|The 2011 guide to Technology in Treasury Management|
The pressures from the decline in customer demand around the world, increases in the price of raw materials and the lack of availability of credit are making it absolutely essential for senior management and corporate treasury to focus on automating the financial supply chain wherever possible. Established financial supply chain and working capital management technologies and services are being installed at unprecedented rates as companies attempt to maximize their cash flows, reduce their inventory and accounts receivables, extend their payment terms for the goods and services they purchase, and minimize debt. Banks and other financial service suppliers are attempting to meet the need for automation, launching new platforms and services and upgrading existing products and services. Companies use a combination of banks and suppliers services to put together the solutions they require. But this is unlikely to be enough. Companies are already having to collaborate to ensure the financial health of not only their own supply chains but those of their suppliers. Collaborative automation is fast becoming necessary for companies to survive in the current economic climate.
Automating the financial supply chain in SEPA
All the necessary pieces for automating the financial supply chains of companies operating in the Single Euro Payments Area (SEPA), a politically-led collaborative initiative, are slowly being put into place. The single currency is well established, SEPA Credit Transfers and Direct Debit payment systems for domestic and cross-border transfers will hopefully be fully operational by 2013, the ISO 20022 e-invoicing message standard has been published and in July 2010 the directive to harmonize VAT treatment of all invoices in Europe was approved. A green paper by the European Commission on the future of value added tax (VAT) collection, examining the possibility of VAT payments split between governments and merchants eliminating the process of VAT returns, has also been published.
The vision for the Digital Single Market, encompassing a single currency, SEPA payment systems, a single invoicing standard and a single VAT system throughout the region, offers real cost savings, particularly for smaller companies. Bo Harald, head of executive advisers at Tieto, a leading light in the e-invoicing business and guru to the European Commission, believes, "e-invoicing means better customer service and it will build the base for automating all administrative processes potentially cutting the costs for SMEs in half and delivering substantial savings in the public sector. e-invoice exchange between e-invoicing providers will be a huge boost to single market efficiency. Also the split payment proposal for VAT collection will minimize fraud."
In 2010 e-invoicing service providers around the world reported record demand, with some experiencing 10% growth in volumes per month. There are still some problems to be overcome for e-invoicing to become really widespread, including the fragmentation of the e-invoicing industry and the lack of willingness on the part of some suppliers to enrol in provider networks.
Consolidation of the e-invoicing service providers - for example, Aribas takeover of the Quadrem network in January 2011 - will doubtless solve some of the fragmentation problems. But there are and, for the foreseeable future at least, will probably continue to be hundreds of e-invoicing service providers (the European Commission estimates there are more than 400 in Europe alone) so the automated exchange of e-invoices that has begun, though volumes are growing very slowly, will need to proliferate for real penetration.
The biggest problem for service providers is supplier enrolment. It is relatively easy to enrol large companies on their networks. The problem is the failure of the hundreds and thousands of small companies, which supply goods and services to the large companies, to join. All the providers have web-based input enrolling services, the real difference seems to be in whether they have large customer service desks to chase and encourage companies to join. Stefan Foryszewski CEO at OB10 believes, "Supplier enrolment is critical for the success of any e-invoicing project. Service providers must have proven track records and the A/P and procurement teams must work together from day one."
Although considerable processing cost savings can be made from the use of e-invoicing (a paper invoice costs around 30 to process compared to 1 for an e-invoice), it also provides other benefits.
One is more visibility of receivables, enabling it to focus its efforts on collecting the payments for outstanding invoices. Another, with approval of e-invoices typically taking a mere two to four days compared to the 20 or more required for a paper invoice, is the opportunity for dynamic discounting.
A new service, Dynamic Discounting Optimizer from OB10, enables a supplier, whose e-invoice has been approved but is not yet due for payment, to opt to be paid early by simply selecting an earlier payment date and accepting the corresponding discounted rate set by the buyer. Although the supplier is paid less, in times of scarce liquidity this can significantly improve the suppliers cash flow. This is perhaps a good incentive for smaller companies to join e-invoicing networks.
