner: We’ve also been here with John Evarts, the Chief Financial Officer and Chief Operating Officer at Mediafly. Thank you.

Evarts: Thanks for having me.

Gardner: And thank you to our audience for joining us for this special podcast coming to you from the 2012 Ariba Live Conference at Las Vegas. I'm Dana Gardner, Principal Analyst at Interarbor Solutions, your host throughout this series of Ariba-sponsored BriefingsDirect discussions. Thanks for listening, and come back next time.

Listen to the podcast. Find it on iTunes/iPod. Download the transcript. Sponsor: Ariba.

Transcript of a BriefingsDirect podcast on how cloud networking helps a small company work well with Fortune 500 enterprises. Copyright Interarbor Solutions, LLC, 2005-2012. All rights reserved.

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• Ariba, IBM Deal Shows Emerging Prominence of Cloud Ecosystem-Based Collaboration and Commerce
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Ariba Dynamic Discounting Gives Companies New Visibility into Cash Flow to Improve the Buying-Selling Processes

Transcript of a sponsored BriefingsDirect podcast on how discount management and dynamic discounting can help businesses manage their cash better.

Listen to the podcast. Find it on iTunes/iPod. Download the transcript. Sponsor: Ariba.

Dana Gardner: Hi, this is Dana Gardner, Principal Analyst at Interarbor Solutions, and you're listening to BriefingsDirect.

Today, we present a sponsored podcast discussion on how discount management and dynamic discounting can dramatically improve how enterprises procure by better managing the buying process, improving cash management, and gaining an analytic edge on constantly improving processes through automation.

We're here now with an executive from Ariba to learn how recent trends are driving savvy companies to improve how they manage their supplier and buying processes using dynamic discounting.

Please join me now in welcoming Drew Hofler, Senior Manager, Working Capital Solution at Ariba. Welcome to the show, Drew. [Disclosure: Ariba is a sponsor of BriefingsDirect podcasts.]

Drew Hofler: Thanks, Dana.

Gardner: Why are you seeing such an uptake in how companies are looking to improve the way they wreak efficiencies out of the buying process, I have to assume it has something to do with the economy?

Hofler: We've seen a lot of growth in this area, particularly over the last three or four years with another wave of economic bad news coming up now. In 2008, when the credit crisis first hit and supply chains became dramatically impacted, you had a lot of suppliers who found their access to credit severely curtailed. You had a lot of buyers who were using the opportunity to enhance their cash flow and their cash position by extending terms with suppliers.

So you had kind of a perfect storm of buying organizations pushing out payment terms and supplying organizations not able to fund those longer terms via traditional credit means, because those were being pulled away. So that created a real cash flow crisis within supply chains.

Now, with what's looking like potentially a double dip recession and the S&P downgrade that recently came along, companies have again realized how important cash is to them. You see that in the metrics. You see that in the Federal Reserve reporting out every single quarter. The amount of cash on the books of corporate America just continues to rise, as companies hold on to their cash and hoard their cash.

In fact, there was a great article a couple of weeks ago in The Wall Street Journal about how companies are actually selling bonds and increasing corporate debt before the impact comes from the S&P downgrade, not so that they can raise cash for expanding operations necessarily, but so they can raise cash to hold it as a buffer against what's going on.

If you look at that in conjunction with suppliers still having their access to credit curtailed, it's not as bad as it was at the height of 2008, but it still is far from where it was pre-2008 in terms of their access to credit.

Liquidity risk

You have this situation where there is significant liquidity risk in the supply chain due to suppliers who are not in as good a cash position -- smaller and medium sized suppliers typically -- facing a downturn in orders, facing a downturn in the economy, and not having necessarily the cash buffer or access to credit to weather that.

On the other hand, you have buyers who have massive amounts of cash that are sitting in banks, where they are earning next to nothing. In fact, two days after the S&P downgrade, Ben Bernanke and the Fed stated that they'll probably keep rates down at around zero for the next two years, until mid-2013.

