Dynamic Discount ManagementMoving Toward MainstreamQ2 2013Featuring Insights on .Benefits of Dynamic DiscountingReasons for Missed DiscountsUnderwritten in part byDynamic Discounting Management ToolsBuilding Blocks of Invoice Automationand Discount ManagementDynamic Discounting Solution Providers

Table of ContentsExecutive Summary.1Opportunities in Payables.3Working Capital and Payables.8What Should I Do Next?.11Reporting & Analysis.12Implementing Dynamic Discount Management.13Ariba .16Ariba Case Study.20Conclusion.21About PayStream Advisors .22 2013 PayStream Advisors, Inc [email protected]

Executive SummaryEarly-payment discounts – the old math-class calculation of “if Company Abuys 100 of merchandise from Company B on terms of 2/10, net 30, whatwill Company A pay for the merchandise if it pays one week after purchase?” –seemed destined for the history books. The “Company A”s of the world simplycouldn’t process their invoices by hand fast enough to beat that “all-or-nothing” 10day deadline. And the “Company B”s of the world stopped offering them becausecustomers were taking discounts to which they weren’t entitled.Leveraging the operational efficiencies of electronic invoicing and automatedpayables, Dynamic Discount Management (DDM), the use of sliding scale ornegotiated terms to optimize cash management, has breathed new life into thisonce moribund practice.A quarter of Accounts Payable practitioners surveyed by PayStream Advisors inNovember 2012 report that they are capturing 100 percent of offered discounts.Most companies are taking at least some. More than 90 percent of AccountsPayable practitioners in PayStream Advisors’ most recent automation surveyranked DDM as a priority, with almost 40 percent listing it as a high priority, seeFigure 1.Figure 154%Interest in CapturingDiscountsCapturing early paymentdiscounts is a growingpriority for mostcompanies.37%9%We make capturingdiscounts a high priorityWe rank capturingdiscounts as somewhatimportantWe do not think thatcapturing discountsis important 2013 PayStream Advisors, Inc [email protected]

PayStream Advisors has developed this Technology Insight report titledDynamic Discount Management: Moving Toward Mainstream, as a resource fororganizations actively exploring dynamic discounting solutions. To complimentthis report, PayStream also published the Dynamic Discount ManagementImplementation Guide. Both the report and the guide are among many resourcesavailable in PayStream’s research library at www.paystreamadvisors.comThe Dynamic Discount Management: Moving Toward Mainstream report is basedon the results of PayStream’s Q4 2012 Dynamic Discount Management surveyof over 200 accounts payable and procurement professionals at U.S. basedenterprises Based on the number of survey respondents, PayStream believesthat the survey has a confidence level of /- 5 percent. 2013 PayStream Advisors, Inc [email protected]

Opportunities in PayablesTell a CFO that your zippy new software solution increases control and visibility ofspend, and you might raise an eyebrow. Offer a risk-free return of 12-36 percent orhigher on available cash . . . now you’ve got their attention.With returns like that, it should come as no surprise that dynamic discounting,trade financing, and buyer-initiated (push) payments have elevated accountspayable automation from an AP, IT and operations issue, to a strategic priority forTreasurers and Chief Financial Officers.Dynamic Discount Management allows companies to invest their cash safely atrates that can significantly exceed returns from many other traditional investments,including the S&P 500, capital purchases, and even gold. Many payablesdepartments with paper invoices or decentralized receipts suffer from lengthyapproval and payment cycles which prevent them from optimizing their financialgain from discounts.Figure 246%Interest in DiscountCaptureWhile interest incapturing discounts ishigh, many companiesare unable to capturediscounts offered bysuppliers.24%11%9%None, we captureall availablediscounts1-10%11 - 20%21 - 30%10%More than 30% 2013 PayStream Advisors, Inc [email protected]

