|By Dana Gardner||
|May 14, 2014 01:00 PM EDT||
The next BriefingsDirect case study interview explores how American Electric Power improves their financial processes and buying operations using Ariba Dynamic Discounting.
It turns out that a real-time business-process approach to billing, ordering and settlement terms between buyers and sellers benefits both American Electric Power, one of the largest investor-owned electric utilities in the U.S., and its many vendors.
BriefingsDirect had an opportunity to uncover more about about such new, agile business services at the recent 2014 Ariba LIVE Conference in Las Vegas when we spoke to Rick Gray, Senior Treasury Specialist at American Electric Power in Columbus, Ohio, and Drew Hofler, Manage Cash Solution Marketing Director at Ariba, an SAP company. The discussion is moderated by me, Dana Gardner, Principal Analyst at Interarbor Solutions.
Here are some excerpts:
Gardner: Tell us about your organization and how you came to be using Dynamic Discounting.
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: What’s changed that makes Dynamic Discounting more relevant now across many markets and industries?
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 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: Define for us what Dynamic Discounting is, and then also tell us what the benefits are and to whom.
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.
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.
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: 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: 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 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.
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: 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.
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?
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: 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 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.
You may also be interested in:
- Ariba's roadmap points to instant, integrated and data-rich business cloud services
- Case study: How ACP simplifies and speeds its billing and payments using the new AribaPay cloud service
- Business success increasingly hinges on supply chain innovation and procurement advantages
- Workforce of the Future -- and Why Preparing Means Rethinking Human Resources Now
- Ariba announces business network analysis enhancements, first transactions conducted under AribaPay
- Spot buying automated by Ariba gives start-up KooZoo a means to shop more efficiently
- Combining big data and cloud capabilities for ecommerce matches buyers and sellers like never before
- Here's Why Healthcare Businesses Must Efficiently Manage Their Suppliers, Purchases, and Processes
- Ariba LIVE roadmap debrief: Cloud data analytics
We’ve worked with dozens of early adopters across numerous industries and will debunk common misperceptions, which starts with understanding that many of the connected products we’ll use over the next 5 years are already products, they’re just not yet connected. With an IoT product, time-in-market provides much more essential feedback than ever before. Innovation comes from what you do with the data that the connected product provides in order to enhance the customer experience and optimize busi...
May. 4, 2016 05:00 PM EDT Reads: 1,302
A critical component of any IoT project is the back-end systems that capture data from remote IoT devices and structure it in a way to answer useful questions. Traditional data warehouse and analytical systems are mature technologies that can be used to handle large data sets, but they are not well suited to many IoT-scale products and the need for real-time insights. At Fuze, we have developed a backend platform as part of our mobility-oriented cloud service that uses Big Data-based approache...
May. 4, 2016 03:30 PM EDT Reads: 606
The increasing popularity of the Internet of Things necessitates that our physical and cognitive relationship with wearable technology will change rapidly in the near future. This advent means logging has become a thing of the past. Before, it was on us to track our own data, but now that data is automatically available. What does this mean for mHealth and the "connected" body? In her session at @ThingsExpo, Lisa Calkins, CEO and co-founder of Amadeus Consulting, will discuss the impact of wea...
May. 4, 2016 03:00 PM EDT Reads: 1,162
SYS-CON Events announced today that Ericsson has been named “Gold Sponsor” of SYS-CON's @ThingsExpo, which will take place on June 7-9, 2016, at the Javits Center in New York, New York. Ericsson is a world leader in the rapidly changing environment of communications technology – providing equipment, software and services to enable transformation through mobility. Some 40 percent of global mobile traffic runs through networks we have supplied. More than 1 billion subscribers around the world re...
May. 4, 2016 01:45 PM EDT Reads: 1,328
SYS-CON Events announced today that Peak 10, Inc., a national IT infrastructure and cloud services provider, will exhibit at SYS-CON's 18th International Cloud Expo®, which will take place on June 7-9, 2016, at the Javits Center in New York City, NY. Peak 10 provides reliable, tailored data center and network services, cloud and managed services. Its solutions are designed to scale and adapt to customers’ changing business needs, enabling them to lower costs, improve performance and focus inter...
May. 4, 2016 01:00 PM EDT Reads: 1,423
The demand for organizations to expand their infrastructure to multiple IT environments like the cloud, on-premise, mobile, bring your own device (BYOD) and the Internet of Things (IoT) continues to grow. As this hybrid infrastructure increases, the challenge to monitor the security of these systems increases in volume and complexity. In his session at 18th Cloud Expo, Stephen Coty, Chief Security Evangelist at Alert Logic, will show how properly configured and managed security architecture can...
May. 4, 2016 12:47 PM EDT Reads: 326
In his session at @ThingsExpo, Chris Klein, CEO and Co-founder of Rachio, will discuss next generation communities that are using IoT to create more sustainable, intelligent communities. One example is Sterling Ranch, a 10,000 home development that – with the help of Siemens – will integrate IoT technology into the community to provide residents with energy and water savings as well as intelligent security. Everything from stop lights to sprinkler systems to building infrastructures will run ef...
May. 4, 2016 12:45 PM EDT Reads: 1,257
The IoTs will challenge the status quo of how IT and development organizations operate. Or will it? Certainly the fog layer of IoT requires special insights about data ontology, security and transactional integrity. But the developmental challenges are the same: People, Process and Platform. In his session at @ThingsExpo, Craig Sproule, CEO of Metavine, will demonstrate how to move beyond today's coding paradigm and share the must-have mindsets for removing complexity from the development proc...