So you have these corporations that have this massive stockpile of cash inside of banks, inside of short-term liquidity investments, money market mutual funds, commercial paper, that’s earning literally almost nothing. In fact, in the case of Bank of New York Mellon, a couple of weeks ago, they started charging companies to hold cash in their vaults, which is somewhat unprecedented.

You have this big dichotomy, where you have buyers who have lots of cash earning basically nothing on it in the short-term, and their suppliers who don't have the access to that cash and have longer terms extended to them. When they do get credit, there are some pretty restrictive covenants with their banks and they're paying a little bit higher rate than they would otherwise. You have this significant liquidity risk.

All of that is to say that what we're seeing is that buying organizations are starting to realize that they can take advantage of the fact that they have all this cash and suppliers who have this need to essentially become the bank and put that cash to work.

Organizations are starting to realize that they can take advantage of the fact that they have all this cash and suppliers who have this need to essentially become the bank and put that cash to work.

They earn a greater return by paying suppliers early in exchange for a discount -- so they're earning a better return on their cash than it would have sitting in the bank -- but they also remove some risk from their supply chain by injecting liquidity into their supply chain, giving suppliers access to liquidity that they might not have otherwise in a way that, one, is not debt to their supplier, and two, improves their working capital position by lowering their days sales outstanding (DSO), when they get paid early on that receivable.

We are seeing all these things line up to create a perfect opportunity for both buyers and suppliers to collaborate over these cash flow needs that are being created by the economy right now.

Gardner: I suppose the solution then at the high level is fairly clear, but how to implement that becomes the issue. So many organizations have disparate ways of managing these issues, managing their procurement and supply chain, often manual processes still at work.

How do you allow for the suppliers to create an incentive for this improved discounting and improved cash flow for them, and how do they then manage and instantiate this and make it repeatable?

Hofler: It’s a great point, because a lot of organizations in this realm of payment terms, agreements with suppliers, paying suppliers, approving invoices, and all of this type of thing, is still a very manual process in so many organizations.

I have looked at buying organization and analyzed their vendor files and at times found literally hundreds of different payment terms to their suppliers, where a best practice would be to have maybe five to 10 that are pretty standardized, unless there happens to be some great exception. People are just making terms with the folks that they know, buyers knowing the salesperson on the supplier side, and agreeing to specific terms that may have nothing to do with the corporate objectives or strategy.

Getting visibility

In order to reap this opportunity and understand what's happening a company needs to get visibility into what's actually happening. That’s where Ariba’s cloud technology allows companies to pull this through the Ariba Network and gain visibility into what's going on and automate the process greatly.

Once they have that visibility, on the one hand, they realize they can get their terms and their payment under control. A lot of times, a company will have what's supposed to be a standard term, let’s say 45 days, 60 days payment, but a supplier is being paid immediately. Somebody called in to the company and the supplier said, "I can't wait this long for my cash. Can you pay me early?" And the person on other end of the phone changed the payment to "immediate" in the ERP for the buyer.

That’s a cash flow waste right there. You're paying immediately when a buying organization could be holding up their money for 45-60 days, or exchanging that immediate pay for some value in the form of a discount.

We're seeing that companies are getting control of that process through automating it, through sending POs through the Ariba Network to their suppliers, where it's centralized and visible to corporate as a whole, bringing invoices back in to accelerate the approval process, and also bringing it under some control and visibility as well.

That opens up the opportunity that we're talking about in terms of collaborating over cash flow, because what you have are these invoices coming in and being approved in a rapid manner, because they're coming in clean. The Ariba Network assures that invoices come in clean and they're being approved quickly. Now you have invoices that are approved say on the fifth day after receipt, but not due until day 60 after the invoice date. That time gap is where the collaboration can come in.

These invoices are coming in and being approved in a rapid manner, because they're coming in clean.

