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Dynamic Discounting from Ariba Gives Companies NewVisibility into Cash Flow and Ways to Improve BuyingProcessesTranscript of a sponsored BriefingsDirect podcast on how discount management and dynamicdiscounting can help businesses manage their cash better.Listen to the podcast. Find it on iTunes/iPod. Sponsor: AribaDana Gardner: Hi. This is Dana Gardner, Principal Analyst at Interarbor Solutions, and youre 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.Were here now with an executive from Ariba to learn how recent trends are driving savvycompanies to improve how they manage their supplier and buying processes using dynamicdiscounting. [Disclosure: Ariba is a sponsor of BriefingsDirect podcasts.]Please join me now in welcoming Drew Hofler, Senior Manager, Working Capital Solution atAriba. Welcome to the show, Drew.Drew Hofler: Thanks, Dana.Gardner: Why are you seeing such an uptake in how companies are looking to improve the waythey wreak efficiencies out of the buying process, I have to assume it has something to do withthe economy?Hofler: Weve 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 longerterms via traditional credit means, because those were being pulled away. So that created a realcash flow crisis within supply chains.

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Now, with whats looking like potentially a double dip recession and the S&P downgrade thatrecently came along, companies have again realized how important cash is to them. You see thatin the metrics. You see that in the Federal Reserve reporting out every single quarter. The amountof cash on the books of corporate America just continues to rise, as companies hold on to theircash and hoard their cash.In fact, there was a great article a couple of weeks ago in the Wall Street Journal about howcompanies are actually selling bonds and increasing corporate debt before the impact comesfrom 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 whats going on.If you look at that in conjunction with suppliers still having their access to credit curtailed, itsnot as bad as it was at the height of 2008, but it still is far from where it was pre-2008 in terms oftheir access to credit.Liquidity riskYou 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, BenBernanke and the Fed stated that theyll probably keep rates down at around zero for the next twoyears, until mid-2013.So you have these corporations that have this massive stockpile of cash inside of banks, inside ofshort-term liquidity investments, money market mutual funds, commercial paper, that’s earningliterally 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 basicallynothing on it in the short-term, and their suppliers who dont have the access to that cash andhave longer terms extended to them. When they do get credit, there are some pretty restrictivecovenants with their banks and theyre paying a little bit higher rate than they would otherwise.You have this significant liquidity risk.All of that is to say that what were seeing is that buying organizations are starting to realize thatthey can take advantage of the fact that they have all this cash and suppliers who have this needto essentially become the bank and put that cash to work.

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They earn a greater return by paying suppliers early in exchange for a discount -- so theyreearning a better return on their cash than it would have sitting in the bank -- but they also removesome risk from their supply chain by injecting liquidity into their supply chain, giving suppliersaccess to liquidity that they might not have otherwise in a way that, one, is not debt to theirsupplier, and two, improves their working capital position by lowering their days salesoutstanding (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 andsuppliers to collaborate over these cash flow needs that are being created by the economy rightnow.Gardner: I suppose the solution then at the high level is fairly clear, but how to implement thatbecomes 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 youallow for the suppliers to create an incentive for this improved discounting and improved cashflow 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, isstill a very manual process in so many organizations.I have looked at buying organization and analyzed their vendor files and at times found literallyhundreds of different payment terms to their suppliers, where a best practice would be to havemaybe 5 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 onthe supplier side, and agreeing to specific terms that may have nothing to do with the corporateobjectives or strategy.Getting visibilityIn order to reap this opportunity and understand whats happening a company needs to getvisibility into whats actually happening. That’s where Ariba’s cloud technology allowscompanies to pull this through the Ariba Network and gain visibility into whats going on andautomate the process greatly.Once they have that visibility, on the one hand, they realize they can get their terms and theirpayment under control. A lot of times, a company will have whats supposed to be a standardterm, let’s say 45 days, 60 days payment, but a supplier is being paid immediately. Somebodycalled in to the company and the supplier said, "I cant wait this long for my cash. Can you payme early?" And the person on other end of the phone changed the payment to "immediate" in theERP for the buyer.That’s a cash flow waste right there. Youre paying immediately when a buying organizationcould be holding up their money for 45-60 days, or exchanging that immediate pay for somevalue in the form of a discount.