Another recent development in dynamic discounting services is Pollenwares Collaborative Cash Flow Optimization (C2FO), which uses an on-demand auction platform to enable Global 1000 companies in the US and Europe to use short-term cash surpluses to pay some of their suppliers early. Pollenware uploads payables the buyer wants to offer for early payment on to the QuickPay supplier portal. Then, using its variable forward auction system, it invites the companys suppliers to take part in a 30- to 45-minute auction. Participation is optional. Those suppliers taking part gather online at a set date and time and enter the percentage discount they are prepared to offer for early payment. The QuickPay system indicates to each supplier the risk of being out-bid and it has the opportunity to increase its original bid. The buyer is shown all the bids as both a percentage discount and an APR discount, based on the number of days the invoice will be paid early. If the bids are attractive the buyer can increase the amount of cash available for the auction. At the end of the designated time the buyer chooses which discounts to accept in return for early payment.
The auctions take very little time to set up and clients offering dynamic discounting for early payment have found more suppliers prepared to participate in an auction than other more standard discount schemes. Pollenware has been offering the service for just over a year, already has 123,000 suppliers on the system and has processed over 775,000 invoices, totalling $19 billion of accounts payables. During 2010, Pollenware clients earned an averaged a 17.2% APR on the cash they made available for early payments through the platform, a compelling alternative to short-term investments, which are yielding little more than 20 to 30 basis points at present. Roy Owens, Pollenwares president, says, "Auctions are much more attractive to suppliers than the classic more static dynamic discounting programmes and certainly help achieve greater discounts for buyers. We believe that our Optimized Collaborative Auction Platform is the future of dynamic discounting programmes."
Ariba is now using statistical evidence from its sourcing and procurement services to identify industry sectors and types of company likely to accept dynamic discounting. For cash-rich companies, dynamic discounting offers the most flexible and highest returns on surplus cash, if only their suppliers can be persuaded to accept less in return for early payment.
Automating sourcing and procurement
E-sourcing and e-procurement are now well established in many companies, with all the departments involved using automated systems to source and procure goods and services. In 2010 several new products and product enhancements were launched to make sourcing and procurement more efficient and to enable greater collaboration between buyers and suppliers.
Searching for a suitable supplier can take a considerable time, sometimes a month or more. Google searches can throw up impossible numbers of options to research in any detail. Over the years Ariba, an e-commerce company providing e-procurement, e-invoicing and working capital management services with a global network of 340,000 businesses, has been asked by many of its large MNC members whether it could search for suitable suppliers on the network. In response, the Ariba Discovery service, launched two years ago, automatically matches buyers with suppliers based on their needs and capabilities across more than 400 categories. Companies using the service have found that sourcing the goods and services they require is now typically taking only four to five days.
Collaboration between buyers and suppliers is also being encouraged through the use of services such as Aribas Enhanced Collaborative Requisitioning, a service enabling buyers and sellers to transact business more efficiently and effectively, forge new business relationships and improve existing ones to boost revenues. The service encourages buyers to include purchases often left off spend management systems by making it easy to requisition items across all spend categories, so improving spend coverage. Though automating sourcing and purchasing is important, purchasing compliance is vital, as the elimination of contract leakage remains one of the single most cost-effective savings a company can achieve.
Automating the trade cycle
All the global network banks offer some form of integrated trade platform incorporating working capital and supply chain management as well as various financing services to create end-to-end solutions. Import and export solutions, ranging from traditional letters of credit to full open account processing, are continually being enhanced; recent product launches by Citi and RBS indicate the banks determination to improve the automation of the trade cycle.
Citi recently launched two new services for exporters. The Trade Document Outsourcing service enables clients to centralize the preparation of their export documents with Citi, which then acts as a full outsourcing centre, managing the flow of documents, ranging from letters of credit to documentary collections to open account payment terms. This web-based solution, which is integrated into Citis processing systems, also enables clients to give permission for their third-party providers and trading partners to enter data, upload documents and files, and obtain transaction information. Citis Direct Presentation service is also designed to improve document processing. Beneficiaries submit their letters of credit documents electronically via the service, a web-based imaging platform that enables documents to be posted on a secure website for review rather than having them physically transported to and fro.