When it is in the cloud online, the buying organization has visibility to all of their suppliers, being able to offer early payment and being able to use their cash to earn greater returns and offering early payments. But all the suppliers then have visibility into that opportunity as well. And the right party at the supplier company that has visibility into that.

When you think about early payment, discount terms, we think of the classic 2/10, net 30 that’s negotiated into a contract at some point. Think of who is having that conversation? It's typically procurement and the salesperson on the side of the supplier. That salesperson on the side of the supplier really is not all that concerned about cash flow. That’s not their metric. It's not what they're measured against, and they don’t really care.

We find that not too many companies get early payment discounts into a large amount of their spend due to that. But when those invoices have come in and have been made visible through this online portal for suppliers to see, who is it at the supplier that now is looking at that? It's the accounts receivable (AR) side. It's the controller. It's the treasurer. It's finance on the side of the supplier that cares about cash flow, that realizes when they need enhanced cash flow, and has the ability to make a decision over that.

We're seeing a huge increase when we deploy clients between what they had originally captured in contracts in terms of early payment terms, versus what they're now able to capture, once they put this in place with the Ariba Network, where the right audience and their suppliers can come in and see that.

So those things -- automating the process, getting visibility into it, getting your process under control so that everything is done in a timely manner to create the opportunity, and then having an online portal visibility for your supply base to see the opportunity -- are key to accessing it.

Business process management

Gardner: So I think that at a very high level we're talking about better business process management (BPM), but across disparate systems of record, different organizations, and the role that Ariba plays, has the opportunity to cross among or between them, but automate, give them insight and visibility at the same time. So that’s pretty cool.

Now, I know the name of your product that you apply to a lot of this is called Ariba Discount Professional, but I have also heard it referred to as "dynamic discounting." What does that really mean? How does that work?

Hofler: The market term for us is Ariba Discount Pro, but the broader vernacular for the market is dynamic discounting or discount management. Dynamic discounting has two aspects to it. One, it's the dynamic nature of it, giving the supplier the ability and control to say when they want to get paid early, when they need the money, to have this sort of automated online conversation or collaboration with the buyer to agree on early payment terms, on an invoice-by-invoice basis.

The supplier can say they don’t need early payment all the time, but there are definitely business cycles, financial cycles in the quarter, or business cycles and seasonal suppliers, where they may have to purchase a lot of stock for an upcoming season, or they might want to purchase some equipment. Then, they need to accelerate some cash flow in order to do that.

The supplier can dynamically say, "Here's what's available to me, and I'll take that invoice, that invoice, and that invoice on an early payment. I agree to those terms." And boom, it's done. So it's basically like an ATM for them. They can choose which ones they want.

The other aspect of dynamic discounting is the fact that it allows for a fair and prorated discount rate to the supplier from the buyer.

The other aspect of dynamic discounting is the fact that it allows for a fair and prorated discount rate to the supplier from the buyer. Before, in the traditional 2/10, net 30 and 2/15, net 45 that a lot of companies have, the structure is such that if you can approve the invoice and pay by day 15, you take 50 percent discount. If you can't approve it by day 15, then you wait and you pay the full amount of the invoice on day 45.

With dynamic discounting and our Discount Pro product, buyers are able to offer to their suppliers a prorated discount that says, "We can pay you early from the moment this is received or from day 15," whatever fits the buyer’s needs, and then prorate that say 2 percent discount down to 0 percent on the net due date of that invoice.

It's fair to the supplier. If they are getting paid 30 days early, they pay a higher discount. If they are getting paid 15 days early, that discount gets lowered in such a way that is fair to that supplier, and yields a constant and consistent return on cash on an annualized basis to the buying organization.

So for example, the 2/10, net 30, that’s the classic textbook example is a 36.5 percent annualized rate of return. So at 20 days early on day 10, it's a 2 percent discount; at 10 days early, 20 days after the invoice is received, it's a 1 percent discount. Both of those equate to 36.5 percent annualized return on cash for the time period that the cash was deployed.

