DDM Finding the Treasure in Treasury

TECHNOLOGY INSIGHT SERIES DDM Finding the Treasure in Treasury Dynamic Featuring Insights on... Interest in Capture and the Ability to Make it Happen Capture of Early Payment s Dynamic Solutions Working Capital and Payables Strategies for Dynamic Underwritten in part by: www.paystreamadvisors.com Q1 2012

Table of Contents Table of Contents Executive Summary...1 Opportunities in Payables...2 What is Dynamic ing?...3 Working Capital & Payables...7 Which Tool is Best For You?...8 What Should I Do Next?...9 Reporting & Analysis...10 Implementing Dynamic...11 Pollenware Profile...13 Pollenware Case Study...16 Conclusion...17 About PayStream Advisors, Inc...17 SolutionSource...18 i

Executive Summary LEARN MORE Listen as PayStream s lead analyst discusses Dynamic ing in this online tutorial: http://www. paystreamadvisors. com/store/details. cfm?id=338 Executive Summary Recent innovations in trade payables and payments have created a more elastic, powerful mix of working capital tools, allowing innovative organizations to create new profit sources, while maintaining full cash flow control. Dynamic (DDM) is an emerging discipline that gives buyers more flexibility to choose how and when to pay suppliers. Suppliers are embracing these new tools as well, finding their own benefit in dynamic working capital management. Since our last report on DDM, payment and financing vehicles have become more powerful, less expensive and more user friendly. Savvy finance managers need to frequently revisit this rapidly changing landscape to stay abreast of emerging opportunities. PayStream Advisors has developed this Technology Insight Series report titled Dynamic : Finding the Treasure in Treasury, as a resource for organizations actively exploring dynamic discounting solutions. To compliment this report, PayStream also published the Dynamic Implementation Guide. Both the report and the guide are among many resources available in our research library at www.paystreamadvisors.com 1

Opportunities in Payables Opportunities in Payables Many payables departments with paper invoices or decentralized receipts suffer from lengthy approval and payment cycles which means they are not optimizing discounts. According to statistics from PayStream Advisors, the average invoice cycle time (from receipt to approval) is 21 days, with best-in-class companies completing this cycle in only five days. Figure 1 INTEREST IN DISCOUNT CAPTURE AND THE ABILITY TO MAKE THIS HAPPEN A number of companies are unable to capture discounts offered by suppliers. The potential rewards for early supplier payments are great. Even the standard discount of 2 percent for payment within 10 days translates to an annual percentage rate of 36 percent. With returns like that, achieving discount capture is like mining for gold; the challenge, as in mining, has been finding a cost-effective way to extract those riches. Organizations struggle with effective discount management because: 1) A low percentage of suppliers offer discount terms 2) Organizations can t process invoices fast enough to take the discounts that are offered PayStream s analysts estimate that only 8 to 12 percent of supplier invoices contain discount terms. The reason: Many suppliers grouse that they stopped offering early payment discounts because some buyers abused the privilege, taking discounts they hadn t earned. A bigger issue is that traditional payment terms only offer a limited benefit. In addition, traditional payment terms do not provide the opportunity to take full advantage of the latest technology. 2

What is Dynamic? In PayStream s November 2011 survey of AP departments, 84 percent of practitioners polled reported that capturing early payment discounts was important to them, but only 27 percent did so consistently. Process hurdles manual and inefficient processes and decentralized invoice receipt were the primary internal stumbling blocks. Figure 2 MISSING EARLY PAYMENT DISCOUNTS More companies are capturing all available discounts, but the remainder are missing more than before. What is Dynamic? Dynamic ing animates the previously take-it-or-leave-it static practice of suppliers offering early payment terms, by allowing both buyers and sellers to propose terms, setting those terms in motion by putting them on a sliding scale, opening them up to competitive bid, or inviting banks and third-party funders to participate. Thus the simple practice of early payment terms has evolved into Dynamic. Figure 3 REASONS FOR LATE PAYMENTS AND MISSED DISCOUNTS On a scale of 1 to 5, where 5 is the highest. 3