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Were seeing that companies are getting control of that process through automating it, throughsending POs through the Ariba Network to their suppliers, where its centralized and visible tocorporate as a whole, bringing invoices back in to accelerate the approval process, and alsobringing it under some control and visibility as well.That opens up the opportunity that were 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 theyre coming in clean. The Ariba Network assures that invoices come in clean andtheyre being approved quickly. Now you have invoices that are approved say on the fifth dayafter receipt, but not due until day 60 after the invoice date. That time gap is where thecollaboration can come in.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 andoffering 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’snegotiated into a contract at some point. Think of who is having that conversation? Its typicallyprocurement and the salesperson on the side of the supplier. That salesperson on the side of thesupplier really is not all that concerned about cash flow. That’s not their metric. Its not whattheyre measured against, and they don’t really care.We find that not too many companies get early payment discounts into a large amount of theirspend due to that. But when those invoices have come in and have been made visible throughthis online portal for suppliers to see, who is it at the supplier that now is looking at that? Its theaccounts receivable (AR) side. Its the controller. Its the treasurer. Its finance on the side of thesupplier that cares about cash flow, that realizes when they need enhanced cash flow, and has theability to make a decision over that.Were seeing a huge increase when we deploy clients between what they had originally capturedin contracts in terms of early payment terms, versus what theyre now able to capture, once theyput this in place with the Ariba Network, where the right audience and their suppliers can comein and see that.So those things -- automating the process, getting visibility into it, getting your process undercontrol so that everything is done in a timely manner to create the opportunity, and then havingan online portal visibility for your supply base to see the opportunity -- are key to accessing it.Business process managementGardner: So I think that at a very high level were talking about better business processmanagement (BPM), but across disparate systems of record, different organizations, and the role

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that Ariba plays, has the opportunity to cross among or between them, but automate, give theminsight 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 DiscountProfessional, but I have also heard it referred to as "dynamic discounting." What does that reallymean? How does that work?Hofler: The market term for us is Ariba Discount Pro, but the broader vernacular for the marketis dynamic discounting or discount management. Dynamic discounting has two aspects to it.One, its the dynamic nature of it, giving the supplier the ability and control to say when theywant to get paid early, when they need the money, to have this sort of automated onlineconversation 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 businesscycles, financial cycles in the quarter, or business cycles and seasonal suppliers, where they mayhave to purchase a lot of stock for an upcoming season, or they might want to purchase someequipment. Then, they need to accelerate some cash flow in order to do that.The supplier can dynamically say, "Heres whats available to me, and Ill take that invoice, thatinvoice, and that invoice on an early payment. I agree to those terms." And boom, its done. Soits 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 discountrate to the supplier from the buyer. Before, in the traditional 2/10, net 30 and 2/15, net 45 that alot of companies have, the structure is such that if you can approve the invoice and pay by day15, you take 50 percent discount. If you cant approve it by day 15, then you wait and you paythe full amount of the invoice on day 45.With dynamic discounting and our Discount Pro product, buyers are able to offer to theirsuppliers a prorated discount that says, "We can pay you early from the moment this is receivedor from day 15," whatever fits the buyer’s needs, and then prorate that say 2 percent discountdown to 0 percent on the net due date of that invoice.Its fair to the supplier. If they are getting paid 30 days early, they pay a higher discount. If theyare getting paid 15 days early, that discount gets lowered in such a way that is fair to thatsupplier, and yields a constant and consistent return on cash on an annualized basis to the buyingorganization.So for example, the 2/10, net 30, that’s the classic textbook example is a 36.5 percent annualizedrate of return. So at 20 days early on day 10, its a 2 percent discount; at 10 days early, 20 daysafter the invoice is received, its a 1 percent discount. Both of those equate to 36.5 percentannualized 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 isensured a fair system control discount based on when they actually receive the cash. So those

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two pieces, that slope line and proration, as well as the dynamic ability for a supplier to achieveearly payment on an invoice-by-invoice basis based on their business need are the things thatreally define dynamic discounting.Substantial returnsGardner: I have to imagine that were talking about very large organizations, very largeprocurement sums, and therefore the returns can be quite substantial. It makes sense of course forthe buying organization to be able to do the best they can with their cash flow, and getting adiscount would do more for them than letting it sit in a low interest-bearing account, as youpointed out.But what really intrigues me about this, Drew, is for the suppliers, where there is complexity ininventory and there is transportation and logistics issues, it gives them a chance to really analyzesome of the timing that works to their advantage and then incentivize based on these discounts asto how that could then benefit them.There seems to be a huge efficiency, maybe difficult to measure in dollar terms, but a hugeefficiency 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 asyou 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, its like an ATM for them, if they need it, where they have access to thispool 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 thats verybeneficial for them, because suppliers have some access to some cash flow. Its not completelyshut off for them. A lot of suppliers will take credit cards or P-Cards. A lot of them will accesslines of credit and things to that effect.But those do two things to them. One, P-Cards are extraordinarily expensive in terms of theexchange rate that they have to pay. And two, lines of credit and that type of thing add debt totheir balance sheet basically.With this type of dynamic discounting, suppliers access this cash flow in a way, depending onwhat the buyer offer might be or what the buyer might accept in terms of the counteroffer fromthe supplier, that is typically cheaper than than credit cards. Its often cheaper than they can findfinancing elsewhere, and it does so in such a way that lowers their DSO, because theyrebasically turning their assets of a receivable into cash. It lowers their DSO, which is great fortheir working capital metrics and cash convergence cycle.