The buying organization is ensured a consistent return on their cash deployed. The supplier is ensured a fair system control discount based on when they actually receive the cash. So those two pieces, that slope line and proration, as well as the dynamic ability for a supplier to achieve early payment on an invoice-by-invoice basis based on their business need are the things that really define dynamic discounting.

Substantial returns

Gardner: I have to imagine that we're talking about very large organizations, very large procurement sums, and therefore the returns can be quite substantial. It makes sense of course for the buying organization to be able to do the best they can with their cash flow, and getting a discount would do more for them than letting it sit in a low interest-bearing account, as you pointed out.

But what really intrigues me about this, Drew, is for the suppliers, where there is complexity in inventory and there is transportation and logistics issues, it gives them a chance to really analyze some of the timing that works to their advantage and then incentivize based on these discounts as to how that could then benefit them.

There seems to be a huge efficiency, maybe difficult to measure in dollar terms, but a huge efficiency potential for these suppliers when they exercise this dynamic discount.

Hofler: I would agree with that. There is just a whole ton of benefits to the suppliers, because as you say, they have full visibility into when they are going to be paid, how much, and on what, and full control over that.

As I mentioned before, it's like an ATM for them, if they need it, where they have access to this pool of liquidity, depending on the things that come along. If anything like logistics, transportation, or added gas prices spike for a week or two and their cash flow has to increase, well, because of that outlay, they can access this early payment and this cash in a way that's very beneficial for them, because suppliers have some access to some cash flow. It's not completely shut off for them. A lot of suppliers will take credit cards or P-Cards. A lot of them will access lines of credit and things to that effect.

It's often cheaper than they can find financing elsewhere, and it does so in such a way that lowers their DSO, because they're basically turning their assets of a receivable into cash.

But those do two things to them. One, P-Cards are extraordinarily expensive in terms of the exchange rate that they have to pay. And two, lines of credit and that type of thing add debt to their balance sheet basically.

With this type of dynamic discounting, suppliers access this cash flow in a way, depending on what the buyer offer might be or what the buyer might accept in terms of the counteroffer from the supplier, that is typically cheaper than than credit cards. It's often cheaper than they can find financing elsewhere, and it does so in such a way that lowers their DSO, because they're basically turning their assets of a receivable into cash. It lowers their DSO, which is great for their working capital metrics and cash convergence cycle.

And it does so in such a way that adds zero debt to their balance sheet, because it's just transferring one asset into another from a receivable into cash. So definitely a lot of supplier benefit.

Gardner: And because Ariba Discount Professional is cloud-based, I imagine that the ability to implement this is fairly straightforward. I also see that there is tight integration with the Ariba Network, which allows for a large supplier participation, an ecosystem, a whole greater than the sum of the parts. Perhaps you could give us a little bit of information on the benefit of being cloud-based and why the Ariba Network integration has benefits?

Sending a message

Hofler: Discount Pro is based on the Ariba Network platform. From the buying side, it simply requires the ability to send a message from your ERP -- we call it a payment proposal message -- to the Ariba Network. It requires a connection, and there are a number of ways to do that.

We have standard adapters for most of the large ERPs -- PeopleSoft, Oracle, SAP. We've integrated with JD Edwards, Lawson, and various others. Simply installing this kind of middleware adapter takes the feed of data from the ERP, translates it into the Ariba cXML. You put that in place. It's basically that middleware to communicate that information back and forth from the Ariba Network, and that's essentially it.

There obviously is some work involved in that, but it's so much lower than on-premise type of work that you would have to do. There's much lower cost, and much quicker time -to-benefit for that. From the supplier’s side, being based in the cloud and on the Ariba Network, it literally can be as simple as a three minute process of signing up on the Ariba Network.

I have actually done it myself to test with a side business, and it's very easy to do. You sign up, you agree to the relationship with your buyer, and boom, all of a sudden you have visibility into every thing that that buyer pushes onto the Ariba Network for you, including the opportunities for early payment.

