American Electric Power Leverages Dynamic Discounting and Business Networks to Bring New Efficiency and Innovation to Buying
American Electric Power Leverages Dynamic Discounting
and Business Networks 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. Sponsor: Ariba, an SAP company
Dana Gardner: Hello, and welcome to a special BrieﬁngsDirect podcast series coming to you
from the 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.
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. We’re
here with Drew Hoﬂer, Manage Cash Solution Marketing Director at Ariba, an SAP company.
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.
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.
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
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?
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
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
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
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.
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
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: American Electric Power is an electric utility. It’s one of the largest investor-owned
electric utilities in the country. We’re in 11 states. We have 5 million customers. And 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 P2P process, and got 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 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.
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?
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.
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 today 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 -- 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.
Gardner: Of course, a recurring theme here at Ariba LIVE is 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.
So 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 afterwards, 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?
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?
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 reengineering that a
customer is doing. We point it out to them as a natural next progression when they are going
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 reengineering 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
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
Gray: You’re welcome.
Gardner: And thanks to our audience for joining this special podcast coming to you from the
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
Listen to the podcast. Find it on iTunes. 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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