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And it does so in such a way that adds zero debt to their balance sheet, because its justtransferring one asset into another from a receivable into cash. So definitely a lot of supplierbenefit.Gardner: And because Ariba Discount Professional is cloud-based, I imagine that the ability toimplement this is fairly straightforward. I also see that there is tight integration with the AribaNetwork, which allows for a large supplier participation, an ecosystem, a whole greater than thesum of the parts. Perhaps you could give us a little bit of information on the benefit of beingcloud-based and why the Ariba Network integration has benefits?Sending a messageHofler: Discount Pro is based on the Ariba Network platform. From the buying side, it simplyrequires 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. Weveintegrated with JD Edwards, Lawson, and various others. Simply installing this kind ofmiddleware adapter takes the feed of data from the ERP, translates it into the Ariba cXML. Youput that in place. Its basically that middleware to communicate that information back and forthfrom the Ariba Network, and thats essentially it.There obviously is some work involved in that, but its so much lower than on-premise type ofwork that you would have to do. Theres much lower cost, and much quicker time -to-benefit forthat. From the supplier’s side, being based in the cloud and on the Ariba Network, it literally canbe 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 its very easy to do. You sign up,you agree to the relationship with your buyer, and boom, all of a sudden you have visibility intoevery thing that that buyer pushes onto the Ariba Network for you, including the opportunitiesfor early payment.From a buyers perspective, with it being on the Ariba Network, they have access to the hundredsof thousands of suppliers that we have on the Ariba Network. In fact, most of the time our newcustomers will see anywhere between a 20 percent and a 50 percent match of their vendorsalready on the Ariba Network.So it makes time-to-value an enablement so much quicker. Its then a matter of simplycommunicating with the supplier, who is already used to the Ariba Network and already on itwith 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.

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Gardner: So weve got the basic information, now perhaps we can get some information aboutwhat it does. Do you have some examples of folks that are doing this? What sort of returns itsgetting for them? How its impacting them in terms of productivity benefit as well as pure dollarsand cents?Hofler: Weve had a number of organizations, a large retail and sporting goods organization, thatcame 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 saidbefore, companies dont necessarily have a lot of their spend under contract discount term, butthey do have some. Their procurement folks have negotiated some discounts, early paymentdiscounts, in the contract. A lot of that is not being captured, because the process doesn’t allowthem 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 thats an immediate savings and immediatecapture of lost opportunity and value to them. Simply by getting their process under controlallowed 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 apenetration of over 20 percent of their suppliers in a short period of time as well.Seeing the opportunityI believe it’s because of the things that I mentioned earlier. It was now putting the opportunity infront of the right people at the supplier’s side. When they realized they had the opportunity, theytook advantage of it, because as I said, the fundamentals are there in the market, where suppliersare typically hurting for cash and cash flow and opportunities for that, willing to take earlypayment.Buyers have lots of cash. When you just bring those two parties together in a way that makes iteasy for them to collaborate and meet that need, your participation is going to go up for sure.And thats what weve seen.Gardner: I was just going to say that in a slack economy, and in some cases an even toughereconomy than we have had most recently, finding efficiencies is de rigueur, its not really anoption.Hofler: Thats exactly right. People are looking for everything to make their companies leanerand better and capture all the value that they possibly can.I may have already said it, but its really a win-win. There is value to both sides, and its not justone imposing their will on the other in order to make their company better at the expense of theother. It is really a win-win. There are significant and tangible benefits to both sides when theydo this.