From a buyer's perspective, with it being on the Ariba Network, they have access to the hundreds of thousands of suppliers that we have on the Ariba Network. In fact, most of the time our new customers will see anywhere between a 20 percent and a 50 percent match of their vendors already on the Ariba Network.

From a buyer's perspective, they have access to the hundreds of thousands of suppliers that we have on the Ariba Network.

So it makes time-to-value an enablement so much quicker. It's then a matter of simply communicating with the supplier, who is already used to the Ariba Network and already on it with other customers and getting them to agree with the relationship with you. All of a sudden, you can transact with each other.

So that network effect is really finding benefit with our buying organizations for sure.

Gardner: So we've got the basic information. Now perhaps we can get some information about what it does in terms of pay-offs. Do you have some examples of folks that are doing this? What sort of returns it's getting for them? How it's impacting them in terms of productivity benefit as well as pure dollars and cents?

Hofler: We've had a number of organizations, a large retail and sporting goods organization, that came in and increased their discount capture by about 90 percent.

One thing is coming onto the Ariba Network and getting your process under control. As I said before, companies don't necessarily have a lot of their spend under contract discount term, but they do have some. Their procurement folks have negotiated some discounts, early payment discounts, in the contract. A lot of that is not being captured, because the process doesn’t allow them to approve the invoices in time, and that type of thing.

That was the case with this organization. It was capturing about 35 percent of their discounts, and raised that to about 95 percent very quickly. So that's an immediate savings and immediate capture of lost opportunity and value to them. Simply by getting their process under control allowed them to capture millions of dollars of lost savings.

In addition, they saw their capture of savings go from about 5 percent of their suppliers to a penetration of over 20 percent of their suppliers in a short period of time as well.

Seeing the opportunity

I believe it’s because of the things that I mentioned earlier. It was now putting the opportunity in front of the right people at the supplier’s side. When they realized they had the opportunity, they took advantage of it, because as I said, the fundamentals are there in the market, where suppliers are typically hurting for cash and cash flow and opportunities for that, willing to take early payment.

Buyers have lots of cash. When you just bring those two parties together in a way that makes it easy for them to collaborate and meet that need, your participation is going to go up for sure. And that's what we've seen.

Gardner: I was just going to say that in a slack economy, and in some cases an even tougher economy than we have had most recently, finding efficiencies is de rigueur, it's not really an option.

Hofler: That's exactly right. People are looking for everything to make their companies leaner and better and capture all the value that they possibly can.

I may have already said it, but it's really a win-win. There is value to both sides, and it's not just one imposing their will on the other in order to make their company better at the expense of the other. It is really a win-win. There are significant and tangible benefits to both sides when they do this.

Some of them will average around 24 percent annualized return on their cash. Others will average less. It depends on how they want to approach their supply base.

I think that's why we've seen so many companies pick this up. We've had growth rates of 60 percent or so in our buyer customer base. Our customers, shortly after going live, have been seeing growth rates in their opportunity and discount capture with their suppliers of 60-80 percent month over month. Obviously that will stabilize at some point, but I think what that says is that huge growth curve, particularly in the first year or so of doing it, speaks to the fact that there is this latent opportunity out there.

We have customers and some of them will average around 24 percent annualized return on their cash. Others will average less. It depends on how they want to approach their supply base. Many buyers will take the opportunity, when there's an opportunity to earn very significant returns on their cash of 36 percent or more from a certain part of their supply base. Typically, the longer tail, the smaller suppliers, will take advantage of that.

But others, especially more recently, are realizing that they can take a nuanced approach to this and look at their entire supply chain and approach each segment differently.

So if you are a long tail of suppliers that otherwise would take P-Card or do things like that, you can get a large amount of return on your cash. But on the other end of your supply chain, your goal as a buying organization with more strategic suppliers is not so much to wring all the value in terms of return on cash that you can out of them, but to make sure that they are there for you when you need them, to reduce the liquidity risk.

