2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
Treasury Management Systems and Supply
Chain Finance
Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
2 TABLE OF CONTENTS IMPACT POINTS .............................................................................................................................................. 3 INTRODUCTION .............................................................................................................................................. 4 WHAT IS SUPPLY CHAIN FINANCE? ................................................................................................................. 5 WHY SCF SOLVES THE BUSINESS PRIORITIES OF BOTH THE CFO AND THE TREASURER................................. 7 TMS: SCF TECHNOLOGY FOR TREASURERS ..................................................................................................... 9 WHY CLOUD-BASED TMS CAN IMPROVE SCF DELIVERY ......................................................................... 11 WHAT IS THE LIKELY FUTURE OF SCF? .......................................................................................................... 13 CONCLUSION ................................................................................................................................................ 15 ABOUT AITE GROUP...................................................................................................................................... 16 AUTHOR INFORMATION ......................................................................................................................... 16 CONTACT ................................................................................................................................................. 16
LI ST OF FIGURES FIGURE 1: TRADITIONAL STATIC INVOICE DISCOUNTING VS. DYNAMIC DISCOUNTING ................................ 6
Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
3 I MPACT POINTS Supply chain finance (SCF) allows organizations to achieve results that measure the success of how corporate chief finance officers and treasurers conduct their business and add value to their company. This document is a white paper on the market definitions and opportunities for SCF. The goal is to identify the most effective information technology (IT) platform that corporate treasurers should use to fully deploy (and enjoy the benefits of) SCF programs. Supply chain finance is based primarily on the foundation of integrating data and information from different sources, and modern treasury management systems can establish the platform that aggregates and distributes transactional data and information to all the stakeholders involved in the SCF exercise (e.g., buyers, suppliers, logistics providers, financial institutions). The integration between treasury management system (TMS) technology and SCF solutions is today not a nice-to-have option but has become almost a necessity. Corporate treasury departments are the main counterparties of TMS solution vendors, and corporate treasurers are the main decision-makers in a SCF sales cycle. Therefore, it is very likely that in the not-too-distant future, software that automates the sourcing and application of SCF across all points in the financial supply chain will be offered as an extension of corporate treasury management systems. Point-to-point connections, different communication protocols, and the existence of legacy systems make the integration with TMS effort cumbersome and almost impractical. Software-as-a-service (SaaS)-based computing comes to solve this issue, allowing the task to be accomplished in a streamlined way.
Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
4 I NTRODUCTION The continual transformation of the financial markets and the dynamics of the credit crunch have brought to the forefront the importance for corporate executives to go beyond banks as the only source of funds for the company's operations and, instead, adopt solutions that allow liquidity to be extracted from the business's internal operations. Although the practices of supply chain finance (SCF) have been described extensively in recent years, education and information are still important factors for the successful implementation of SCF programs. In fact, SCF is more than a set of discrete financial products. It is rather a disciplinedand collaborativeapproach to improving the working capital ratios of the entire network of supply chain partners. Supply chain finance allows organizations to achieve results that measure the success of how corporate chief finance officers (CFOs) and treasurers conduct their business and add value to their company. This document is a white paper on the market definitions and opportunities for SCF. The goal is to identify the most effective IT platform that corporate treasurers should use to fully deploy (and enjoy the benefits of) SCF programs. The scenario proposed in this paper is that treasury TMSs can provide the right technology solution to support the execution of complex business problems. The document will also demonstrate that the integration between TMS technology and SCF solutions is today not a nice-to-have option but has become almost a necessity. Supply chain finance is based primarily on the foundation of integrating data and information from different sources, and modern treasury management systems can establish the platform