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I think thats why weve seen so many companies pick this up. Weve had growth rates of 60percent or so in our buyer customer base. Our customers, shortly after going live, have beenseeing growth rates in their opportunity and discount capture with their suppliers of 60-80percent month over month. Obviously that will stabilize at some point, but I think what that saysis that huge growth curve, particularly in the first year or so of doing it, speaks to the fact thatthere is this latent opportunity out there.We have customers and some of them will average around 24 percent annualized return on theircash. Others will average less. It depends on how they want to approach their supply base. Manybuyers will take the opportunity, when theres an opportunity to earn very significant returns ontheir cash of 36 percent or more from a certain part of their supply base. Typically, the longertail, the smaller suppliers, will take advantage of that.But others, especially more recently, are realizing that they can take a nuanced approach to thisand 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, youcan get a large amount of return on your cash. But on the other end of your supply chain, yourgoal as a buying organization with more strategic suppliers is not so much to wring all the valuein terms of return on cash that you can out of them, but to make sure that they are there for youwhen 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 theopportunity to their more strategic suppliers to gain access to the cash piles that the buyingorganization has, but at rates that are much lower, that are closer to what they might be able toget out in the marketplace from a bank.No burden to supplierThose are more around 6 percent, 4 percent annualized, but still much better than the buyingorganization gets on their cash sitting in a money market account earning less than a quarter of apercent, or close to zero right now. But they do it in such a way that does not add a burden totheir supplier.Im seeing buying organizations take a blended, more nuanced approach to using this. The greatthing about the tools online is that they have full flexibility to do that, to group their suppliershow they wish, to offer different rates to different suppliers, to control the amount of cash thatthey make available, and they are really starting to take advantage of that.Gardner: Drew, Im afraid we are about out of time, but I would still like to hear a little bit moreabout what is going to happen in the future that might further incentivize and encourage folks topursue this.

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Im primarily thinking about those companies that take advantage of cloud more. The more thatyou take advantage of cloud, the more commonality there is at a cloud platform or a cloud ofclouds, it seems to me the more opportunities there are to define these cross-pollenization leveltypes of efficiencies and then apply them realistically.Whats coming down the pike. Maybe its cloud, mobile, social. How does that impact why folkswould be perhaps pursuing this dynamic discounting value even more?Hofler: When you talk about dynamic discounting, what we like to say is that it enablescollaborative cash flow, and that collaboration is really what the cloud, social networking,business social networking, is really all about. Its 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 participatingin 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 were starting to see thatnormalized, because dynamic discounting is a very fairly young industry still in terms of overallbusiness practices and processes. But were starting to see it become more of a norm.When you have that happening over the cloud, when you have that kind of collaboration ofinformation going back and forth, you have more suppliers becoming normal, well see buyerslearning and having access to aggregated data, trends, and behaviors that show them how toapproach this, because they can see how it has worked across industries in the past, and thensupplying organizations finding it much more normal.Social mediaI see it tying into the communication methods that are becoming so prevalent in social mediaand in the cloud, just basically to give suppliers access to the opportunity and open up theopportunity. Weve seen such growth when buyers become active and make this available tosuppliers, simply because its tapping into the late need that suppliers didn’t know they had a fixfor, 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 goviral is whats really going to happen more and more, as we go into the future and it kind ofsnowballs.Gardner: Weve been listening to a sponsored podcast discussion on how discount managementand dynamic discounting can dramatically improve how enterprises procure and better managethe buying process while also improving cash management.

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Id like to thank your guest. We have been joined by Drew Hofler. He is the Senior Manager inthe 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 ifyou wanted to pursue an understanding. Maybe there is a white paper, background information.What would you recommend?Hofler: Id go to www.ariba.com and look at our Manage Cash section. There are all sorts ofthings in there, some white papers and case studies and things to that effect.Gardner: This is Dana Gardner, Principal Analyst at Interarbor Solutions. Youvee been listeningto a BriefingsDirect podcast. Thanks again for coming and listening, and do come back nexttime.Listen to the podcast. Find it on iTunes/iPod. Sponsor: AribaTranscript of a sponsored BriefingsDirect podcast on how discount management and dynamicdiscounting can help businesses manage their cash better. Copyright Interarbor Solutions, LLC,2005-2011. All rights reserved.You may also be interested in: • Ariba, IBM Deal Shows Emerging Prominence of Cloud Ecosystem-Based Collaboration and Commerce • Ariba Steps Up Cloud Efforts with StartContracts, On-Demand Contract Management for SMBs • Ariba Live Discussion: How Cloud Alters Landscape for eCommerce, Procurement, and Supply Chain Management • Cloud-Based Commerce Network Helps Florida Manufacturer MarkMaster Reach New Markets, Streamline Transactions • Aribas Jason Kurtz on How IT Financial Trends are Maturing Technology Procurement and Management Needs