So a lot of buyers are taking the cash that they have, using this product, and offering the opportunity to their more strategic suppliers to gain access to the cash piles that the buying organization has, but at rates that are much lower, that are closer to what they might be able to get out in the marketplace from a bank.

No burden to supplier

Those are more around 6 percent, 4 percent annualized, but still much better than the buying organization gets on their cash sitting in a money market account earning less than a quarter of a percent, or close to zero right now. But they do it in such a way that does not add a burden to their supplier.

I'm seeing buying organizations take a blended, more nuanced approach to using this. The great thing about the tools online is that they have full flexibility to do that, to group their suppliers how they wish, to offer different rates to different suppliers, to control the amount of cash that they make available, and they are really starting to take advantage of that.

Gardner: Drew, I'm afraid we are about out of time, but I would still like to hear a little bit more about what is going to happen in the future that might further incentivize and encourage folks to pursue this.

I'm primarily thinking about those companies that take advantage of cloud more. The more that you take advantage of cloud, the more commonality there is at a cloud platform or a cloud of clouds, it seems to me the more opportunities there are to define these cross-pollenization level types of efficiencies and then apply them realistically.

It enables collaborative cash flow, and that collaboration is really what the cloud, social networking, business social networking, is really all about.

What's coming down the pike. Maybe it's cloud, mobile, social. How does that impact why folks would be perhaps pursuing this dynamic discounting value even more?

Hofler: When you talk about dynamic discounting, what we like to say is that it enables collaborative cash flow, and that collaboration is really what the cloud, social networking, business social networking, is really all about. It's about communicating, communicating need, and collaborating over solutions.

What I see coming down the line is that, as more and more network or cloud effect takes place, where suppliers who are on the Ariba Network, for example, have multiple buyers participating in this and so they are doing this across different buyers, it becomes more of a norm.

It becomes something that is a normal part of business. I think we're starting to see that normalized, because dynamic discounting is a very fairly young industry still in terms of overall business practices and processes. But we're starting to see it become more of a norm.

When you have that happening over the cloud, when you have that kind of collaboration of information going back and forth, you have more suppliers becoming normal, we'll see buyers learning and having access to aggregated data, trends, and behaviors that show them how to approach this, because they can see how it has worked across industries in the past, and then supplying organizations finding it much more normal.

Social media

I see it tying into the communication methods that are becoming so prevalent in social media and in the cloud, just basically to give suppliers access to the opportunity and open up the opportunity. We've seen such growth when buyers become active and make this available to suppliers, simply because it's tapping into the late need that suppliers didn’t know they had a fix for, that they had a solution for, in terms of accessing this cash.

As that becomes more available and more known through the cloud, through the collaboration, the suppliers hear about it more, they realize they have the access. Just that ability for it to go viral is what's really going to happen more and more, as we go into the future and it kind of snowballs.

Gardner: We've been listening to a sponsored podcast discussion on how discount management and dynamic discounting can dramatically improve how enterprises procure and better manage the buying process while also improving cash management.

I'd like to thank your guest. We have been joined by Drew Hofler, Senior Manager in the Working Capital Solutions Group at Ariba. Thanks so much, Drew.

Hofler: Thanks, Dana. My pleasure.

Gardner: Let me ask you one last question. Where can you go for more information on this if you wanted to pursue an understanding. Maybe there is a white paper, background information. What would you recommend?

Hofler: I'd go to www.ariba.com and look at our Manage Cash section. There are all sorts of things in there, some white papers and case studies and things to that effect.

Gardner: This is Dana Gardner, Principal Analyst at Interarbor Solutions. You'vee been listening to a BriefingsDirect podcast. Thanks again for coming and listening, and do come back next time.

Listen to the podcast. Find it on iTunes/iPod. Download the transcript. Sponsor: Ariba.

Transcript of a sponsored BriefingsDirect podcast on how discount management and dynamic discounting can help businesses manage their cash better. Copyright Interarbor Solutions, LLC, 2005-2011. All rights reserved.

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