What is Dynamic? Solutions typically fall into one of three categories: 1) Sliding Scale s 2) Third Party Financing 3) Market Based Price Discovery Sliding Scale s Dynamic ing provides the technological and business framework for buyers and sellers to capitalize on the early payment opportunities in trade payables on a much larger scale than previously. Dynamic discounts differ from traditional discounts in two key aspects: first, the discount is calculated as a function of the time of payment, in other words, it is based on a sliding scale. This eliminates the problem of static terms, such as 2%, 10, Net 30, where you are no longer entitled to a discount if the invoice approval takes longer than 10 days. Second, and more important, dynamic discounting can address the entire invoiced spend not just the fraction that is currently subject to traditional payment terms. With dynamic discounts, earlier payment against a time-variable discount is proactively offered to all the suppliers with approved invoices. Early payment offers are made on all approved invoices awaiting payment. Early payment opportunities are especially powerful for those invoices that are approved quickly such as PO-based invoices, ERS and those originating electronically via EDI, a vendor portal or an e-invoicing network such as Ariba, JPM Chase s Order to Pay, Direct Insite, Taulia or OB10. For these fast or automated approval invoices, payment takes place at a discount attractive to both the buyer and the supplier, often calculated from an interest rate in the double digits, times the number of days the payment is advanced. Earlier payment is lucrative for a large buying organization, as typical interest rates underlying such discounts are much higher than the buyer s cost of capital for riskfree investments. The funding capital for sliding scale dynamic discounts usually comes from the buyers working capital. To minimize changes to a company s days payable outstanding (DPO) many organizations will extend their payment terms for some suppliers so that they can maintain a neutral cash and payable position on their balance sheet. 4

What is Dynamic? Third Party Financing Emerging solutions that enable trading partners buyers, suppliers and lenders to rapidly exchange transaction-related information and funds have created a new early payment funding source use of third party financing. Supply Chain Finance and Receivables Trading, relatively new concepts, are gaining acceptance as a means of facilitating realtime, collaboration between buyers, suppliers and capital sources. Third Party Finance solutions come in two types: Supply Chain Finance provided by a bank of other financial lenders allows payers to use other capital sources in order to pay suppliers before the due date. Receivables Trading allows sellers to place their accounts receivable in the open market for purchase by hedge funds and private lenders. Supply Chain Finance Supply Chain Finance (SCF) is typically used to enable an extension of payment terms by a large buying organization, which results in a one-time improvement in working capital. The primary role of SCF is to provide suppliers with access to financing at attractive rates, which reduces a buyer s supply chain risk. From an accounting standpoint, not much changes for the buying organization, as the bank advances early payment to the supplier buying the receivable from the supplier and the buying organization simply changes the payee, making payment to the bank, instead of the supplier on the due date. Thus, the payer pays the funding provider on the original due date of the invoice. In certain industries such as retail and heavy manufacturing, SCF is commonly used as an important source of capital to fund the supply chain as it provides access to early funds at a cost which is close to the buyer s cost of capital. At the same time, SCF enables suppliers to reduce their Days Sales Outstanding (DSO) without the need for more expensive financing options such as factoring and asset-based lending. However, due to higher legal and process requirements, SCF is mostly deployed only for larger suppliers, and not as well suited for suppliers of all sizes, as is Dynamic ing. Receivables Trading Receivables trading, a close cousin of factoring, allows suppliers to 5