RBSs MaxTrad Network provides a single platform for all trade finance payables and receivables, open account trading, supply chain finance, and cash management and payments integration, as shown in Figure 1. To speed up trade document flows RBS recently added DigiSuite to the MaxTrad Network. DigiSuite uses advanced scanning technology, including the scanning of photos of documents taken by mobile phone, to ensure that all the documents in a clients financial supply chain are digitized, eliminating the need for manual, paper-driven processes. Importers and exporters are now able to scan in trade documentation and send it in digitized form to RBSs MaxTrad Network, speeding up the flow of documents between all the different parties in a transaction.
Figure 1 - MaxTrad Network
Exporters can use MaxTrad DigiSuite for electronic document preparation and presentation in real time. RBS checks the documents for discrepancies and informs the exporter, which then either accepts the discrepancies or submits revised documents. DigiSuite condenses the time-frame for the submission, review and delivery of clean documents considerably. Madhav Goparaju, global head of trade product delivery and sourcing solutions, Global Transaction Services, RBS, claims, "The addition of DigiSuite to MaxTrad really has cut clients costs and shortened the whole trade cycle."
Financing the supply chain
Financing the supply chain has become even more important as liquidity, or more accurately the lack of liquidity, continues to cause problems. Over the past year there have been several enhancements to existing products and services, and one major new development.
Supply chain finance, or reverse factoring as it is sometimes known, is now well established world-wide. Large companies have come to understand how it can be used to provide their smaller suppliers with a cheap source of liquidity, though some large companies also benefit by extending their payment terms. In many cases, the interest rate the suppliers obtain is not particularly low, but some are still keen to receive their cash considerably earlier than they otherwise would. One of the biggest problems in supply chain finance, as in e-invoicing, is the enrolment and implementation of the suppliers. Over the past 12 months the banks have all been automating the enrolment process. Their aim to move to truly electronic so-called on-boarding systems using standardized processes and contracts. Although most banks new business has been in supply chain finance, they and other suppliers of traditional factoring continue to offer these services and some companies are now using a combination of the two.
Identifying opportunities to reduce days sales outstanding and to automate key processes in the financial supply chain has always proved difficult. Citis Working Capital Analytics is now being used to identify opportunities to improve the overall efficiency and cost-effectiveness of their clients payables processes, offering recommendations for improving working capital and supply chain strategies, including ways to streamline procure-to-pay processes, based on individual clients goals and practices.
And new ways for reducing days sales outstanding are also emerging. The Receivables Exchange in the US provides a centralized and transparent electronic marketplace enabling companies to sell their receivables directly to institutional investors in a real-time, competitive auction process. The seller uploads the receivable invoices for sale and sets up the auction, specifying the closing date, the minimum advance and the maximum fee it is prepared to accept. The seller also has the option of setting a buyout price, which will win the auction instantly (similar to the Buy it Now option on eBay). The auction must be approved by The Receivables Exchange and must be for a minimum of $10,000, which can be made up of multiple invoices. The auction is posted online where buyers are able to check the background of the seller and can see details of all the invoices. The bidding process, shown in Figure 2, enables buyers to estimate how competitive their bids are and the seller to monitor the auction in progress. An auction typically takes less than 24 hours, sometimes less than two hours. The funds are wired to the sellers bank account the next business day.
Figure 2 The Receivables Exchange auction
Source: The Receivables Exchange
The buyers are regulated financial institutions and there are now 80 buyers on the exchange including hedge funds and banks. The sellers are companies with business operations in the US. There are 1,400 sellers on the exchange, the majority medium-sized companies and SMEs but there are also some large multinationals. The Receivables Exchange charges both buyers and sellers. Sellers pay a one-off registration fee of $500 and both sellers and buyers pay transaction fees of 0.03% to 0.07%, based on a proprietary algorithm.
The Receivables Exchange trades many million dollars worth of invoices a day and runs thousands of auctions each month. Most sellers have found they have lowered the cost of their working capital by around 30%, some by as much as 50%. Nic Perkin, co-founder and president of The Receivables Exchange, claims, "On the exchange, companies are lowering their cost of capital and shortening their days sales outstanding to one day while maintaining complete control of their relationships." The Receivables Exchange has plans to launch its service internationally in due course.
Putting together new combinations of existing products and services seems to be the future of financial supply chain management - for example, using a combination of the purchase card, dynamic discounting and supply chain financing. Auctions also seem to be playing an increasingly important role. But until there is more collaboration between buyers and sellers and more automation of the processes involved, companies can only dream of the ideal financial supply chain solution.