The potential rewards for early supplier payments are great. Even the standarddiscount of 2 percent for payment within 10 days translates to an annualpercentage rate of almost 37 percent. And yet, only about 25 percent of thecompanies PayStream surveyed were able to capture all discounts offered,see Figure 2. The reasons most often given for failure to take an early paymentdiscount were lengthy approval cycles and lost or missing invoices – bothproblems commonly associated with manual payment processes and paperinvoices, see Figure 3. Despite these clear advantages, challenges remain.Figure 3Reasons for LatePayments and MissedDiscountsLengthy approval cyclesranks as the top reasonfor late payments andmissed discounts.27%Lengthy Approval Cycles13%Large Number of ExceptionsMissing Information on Invoices8%21%Lost or Missing Invoices20%Decentralized Invoice ReceiptOther11% 2013 PayStream Advisors, Inc [email protected]

What is Dynamic Discount Management?Dynamic Discounting harnesses the power of electronic invoicing and the cloudto enable buyers and suppliers to propose discount terms that change. Insteadof the former static practice of offering a “2%, 10, net 30” discount, dynamicdiscounting might include offering discounts on a sliding scale that can changedaily or even hourly depending upon both parties’ needs. A more recent innovationopens discounts to competitive bids and invites banks and third-party funders toparticipate. Enabling participants to make the best deal for themselves creates a“win-win” for all parties.Sliding Scale DiscountsThe technology of most Dynamic Discounting solutions provides a user-friendlyinterface that brings buyers and sellers together and enables both sides of eachtransaction to benefit by capitalizing on early payment discounts on a much largerscale than was previously possible. There are two key differences between thistype of dynamic discounting and traditional static terms:1. Sliding Scale Discounts decrease with the passage of time.2. With discounts spread over 30 days, virtually all invoices paid in 29 days orless are eligible for a discount.Dynamic discounts allow early payment offers on all approved invoices awaitingpayment. This becomes especially powerful for invoices that are approved quicklysuch as those generated directly from a purchase order and those originatingelectronically via EDI, vendor portal, or eInvoicing network.Automated solutions are collaborative to varying degrees, allowing both buyersand sellers to come to mutually agreeable discount terms quickly and efficiently.This discount can offer buyers a double digit APR while at the same timesatisfying suppliers’ immediate need for cash.Funding for sliding scale dynamic discounts usually comes from a buyer’s workingcapital, although banks, auctions and third parties are becoming more involved asword of available returns and relatively low risk spreads. Early payments can belucrative for large buyers since the typical interest rates underlying the discountsare much higher than the buyer’s cost of capital for risk-free investments such ascertificates of deposit.Third Party FinancingDDM solutions also enable buyers to access an alternative early payment fundingsource – third party financing. Depending on liquidity requirements, all DynamicDiscount Management solutions aim to improve the buyer’s bottom line, whileThird Party Financing can be used to free up working capital. 2013 PayStream Advisors, Inc [email protected]

Third Party Finance solutions come in three types:1. Supply Chain Finance provided by a bank or other financial lenders allowspayers to use other capital sources to pay suppliers before the due date.2. Receivables Trading allows sellers to place their accounts receivable in theopen market for purchase by hedge funds and private lenders.3. Market-Based Price Discovery is an auction-based type of receivablestrading.1. Supply Chain FinanceSome buying organizations may want to limit the amount of working capital theyinvest. Supply Chain Finance (SCF) is typically used to enable an extensionof payment terms by a large buying organization, which results in a one-timeimprovement in working capital. SCF provides suppliers with access to financingat attractive rates, which reduces a buyer’s supply chain risk.From an accounting standpoint, not much changes for the buying organization, asthe bank advances early payment, “buying” the receivable from the supplier. Thebuying organization then makes payment to the bank, instead of the supplier. Incertain industries such as retail and heavy manufacturing, SCF is an importantsource of capital to fund the supply chain, providing access to early funds at a rateclose to the buyer’s cost of capital. SCF enables suppliers to reduce their DaysSales Outstanding (DSO) without resorting to more expensive financing optionssuch as factoring and asset-based lending. Due to its higher legal and processrequirements, SCF is mostly deployed only for larger suppliers, and may not be aswell suited for suppliers of all sizes, as is Dynamic Discounting.2. Receivables TradingReceivables trading enable suppliers to trade their approved receivables for cashin an exchange platform. The exchange houses all the transaction history andbuyer/supplier information and facilitates the matching of a supplier interested inearly payment with a willing lender. In an exchange similar to factoring, the lenderadvances the supplier funds before the due date and takes payment assignmentfrom the buyer, who pays the lender before the due date.The buying organization must approve the invoice and trade payable to be tradedbefore any transactions take place. Upon approval, the buyer can either guaranteepayment of an invoice (similar to factoring), or agree to make payments to theintermediate lender. The arbitrage opportunity between large buying organizationsand their smaller suppliers makes these vehicles popular for organizations thatmay not want to use their own capital to fund trade payables. Third party supplierfinancing solutions position buyers to partner with innovative banks and otherlenders to support their supply chains, allowing buyers to retain if not extend, their(DPO). 2013 PayStream Advisors, Inc [email protected]