that aggregates and distributes transactional data and information to all the stakeholders involved in the SCF exercise (e.g., buyers, suppliers, logistics providers, financial institutions). With technology today reaching new peaks of effectiveness, cloud computing allows corporations to accomplish the task of integrating various sources of data in a streamlined way. Software applications no longer require expensive infrastructures and time-consuming implementation projects. SaaS is the new IT paradigm that provides the foundation for SaaS- based treasury management system to become the likely platform that will allow corporate treasurers to enjoy the benefits of SCF initiatives without the concern of having to install yet another technology stack on their already chaotic IT portfolio. This document is based on the assumption that a SaaS-based TMS is the likely platform for SCF solutions that corporate treasurers will use. Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
5 WHAT IS SUPPLY CHAI N FINANCE? In a tough economic environment, it is less easy to access funds through traditional channels. The ability to innovate and be flexible is a requirement in the newly evolving ecosystem. During this transformational process, businesses will find or generate sources of precious liquidity within their own operational processes once they are capable of analyzing the impacts of supply chain management practices on the components of working capital. When a company's chief financial officer and treasurer understand the financial dynamics of the supply chain, they can employ a vast array of financial instruments and practices to help the company meet its working- capital objectives. Banks have a role in supporting working capital management through optimizing their customer's financial condition. This is the supply chain finance arena. The adoption of financial instruments to improve accounts payable (A/P), accounts receivable (A/R), and inventory values has long been a common practice among corporate treasurers. Financial institutions, therefore, need to offer such instruments in a more organic way to impact the underlying financial elements concerned. These instruments and practices are components of SCF. Given the extreme importance for their business results, market players state that there is a strong need for clarity around terms and definitions of SCF and its components. The lack of a common nomenclature complicates the understanding of the solutions offered and amplifies the confusion of apparently simple financial instruments. Supply chain finance is therefore best described as a series of practices and technologies that support the regular trade flows and the financial processes of collaborative parties in an end-to-end supply chain. The premise of SCF is to reduce the finance costs of not only one part of the supply chain but rather the entire supply chain. True SCF software vendors are those developing and commercializing application suites that apply to the entirety of these processesnot solely to the buyer/supplier portion. SCF should actually refer to the financial approaches and instruments that optimize the transactions, working capital, and costs of all supply chain processes, from product design to after-sales management, and through procurement, manufacturing, warehouse management, and distribution. If we are to look at the real market for SCF todayand set realistic expectationsbanks and businesses are mainly concentrated on the buyer side of the trade equation. What the market refers to as SCF are typically "supplier finance" platforms focused on payables. The set of the payables financial supply chain processes and the financial instrumentsalong with the enabling IT solutionsconstitute the focus of the present white paper. As a proven success, the payables-centric segment will no doubt continue to grow and flourish and will be enhanced by further dematerialization and accelerated exchange of electronic data and documents. With this in mind, two are the most frequentlyand successfullyadopted payables-centric SCF instruments in the market today: Reverse factoring Invoice discounting (aka cash discounting)
Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
6 Reverse factoring (aka approved payables finance) allows a supplier to receive early payment with a discount of an invoice due to be paid by a buyer. The buyer approves the invoice for payment and arranges for early payment by means of finance raised from a bank or other provider, who relies on the creditworthiness of the buyer without recourse to the supplier. The finance provider applies to the supplier a discount rate (i.e., cost of capital) lower than what it would normally apply should the supplier not be connected to the creditworthy buyer. The arbitrage opportunity on the difference of cost of capital 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. Invoice discountingthe other SCF instrument described in this paperrelies on suppliers receiving a percentage of their receivables in exchange for an earlier payment, thus reducing their DSO (says sales outstanding) exposure. Traditional invoice discounting is based on a "fixed" combination of discount value/payment date. The most frequently illustrated invoice discount scheme is "2/10, Net 30": For an invoice due to payment in 30 days the supplier offers an extra 2% discount on the invoice face value, receiving in return an early payment in 10 days (i.e., 20 days earlier than contracted). The potential rewards for early supplier payments are great. Even the standard discount of 2% for payment within 10 days translates to an annual percentage rate of 36%. This SCF instrument, though, suffers a problem of static terms: In the cited 2/10, Net 30, the supplier risks not being entitled to a discount if the invoice approval takes longer than 10 days. The alternative solution to static invoice discount is dynamic discounting: This new form of invoice discount allows both buyers and suppliers to propose terms by putting them on a sliding scale and opening them up to negotiation, as shown in Figure 1. Figure 1: Traditional Static Invoice Discounting vs. Dynamic Discounting