What is Dynamic? trade their approved receivables for cash in an exchange platform. The exchange houses all the transaction history and buyer/supplier information and facilitates the matching of a supplier interested in early payment with a willing lender. The lender advance funds before the due date and takes payment assignment from the buyer. On the invoice due date, the buyer pays the lender. The exchange facilitates the flow of transaction and payment information. Both of the Third Party Financing choices rely on the buying organization approving the invoice and trade payable to be traded. Upon approval, the buyer can either guarantee payment of an invoice (similar to factoring), or agree to make payments to the intermediate lender. The arbitrage opportunity between large buying organizations and their smaller suppliers makes these vehicles popular for organizations that may not want to use their own capital to fund trade payables. Third party supplier financing solutions position buyers to partner with innovative banks and other lenders to support their supply chains, allowing buyers to retain, and potentially extend, their (DPO). Market-Based Price Discovery Market-Based Price Discovery for early cash flow delivery is an emerging solution that enables buyers and suppliers to rapidly create and inject cash flow into the supply chain. Market-Based Price Discovery allows buyers to award early payment to suppliers that bid a discount that meet the buyer s specific return parameters. Within the Market-Based Price Discovery process suppliers compete for shares of an early payment cash pool, each according to their own need, with various, discount rates being established online. Like all Dynamic solutions only approved invoices are eligible for the program. Market-Based Price Discovery provides the treasury organization a low-risk investment option with higher returns than what they currently earn in other investment vehicles. Depending on liquidity requirements, all Dynamic solutions aim to improve the buyer s bottom line, while Third Party Financing can be used to free up working capital. Early payment, Third Party Finance and Market-Based Price Discovery offered by these programs can help suppliers fund their businesses. 6

Working Capital & Payables Working Capital & Payables Demand for solutions to reduce trade payables start with two fundamental business needs the supplier s need for liquidity and the buyer s need for low-risk, short-term investment opportunities. By providing incentives to suppliers for early settlement, DDM solutions serve the cash management needs of buyers and suppliers alike. While discounts were historically driven by suppliers as an incentive for securing early payment, enhanced visibility into invoice status via automation and collaborative networks are turning the tables and enabling buyer organizations to proactively propose early settlement discounts to suppliers. With third-party financing, buyers can extend their payment terms through the injection of third-party capital without adversely affecting supplier relations. Suppliers gain additional cash liquidity and stronger balance sheet positions. Invoice Approval Cycle Times Prior to the availability of DDM tools, timely invoice approval was not a priority. In the absence of discounts, faster approvals didn t necessarily lead to an acceleration of payments. In fact, during this financial downturn, a strong focus on liquidity has led many large buying organizations to stretch their payment cycle, which now averages 56 days (up from 53, according to REL Consultancy 2009 Working Capital Study). Successful DDM is dependent on fast invoice processing ideally less than 14 days. Since only approved invoices can be used for DDM to work, the volume and number of invoices awaiting payment is the critical ingredient to unlocking the opportunity in DDM. 7

Which Tool is Best For You? Which Tool is Best For You? Electronic Processes Drive Supplier Interest Invoice automation can boost the success of DDM. Through the integration of self-service supplier portals and DDM, the combined solutions can dramatically increase collaboration between buyers and suppliers. DDM solutions generally accelerate the exchange of information between trading partners and provide improved visibility and control over financial transactions, giving both parties something of value. Suppliers ability to upload, view and track invoices in real time as they make their way through a buyer s workflow process, improves the visibility and control they have over AR processes. Suppliers receive notification immediately upon completion of a buyer s payables approval process, allowing them to monitor and assess receivables in real time. For the buyer, this translates into a reduction in resources required to resolve discrepancies and respond to inquiries. Both buyers and sellers receive payment data and remittance detail electronically facilitating reconciliation of payables and receivables. In particular, companies holding excess liquidity will find dynamic discounting attractive, as it presents an opportunity to make shortterm, risk-free investments in their own supply chain at rates superior to any alternative investment. From an accounting perspective, a dynamic discounting solution will result in a reduction of AP in the short term; but with a lower spend due to discounts earned. Typical savings range from $1 million to $5 million per billion dollars in annual spend discounted. 8