3. Market-Based Price DiscoveryMarket-Based Price Discovery is an auction-based type of receivables trading. Inthis scenario buyers can award early payment to suppliers that bid a discount thatmeets the buyer’s specific return parameters. Suppliers compete for shares of anearly payment cash pool, each according to their own need, with various discountrates being established online. Like all Dynamic Discount Management solutionsonly approved invoices are eligible for the program. Market-Based Price Discoveryprovides the treasury organization a low-risk investment option with returnstypically higher than other investment vehicles. 2013 PayStream Advisors, Inc [email protected]

Working Capital and PayablesDDM solutions provide early settlement opportunities that serve the cashmanagement needs of buyers and suppliers. DDM provides suppliers with liquidityand buyers with a low-risk, high yield, short-term investment opportunity. Whilediscounts were historically driven by suppliers as an incentive to secure earlypayment, enhanced visibility into invoice status via automation and collaborativenetworks are turning the tables and enabling buyer organizations to proactivelypropose early settlement discounts to suppliers. Third-party financing enablesbuyers to extend their payment terms through the injection of third-party capitalwithout adversely affecting supplier relations. Suppliers gain additional cashliquidity and stronger balance sheet positions.Invoice Approval Cycle TimesFor many buyers, timely invoice approval was not a priority prior to the availabilityof DDM tools. Faster approvals didn’t necessarily lead to accelerated payments. Infact, during the recent financial downturn, extending payment cycles allowed manylarge buying organizations to improve their liquidity. Successful DDM dependsupon fast invoice processing – ideally less than 14 days. Since only approvedinvoices can be used for DDM to work, the volume and number of invoicesawaiting payment is the critical ingredient to unlocking DDM opportunities.Electronic Processes Drive Supplier InterestMost companies list supplier resistance as the biggest obstacle to implementingDDM. eInvoice automation that makes the solution easy for the supplier to benefitcan help overcome that obstacle. Many solutions offer self-service supplier portalsintegrated with DDM, which provides valuable services to both suppliers andbuyers. Since DDM solutions generally accelerate the exchange of informationbetween trading partners and provide improved visibility and control over financialtransactions, suppliers’ ability to upload, view and track invoices in real time asthey make their way through a buyer’s workflow process, improves the visibilityand control they have over AR processes.Suppliers receive notification immediately upon completion of a buyer’s payablesapproval process, allowing them to monitor and assess receivables in real time.For the buyer, this translates into a reduction in resources required to resolvediscrepancies and respond to inquiries. Both buyers and sellers receive paymentdata and remittance detail electronically facilitating reconciliation of payablesand receivables. In particular, companies holding excess liquidity will finddynamic discounting attractive, as it presents an opportunity to make short term,risk-free investments in their own supply chain at rates superior to most otherinvestments. A dynamic discounting solution will also result in a reduction of APin the short term but with a lower spend due to discounts earned. Seventy-twopercent of companies surveyed cited lower processing costs as a major benefit 2013 PayStream Advisors, Inc [email protected]

