Ariba: Dynamic discounting - Drew Hofler

With markets volatile and interest rates low, many finance officers are wondering where to put their cash. Drew Hofler of Ariba explains how dynamic discounting can produce impressive financial and operational benefits with minimal risk.

As interest rates are extremely low, companies are faced with the difficult question of how to maximise their capital. They don't want to invest in unpredictable markets, but gain little by way of returns from stockpiling cash in banks. Despite these difficulties there are still ways of achieving a healthy return.

Take dynamic discounting, which allows buyers and sellers to dynamically change their payment terms on a sliding discount scale. By taking advantage of the discounts that can be derived from early invoice payment, companies have a highly effective, risk-free way of both leveraging their capital and strengthening relations with supply chain partners.

"Economic conditions have created the right environment for dynamic discounting," says Drew Hofler, senior manager, working capital management solutions at Ariba. "We are seeing increased activity on our network from companies that are effectively investing in their supply chains. Even one of our smaller customers saved $135,000 in early payment discounts last month alone, a far better return than idle cash will get sitting in a bank."

Ariba offers a collaborative platform that can facilitate successful early payment. It provides buyers and suppliers with complete visibility of the invoicing process and allows them to set automatic parameters that govern payment timings and approvals.

"This platform helps the buyer and supplier come to a good place in terms of the right level and frequency of discount," explains Hofler. "The supplier can say, 'just pay me early every time as soon as my invoice is approved', or can choose to do it on an invoice-by-invoice basis depending on a special need, such as wanting to accelerate cash flow. Deploying cash like this provides liquidity to the supply chain, which reduces risk and gives suppliers a buffer during tough times."

Results, so far, have been impressive. Customers on the Ariba network are averaging returns of 24% on dynamic discounting. Levels of supplier participation are also on the rise.

"One customer went from 35% discount captured to over 95% with us," says Hofler. "They also managed to increase supplier participation from around 4% to more than 20%, capturing $1 million annually. Normally when negotiating early-payment discounts, you have the buyer on one side and the sales person on the supplier side. Neither really cares about cashflow. When we get companies on to this platform, you get the involvement of finance and the treasury, who do care."

Of course, dynamic discounting cannot be effective without e-invoicing. Average invoice approval times of 35 or 40 days provides no opportunity to benefit from potential discounts. Despite this, electronic invoicing solutions were initially slow to catch on. Ariba has allocated a lot of time and resources to encouraging uptake.

At the same time, the adoption of electronic systems does not necessarily guarantee increased efficiency. After all, there are many forms of e-invoicing, some more effective than others. "A lot of people are asking, 'what is e-invoicing?'," Hofler expands. "Is it just scanning, point-to-point?' Some firms have tried things like scanning and did not enjoy great benefits. Sure, it puts the invoice into electronic format, but if the invoice is garbage it is just getting the garbage to you quicker and not necessarily doing anything for the underlying processing of that invoice."

Smart invoicing

Ariba uses what is known as 'smart invoicing'. Its network allows organisations to set parameters and filters, and flag common formatting problems. As soon as an invoice enters the network, its progress can be tracked by both parties, making it easier for FDs to accurately plan and forecast cashflow.

"If the supplier submits an invoice and something is missing or wrong, the system provides them with immediate feedback," explains Hofler. "The supplier can immediately fix the problem instead of having to go back and forth for days or potentially months. Once they start to use the Ariba network for e-invoicing, we see customers being able to approve PO invoices within seconds and other kinds within a couple of days."

"VAT compliance is a major issue for companies doing business in Europe," says Hofler, "and Ariba has invested heavily to ensure that we can help companies manage the issues surrounding it. For instance, we have developed extensive country guides to help our clients remain VAT compliant in more than 33 countries, and the company recently expanded its reach and capabilities with the acquisition of b-process, France's largest electronic invoicing network, and one of the largest e-invoicing networks in Europe.

"Whether you are working with buyers, suppliers or third parties, the bottom line of making that collaborative commerce happen is getting visibility and efficiency into the system," he explains. "Fewer errors also lead to increased productivity."