What Should I Do Next? What Should I Do Next? DDM generally works well if there is a strong vision and alignment around process improvement. To achieve the long-term value of DDM, organizations need to adopt a strategy involving both procurement and finance, and therefore initiatives should be approached at an enterprise level. DDM initiatives need a strong framework to ensure that programs are approached on a strategic basis which bridges the supply chain, accounts payable and finance functions. PayStream s analysts have introduced such a framework to help enterprises implement integrated DDM and maximize its benefits. When considering DDM, there are a number of features that are valuable to consider, including: Dynamic ing Tools configuration flexibility to configure and change discount schemes at various levels, globally for all suppliers, for specific supplier tiers and even at the individual supplier level. control ability for buyers to specify which invoices will be made available for discounting based on working capital needs and the dates on which these invoices can be discounted. Payables portal suppliers can log into the portal and view invoices that can be discounted and evaluate the associated financing fees and timing. Auction and trading platform usually a web exchange where suppliers discount or trade specific invoices. Accounting integration tool to account for the integration and posting of the payments, discounts such as changes to Cost of Goods Sold, General Ledger entries to buyers ERP and accounting systems. Remittance management sending the remittance information to suppliers via the portal in a format of their choice that they can easily transfer the remittance advices into their receivables systems. 9

Reporting & Analysis Reporting & Analysis Standard reports suite of standard reports that come bundled with discounting solutions. Authorized users can perform simple and advanced searches to generate reports that provide visibility across transactions to buyers and suppliers. Custom reports ability to generate ad hoc reports and save the queries as templates for further reuse. Business intelligence wealth of information gleaned from the procure-to-pay process, can be used not only to comply with regulatory requirements but also to provide valuable business for strategic spend analysis. Table 1 BENEFITS OF INVOICE AUTOMATION AND DISCOUNT MANAGEMENT Electronic Settlement Enhances prompt payment discount capture and reduces the incidence of late fees. Lowers processing costs by removing the need for printing and mailing checks and the incidence of fraud. Supplier notification and vendor selfservice options reduce the number of supplier inquiries and exceptions. 77 Online search and retrieval tools aid in payment verification and collaborative dispute resolution. Aids in compliance with Sarbanes-Oxley and other regulatory requirements. Payables ing Provides a low-cost financing alternative to suppliers and an additional income stream to buyers. Enhanced visibility into the timing and amount of payments aids in superior cash flow forecasting capability for suppliers. Delivers better cash liquidity and stronger balance sheet positions for suppliers without relying on high cost financing alternatives. Buyers can extend their payment terms; suppliers can accelerate their cash conversion cycles. 7 10

Eight Building Blocks of IADM Implementing Dynamic Managment Following an analysis of several larger corporate enterprises, PayStream Advisors has created the Implementation Guide called The Eight Building Blocks of Invoice Automation and to help enterprises see the big picture, make their business cases and plan their implementation. Figure 4 EIGHT BUILDING BLOCKS OF INVOICE AUTOMATION AND DISCOUNT MANAGEMENT A strategic framework to bridge supply chain, accounts payable and finance functions. 1. Purchase-to-Pay Vision a. Leadership and senior management buy-in b. Cross-functional alignment and support c. Clear understanding of the value proposition 2. Purchase-to-Pay Strategy a. Clear and concise discount management strategy b. Multi-year automation roadmap c. Documented metrics to measure progress 11

Eight Building Blocks of IADM 3. Supplier Interaction a. Defining buyer-supplier collaboration goals b. Vendor segmentation and adoption planning c. Supplier communication and recruitment strategy d. Payment and discount terms configuration e. Incentives/penalties to drive supplier behavior 4. Culture and Change a. Inter-departmental collaboration and shared risk/goals b. IT resource allocation and training c. Incentive compensation based on goals achieved d. Cash management flexibility 5. Process a. Enhanced invoice visibility and accurate accruals b. Cash conversion cycle and DPO goals c. Improving processing efficiencies and accelerating approval cycles 6. Purchase-to-Pay Information a. Identifying efficiency metrics that need to be improved b. Leveraging external benchmarking data c. Visibility across transactions and access to data dashboards 7. Automation Technology a. Front-end imaging and approval workflow solutions b. Electronic invoice submission and receipt applications c. Seamless integration with ERP and accounting systems 8. Value-Added Services a. Multiple delivery models including hosted and SaaS b. Supplier recruitment and onboarding c. Availability of third-party credit and financing The above framework can be used for internal education and debate in developing the vision and strategies. It can then be the basis of an assessment of the enterprise s current and required capabilities, to help understand its current position and future strategy. 12