of implementing a DDM solution. Typical savings can range from 1 million to 5million per billion dollars in annual spend discounted.Electronic payments, the final step in a fully-automated purchase-to-pay solution,are critical to dynamic discounting, because they accelerate the paymentcycle and provide the fraud protection and control required to capitalize on thevarious discount opportunities discussed below, see Figure 4. ePayments canalso significantly lower processing costs by removing the need for printing andmailing checks. Less paper reduces opportunities for fraud. Supplier notificationand vendor self-service options reduce the number of supplier inquiries andexceptions. Online search and retrieval tools aid in payment verification andcollaborative dispute resolution, as well as compliance with all regulatoryrequirements.Figure 4Benefits Achieved byUsing Electronic PaymentsLower processing costsranks as the top benefitto utilizing ePayments.80%Lower processing costsReduction in procure-to-paycycle times49%Reduction in check fraud/ lost checks20%30%Increased vendor satisfaction45%Increase in on-time paymentsIncreased ability to captureearly payment discounts29%25%Reduction in duplicate paymentsOther, please specify12%Enhanced visibility into the timing and amount of payments aids in superiorcash flow forecasting capability for suppliers while delivering better cash liquidityand stronger balance sheet positions for suppliers without relying on high costfinancing alternatives. Buyers can extend payment terms; suppliers can acceleratecash conversion cycles.Despite the benefits associated with electronic payments, many companies stillissue payments via paper checks. This cumbersome manual-based process 2013 PayStream Advisors, Inc [email protected]

impacts the number of discounts captured since it slows the invoice process timeresulting in late payments and missed discounts, see Figure 5 for the primaryreasons companies do not use electronic payments.Figure 5Primary ReasonCompanies do not UseElectronic PaymentsSupplier resistance isthe number one reasoncompanies do not utilizeePayments.20%Internal resistance to change11%Concerns around security / fraudSupplier resistance to acceptelectronic paymentsDifficulty in collecting bankinginformation from suppliersDifficulty in integrating electronicpayments with AP systemsOther, please specify21%4%19%25% 2013 PayStream Advisors, Inc [email protected]

What Should I Do Next?DDM generally works well if there is a strong vision and alignment around processimprovement. To achieve the long-term value of DDM, organizations need to adopta strategy involving both procurement and finance, and therefore initiatives shouldbe approached at an enterprise level. DDM initiatives need a strong frameworkto ensure that programs are approached on a strategic basis which bridges thesupply chain, accounts payable and finance functions. PayStream’s analysts haveintroduced such a framework to help enterprises implement “integrated” DDM andmaximize its benefits. When considering DDM, there are a number of features thatare valuable to consider, including:Dynamic Discounting Management ToolsDiscount configuration – flexibility to configure and change discount schemes atvarious levels, globally for all suppliers, for specific supplier tiers and even at theindividual supplier level.Discount control – ability for buyers to specify which invoices will be madeavailable for discounting based on working capital needs and the dates on whichthese invoices can be discounted.Payables portal – suppliers can log into the portal and view invoices that can bediscounted and evaluate the associated financing fees and timing.Auction and trading platform – usually a web exchange where suppliersdiscount or trade specific invoices.Accounting integration – this tool accounts for the integration and posting ofpayments, discounts such as changes to Cost of Goods Sold, General Ledgerentries to buyers’ ERP and accounting systems.Remittance management – sending the remittance information to suppliers viathe portal in a format of their choice so they can easily transfer the remittanceadvices into their receivables systems. 2013 PayStream Advisors, Inc [email protected]

Reporting & AnalysisWhen selecting a discounting solution, it is important to consider the strategicas well as tactical capabilities. Just as good inputs are required up front, itis important to consider the outputs, specifically the analytics and reportingcapabilities on the back end that will provide visibility to buyers and suppliers andprovide decision makers with the tools they need to optimize cash management.Standard reports – most discounting solutions provide a suite of standard reportsbundled with their systems that enable authorized users to perform simple andadvanced searches to generate reports that provide visibility across transactions tobuyers and suppliers.Custom reports – ability to generate ad hoc reports and save the queries astemplates.Business intelligence – information gleaned from the procure-to-pay process canbe used not only to comply with regulatory requirements but also to provide valuabledata for strategic spend analysis. 2013 PayStream Advisors, Inc [email protected]

