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

1. Dynamic Discounting from Ariba Gives Companies New
Visibility into Cash Flow and Ways to Improve Buying
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. 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. [Disclosure: Ariba is a sponsor of BriefingsDirect podcasts.]
Please join me now in welcoming Drew Hofler, Senior Manager, Working Capital Solution at
Ariba. 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 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.

2. 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.

3. 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 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 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.

4. 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.
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

5. 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. 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

6. 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.
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.

7. 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.
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.

8. Gardner: So we've got the basic information, now perhaps we can get some information about
what it does. 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.

9. 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.

10. 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.
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.

11. I'd like to thank your guest. We have been joined by Drew Hofler. He is the 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. 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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