Pollenware (C 2 FO) Profile Pollenware (C 2 FO) TM Profile Pollenware s Collaborative Cash Flow Optimization (C 2 FO) solution enables their corporate clients to achieve compelling returns on their short-term cash while simultaneously addressing the cash flow needs of their suppliers. Its cloud-based solution also provides the missing link in the DDM market with an interface that benefits clients and their supply-side trading partners. Pollenware was founded in 2008 and is based in suburban Kansas City. Founded 2008 Headquarters Other Locations Mission Woods, Kansas Hingham, MA; Seattle, WA; Omaha, NE Employees 35-50 Table 2 Revenues Confidential Pollenware (C 2 FO) SOLUTION PROFILE Customers 525 Annual Transactions +$1 Billion Industry Segments Retail, Manufacturing, Healthcare and Conglomerates Key Accounts Costco, Walgreens, ToysRUs, La-Z-Boy, Iron Mountain, WellPoint Partners/Resellers Iron Mountain Solution Overview Pollenware (C 2 FO) turns Accounts Payable liabilities into incomegenerating assets through collaborative market clearing events in which buyers designate pools of cash for early payment and suppliers bid discretely, each according to their own need for a share of that cash by offering various and unique discounts. Pollenware (C 2 FO) is an online, early payment system that hosts weekly market clearing events, where suppliers make dynamic bids for accelerated payment of their approved invoices by discounting those invoices in real-time, 30 minute (C 2 FO) Events. Suppliers log into the (C 2 FO) Supplier Portal to view their approved invoices and to select their invoices for payment acceleration. 13

Pollenware (C 2 FO) Profile They place pre-bids before the (C 2 FO) Event, and during the (C 2 FO) Event they increase their bid(s) iteratively according to their condition status relative to other bids being placed by other participating suppliers. Unique to the Pollenware solution, supplier invoices may be awarded across a broad range of discounts offered. Pollenware (C 2 FO) offers true dynamic (real-time) discounting, allowing buyers to realize income opportunities beyond the scope of sliding scale norms. The Pollenware solution allows variable and discrete awarding of discounted invoices, which creates income opportunities averaging eight times more income than standard sliding-scale discount programs. These (C 2 FO) events have struck a chord with buyers achieving A.P.R. s in excess of 10%. Supplier Recruitment Once a program has been introduced through a buyer executive letter, supplier video and FAQ supplier website, a dedicated Supplier Relationship team follows up with suppliers with personal phone calls. Supplier outreach teams act as supplier advisors and buyer advocates, focusing on education, demonstrating the importance of working capital, and helping suppliers to develop bidding strategies that are a win for the supplier and for the buyer. Cash The pre-bid process allows buyers and suppliers to manage cash flow needs. The competitive bid nature of the (C 2 FO) Events lets each supplier place bids based on their cash needs and adjust those bids based on real-time feedback on the likelihood of the bid being accepted given the size of the available cash pool and the amount of their discount offer. Suppliers are typically paid (by the buyer) within approximately 24-48 hours of the market clearing event, and buyers realize a risk-free return on their short-term investment, exponentially higher than what they would have earned on other short-term investments. Reporting and Analytics Pollenware (C 2 FO) comes preconfigured with a set of standard reports and supports more than 50 standard and custom reports. 14