Implementing Dynamic DiscountManagementPayStream Advisors has created the Discount Management ImplementationGuide called “The Eight Building Blocks of Invoice Automation and DiscountManagement” to help enterprises see the big picture, make their business casesand plan their implementation.Figure 6Eight Building Blocks ofInvoice Automation andDiscount ManagementA strategic frameworkto bridge supply chain,accounts payable andfinance functions.P2P VisionP2P StrategySupplier e PropositionGoalsMeasurementsAutomation RoadmapCollaboration GoalsSegmentation PlanningCommunicationsIncentives/DisincentivesP2P ProcessesInvoice Visibility AccrualsCash Conversion CycleProcessing EfficiencyStakeholder Orientation8 BuildingBlocks ofInvoiceAutomationCulture / ChangeManagementInter-departmental SynergyShared Goals/RisksIT ResourcesTrainingP2P InformationP2P TechnologyP2P ServicesEfficiency MetricsBenchmarking DataDashboardsPayment SchedulingImaging WorkfloweInvoice ApplicationsArchitectureIntegration with ERPSaaS DeliveryInvoice NetworksSupplier On-boardingDiscount Management3rd Party PCards, ePayment1. Purchase-to-Pay Visiona. Leadership and senior management buy-inb. Cross-functional alignment and supportc. Clear understanding of the value proposition2. Purchase-to-Pay Strategya. Clear and concise discount management strategyb. Multi-year automation roadmapc. Documented metrics to measure progress 2013 PayStream Advisors, Inc [email protected]

3. Supplier Interactiona. Defining buyer-supplier collaboration goalsb. Vendor segmentation and adoption planningc. Supplier communication and recruitment strategyd. Payment and discount terms configuratione. Incentives/penalties to drive supplier behavior4. Culture and Change Managementa. Inter-departmental collaboration and shared risk/goalsb. IT resource allocation and trainingc. Incentive compensation based on goals achievedd. Cash management flexibility5. Process Managementa. Enhanced invoice visibility and accurate accrualsb. Cash conversion cycle and DPO goalsc. Improving processing efficiencies and accelerating approval cycles6. Purchase-to-Pay Informationa. Identifying efficiency metrics that need to be improvedb. Leveraging external benchmarking datac. Visibility across transactions and access to data dashboards7. Automation Technologya. Front-end imaging and approval workflow solutionsb. Electronic invoice submission and receipt applicationsc. Seamless integration with ERP and accounting systems8. Value-Added Servicesa. Multiple delivery models including hosted and SaaSb. Supplier recruitment and on-boardingc. Availability of third-party credit and financing 2013 PayStream Advisors, Inc [email protected]

The above framework can be used for internal education and debate in developingthe Discount Management vision and strategies. It can then be the basis ofan assessment of the enterprise’s current and required capabilities, to helpunderstand its current position and future strategy. 2013 PayStream Advisors, Inc [email protected]

AribaAriba, an SAP company, makes business commerce as easy as consumercommerce, with software solutions that enable organizations to buy, sell andmanage cash in a networked economy. More than 100,000 companies aroundthe world, including more than 80 percent of the Fortune 1000, use the AribaCommerce Cloud to transact more than 400 billion in business annually.Ariba Discount Professional has helped clients maximize the benefits of DynamicDiscounting since 2003. It is part of the Ariba Collaborative Finance Solutions suite thatspans the Procure-to-Pay process from smart invoicing and paper invoice conversionto integrated electronic payment and working capital management. These solutionssupport global e-invoicing in more than 70 currencies as well as digital signatureauthentication, VAT/tax compliance and data archiving.WebsiteFoundedHeadquartersOther LocationsEmployeesRevenuesCustomersEnd UsersAnnual TransactionVolumeIndustry SegmentsKey AccountsAwards / Recognitionswww.ariba.com1996Sunnyvale, CA40 offices in 21 countries, including North andSouth America, Europe, Asia/Pacific and Australia2,432Quarter end 6/30/2012: 131.5 million ( 443.8 millionfor FY 2011)1 million trading partners4.5 million 400 billion Consumer goods, distribution, financial services,healthcare and pharmaceutical, manufacturing, oil andgas, public sector, publishing, retail, services, telecom,utilities, among others.Key clients are market leaders in target verticals. Asmall sample includes AstraZeneca, Bank of America,Entergy, GlaxoSmithKline.Technology Excellence Awards: Leading P2PTechnology – 2012, PayStream Advisors; Beste-Procurement Solution – 2012. Global Financemagazine: 100 Great Supply Chain Partner,SupplyChainBrain: Ten Best Web Support Sites,Association of Support Professionals 2013 PayStream Advisors, Inc [email protected]