May. 4, 2016 12:45 PM EDT Reads: 904
We're entering the post-smartphone era, where wearable gadgets from watches and fitness bands to glasses and health aids will power the next technological revolution. With mass adoption of wearable devices comes a new data ecosystem that must be protected. Wearables open new pathways that facilitate the tracking, sharing and storing of consumers’ personal health, location and daily activity data. Consumers have some idea of the data these devices capture, but most don’t realize how revealing and...
May. 4, 2016 12:45 PM EDT Reads: 598
Artificial Intelligence has the potential to massively disrupt IoT. In his session at 18th Cloud Expo, AJ Abdallat, CEO of Beyond AI, will discuss what the five main drivers are in Artificial Intelligence that could shape the future of the Internet of Things. AJ Abdallat is CEO of Beyond AI. He has over 20 years of management experience in the fields of artificial intelligence, sensors, instruments, devices and software for telecommunications, life sciences, environmental monitoring, process...
May. 4, 2016 12:15 PM EDT Reads: 1,337
trust and privacy in their ecosystem. Assurance and protection of device identity, secure data encryption and authentication are the key security challenges organizations are trying to address when integrating IoT devices. This holds true for IoT applications in a wide range of industries, for example, healthcare, consumer devices, and manufacturing. In his session at @ThingsExpo, Lancen LaChance, vice president of product management, IoT solutions at GlobalSign, will teach IoT developers how t...
May. 4, 2016 12:15 PM EDT Reads: 530
There is an ever-growing explosion of new devices that are connected to the Internet using “cloud” solutions. This rapid growth is creating a massive new demand for efficient access to data. And it’s not just about connecting to that data anymore. This new demand is bringing new issues and challenges and it is important for companies to scale for the coming growth. And with that scaling comes the need for greater security, gathering and data analysis, storage, connectivity and, of course, the...
May. 4, 2016 11:15 AM EDT Reads: 1,237
Increasing IoT connectivity is forcing enterprises to find elegant solutions to organize and visualize all incoming data from these connected devices with re-configurable dashboard widgets to effectively allow rapid decision-making for everything from immediate actions in tactical situations to strategic analysis and reporting. In his session at 18th Cloud Expo, Shikhir Singh, Senior Developer Relations Manager at Sencha, will discuss how to create HTML5 dashboards that interact with IoT devic...
May. 4, 2016 11:00 AM EDT Reads: 1,383
So, you bought into the current machine learning craze and went on to collect millions/billions of records from this promising new data source. Now, what do you do with them? Too often, the abundance of data quickly turns into an abundance of problems. How do you extract that "magic essence" from your data without falling into the common pitfalls? In her session at @ThingsExpo, Natalia Ponomareva, Software Engineer at Google, will provide tips on how to be successful in large scale machine lear...
May. 4, 2016 10:00 AM EDT Reads: 1,517
Digital payments using wearable devices such as smart watches, fitness trackers, and payment wristbands are an increasing area of focus for industry participants, and consumer acceptance from early trials and deployments has encouraged some of the biggest names in technology and banking to continue their push to drive growth in this nascent market. Wearable payment systems may utilize near field communication (NFC), radio frequency identification (RFID), or quick response (QR) codes and barcodes...
May. 4, 2016 08:15 AM EDT Reads: 1,008
You think you know what’s in your data. But do you? Most organizations are now aware of the business intelligence represented by their data. Data science stands to take this to a level you never thought of – literally. The techniques of data science, when used with the capabilities of Big Data technologies, can make connections you had not yet imagined, helping you discover new insights and ask new questions of your data. In his session at @ThingsExpo, Sarbjit Sarkaria, data science team lead ...
May. 4, 2016 08:00 AM EDT Reads: 1,191
The IETF draft standard for M2M certificates is a security solution specifically designed for the demanding needs of IoT/M2M applications. In his session at @ThingsExpo, Brian Romansky, VP of Strategic Technology at TrustPoint Innovation, will explain how M2M certificates can efficiently enable confidentiality, integrity, and authenticity on highly constrained devices.
May. 4, 2016 08:00 AM EDT Reads: 1,269
Manufacturers are embracing the Industrial Internet the same way consumers are leveraging Fitbits – to improve overall health and wellness. Both can provide consistent measurement, visibility, and suggest performance improvements customized to help reach goals. Fitbit users can view real-time data and make adjustments to increase their activity. In his session at @ThingsExpo, Mark Bernardo Professional Services Leader, Americas, at GE Digital, will discuss how leveraging the Industrial Interne...
May. 4, 2016 04:45 AM EDT Reads: 1,361
Whether your IoT service is connecting cars, homes, appliances, wearable, cameras or other devices, one question hangs in the balance – how do you actually make money from this service? The ability to turn your IoT service into profit requires the ability to create a monetization strategy that is flexible, scalable and working for you in real-time. It must be a transparent, smoothly implemented strategy that all stakeholders – from customers to the board – will be able to understand and comprehe...
May. 3, 2016 12:30 PM EDT Reads: 1,232
You deployed your app with the Bluemix PaaS and it's gaining some serious traction, so it's time to make some tweaks. Did you design your application in a way that it can scale in the cloud? Were you even thinking about the cloud when you built the app? If not, chances are your app is going to break. Check out this webcast to learn various techniques for designing applications that will scale successfully in Bluemix, for the confidence you need to take your apps to the next level and beyond.
May. 3, 2016 12:15 PM EDT Reads: 1,617