Pollenware (C2FO) Profile Dynamic Pollenware (C 2 FO) Profile PollPricing is flexible and includes a small implementation fee, subscription fee and a percent gain share on the income earned. Buyers can customize their pricing to meet their unique needs. Pollenware does not charge a fee to the supplier. Pricing and Implementation Pricing is flexible and includes a small implementation fee, subscription fee and a percent gain share on the income earned. Buyers can customize their pricing to meet their unique needs. Pollenware does not charge a fee to the supplier. Implementation typically takes two to three weeks, although only about 40 hours of staff time is required from the buyer. One of the biggest advantages of Pollenware s cloud-based platform and standard interfaces is that implementation requires minimal IT support. Most of the implementation time is spent obtaining client approvals and recruiting suppliers. Two primary drivers of implementation time are the Communications Package Approval, and Data Transfer Protocols. 15

Pollenware (C 2 FO) Case Study Pollenware (C 2 FO) TM Case Study Fortune 500 children s retailer turns their accounts payable liabilities into income generating assets while infusing liquidity into their supply chain. The Challenge Enhance short term yields on cash - currently at a record low of 10-30 basis points Benefit the company s large and diverse supplier community which was struggling with industry challenging capital constric tions and costs Address opportunities in Accounts Payable, one the company s largest balance sheet liabilities Create a win for suppliers The Solution Pollenware created an online, early payment solution where suppliers make dynamic bids for accelerated payment of approved invoices by discounting those invoices in weekly, real-time, 30 minute (C 2 FO) market clearing events. Pollenware and customer teams worked together to manage multiple project streams including: Marketing the program to the supplier base Onboarding and training suppliers with a dedicated Supplier Relationship team Operating weekly early payment (C 2 FO) events Coordinating Cash and Treasury activities for early payment The Results In six weeks from contract to (C 2 FO) go live, Pollenware was able to launch the program with no IT support and less than 40 hours of overall client effort. To date, the program has a supplier adoption rate of more than 50% and has generated in excess of $2MM of discount income at 13% A.P.R and more than $275 million in early cash flow delivered to the clients suppliers. 16

Conclusion Conclusion Conclusion Nobody can afford to leave money on the table, yet most companies are doing just that in the form of early payment discounts not taken. The opportunity remains, however, especially now, with working capital at a premium, which is why buyers, suppliers, technology vendors, and forward-thinking bankers and investors are setting aside the old 10-day fixed discount deadline and replacing it with flexible, dynamic terms designed to optimize working capital on both sides of the purchase transaction. In this report, and the accompanying vendor profiles, we looked at three of the most popular DDM solutions, including: sliding scale discounts, supply chain finance, and discount auctions. In addition, we provide advice on vendor selection. PayStream Advisors will continue to monitor emerging technology and report back with additional findings. About PayStream Advisors, Inc. PayStream Advisors is a technology research and consulting firm that improves the way companies plan, evaluate, and select emerging technologies to achieve their business objectives. PayStream Advisors assists clients in sorting through the growing complexities of IT applications related to business process automation with the goal of making objective, analytical, and actionable recommendations. Online Resources Advisory Services Free Reports Software Directory Technology Solution Profiles End-User Case Studies Assess your current state Develop your business case Create and manage your RFP Review and select the perfect vendor 17

SolutionSource PayStream s SolutionSource is the first step toward finding an automation solution. Start Your Search Here: http://www.paystreamadvisors.com/solutions/ 1. SEARCH SEARCH BY FUNCTION: BY FUNCTION: Business Process Business Process Outsourcing Dynamic Payables ing E-Procurement Supply Chain Enterprise Content Imaging/Workflow/Document Mgmt. Purchasing Card (P-Card) Recovery Audit Services/Solutions Supplier Electronic Payments Contract /Payment Review 4 Easy Steps. All FREE 1. Search for solutions 2. Narrow your needs 3. Speak with an analyst 4. Obtain your free Buyer s Guide Register today to automatically receive notification of upcoming PayStream reports. To view upcoming 2012 reports, click through to PayStream s Research Report calendar or contact Mark Colwell. 18