Partners / ResellersIBM, ScanOne, Logica, TrustWeaver, Hubspan, andMicrosoft. BPO providers Genpact and Accenture.Bank reseller Wells Fargo. The ReceivablesExchange for receivables financing.Solution OverviewAriba Discount Professional is a full-suite dynamic discount platform that allowsbuyers and suppliers to collaborate in both automatic and/or ad-hoc dynamicdiscounts. The solution has enabled clients to maximize the benefits of DynamicDiscount Management (DDM) since 2003. Fully integrated into the Ariba CollaborativeFinance Solutions Suite, Ariba Discount Professional allows clients to earn highreturns on available cash by offering suppliers a variety of discount options customizedfor each client’s business needs. Trading partners can connect and collaborate overmultiple business processes, giving full visibility to both sides into order and invoicestatus, payment timing and fulfillment, and early payment opportunities.SAP’s acquisition of Ariba in late 2012 made Ariba Discount Professional SAP’s onlynative DDM solution. Ariba Discount Professional will be fully integrated into the SAPsuite of solutions and be part of the joint Ariba/SAP roadmap for ongoing innovation.These innovations will still be available to all Ariba Network customers, regardless ofplatform.Supplier RecruitmentGood results for suppliers translate into great results for buyers. Ariba’sRapidRamp accelerated supplier onboarding methodology is part of the standardsolution package. Ariba has over 500 global employees dedicated to supplierrecruitment and enablement. Over 1 million trading partners around the world arealready part of the network.Ariba’s Working Capital Management services team begins working for clients assoon as the contract is signed. Given that most companies do not have the time,expertise or resources to actively manage a dynamic discounting or payment termsinitiative, Ariba’s managed services team helps clients define a clear strategy, and thenemploys Ariba’s Rapid Ramp methodology to actively drive supplier onboarding anddiscount participation, so that many of the client’s suppliers are signed up and ready toparticipate in dynamic discounting from the moment the system is live. Once live, thesupplier interface allows suppliers to see all their buyers on one screen through onelog-in, and their ability to easily navigate their discount options is a key recruiting toolfor Ariba Discount Professional .Electronic InvoicingAriba Invoice Automation and Ariba Invoice Professional solutions are alsoavailable to customers on the Ariba Network. Ariba smart invoicing features the 2013 PayStream Advisors, Inc [email protected]

most advanced validation rules available, driving straight-through processingrates to more than 98 percent of invoices processed through the Network. Errantinvoices are returned to the supplier before entering the organization. Thisaccelerates the processing of valid PO and non-PO invoices before invoices postto ERP/back office systems. The solution also performs automated, detailed POline level matching on any invoice using 80 user-configurable business rules withno coding required.Both suppliers and buyers have full visibility into invoice approval status andpayment timing. This visibility, combined with the solution’s ability to contain anunlimited number of discount options, enables all network participants to betterforecast their cash flow and adjust the dynamic discounting to meet their businesscash needs.Dynamic DiscountingAriba Discount Professional enables clients to take advantage of a variety of discountoptions customized to fit a client’s specific business needs. The solution offers suppliersmany attractive options beyond traditional discounts, including a sliding scale ofdiscounts depending upon the time of payment. The solution supports both automaticand ad-hoc Dynamic Discounts, allowing for both recurring and one-time-onlydiscount capabilities. The system has flexibility through Ariba Receivables Finan

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 almost 37 percent. And yet, only about 25 percent of the companies PayStream surveyed