Source: Aite Group At any point in time the supplier and the buyer can agree on the discount to apply or on the advance payment date. The underlying system takes care of providing visibility to the parties involved as well as ensuring the contractual parameters (e.g., maximum discount allowed; minimum early payment days) are met. This sophisticated SCF alternative version of invoice discounting requires a robust technology platform to run the necessary calculations and negotiation process. 2.5% 2.0% 1.5% 1.0% 0.5% 0% $ 10 days 30 days 2.5% 2.0% 1.5% 1.0% 0.5% 0% $ 10 days 30 days 20 days $ $ $ $ Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
7 WHY SCF SOLVES THE BUSINESS PRI ORITI ES OF BOTH THE CFO AND THE TREASURER It is well known that the financial (and now economic) crisis has stretched the resources of small, yet strategic, suppliers of large corporations to the limit. The instinctive reaction of large buyers to the incumbent crisis that is, to delay payments as a means to free up liquidityhas put suppliers on their knees. This has had a negative consequence on the buyers as well, as the campaigns to stop or delay payments have hit both "normal" and "strategic" suppliers, reducing their ability to serve their large customers. In this business environment the upheaval of the economic and financial crisis that we are still suffering is marking an evolution in the role of the treasury function. The treasury ecosystem has been revolutionized, and the "cash is king" imperative requires treasury to adopt new ways to interact with corporate executives and the other lines of business. Past is the time when treasury was made responsible only for "bean counting" and executing payments instructions. Treasury managers today must adapt and dominate areas (e.g., payables, receivables, credit management) that were previously only niches of their business ecosystem. During this transformational process corporations will find sources of precious liquidity within their own operational processes, once they are capable of analyzing the impacts of supply chain management practices on the components of working capital. Successful treasury organizations are adapting to disruptive events by moving into the "new" environment of supply chain management. One of the functions of SCF is to align the deployment of financial instruments with the actual movement of goods and payments along the supply chain. Supply chain finance promises to support the company in both securing business continuity to its supplier base through focused funding and extracting liquidity from supply chain processes. Cash visibility, management of liquidity, and management of risk are the key priorities of corporate finance executives who meet with shareholders and investors almost daily. The treasury office has become the "information steward" of the CFO. Corporate CFOs are supporting their CEO's strategy in multiple facets, mainly along the lines of: Improving the capital side of the balance sheet Extracting liquidity from the global value chain and improving the profit and loss figures (e.g., through invoice discounting) Optimizing working capital ratios (i.e., A/P, A/R, inventory) Supply chain finance will further be accepted as a strategic necessity for a company since it represents the answer to the CEO's challenge by: Turning the last source of cash into the driving force of corporate growth Being an innovative differentiator for ensuring sustainability, especially in the critical international trade Offering a major source of liquidity and key enabler of profit margins and return on equity Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
8 In light of this new perspective, the role of a corporate treasurer is to provide the CFO with pertinent and up-to-date information on the company's financial situation (e.g., liquidity position, sources of available cash, status of counterparty risk) and with a future outlook of cash inflows and outflows. Corporate financial performance is now more than ever linked to supply chain decisions, and the role of the treasurer is expanding across the full financial supply chain. Treasurers of very large (i.e., revenue of more than US$10 billion) corporations today look at cash not only in terms of where to find available sources of finance but also on how to best utilize the free cash available on behalf of their supplier base. The behavior of corporations in response to the credit crisis is forcing banks to turn away from their traditional, product-oriented approach toward being more careful and conscious of their customers' needs and expectations. Banks want to become more customer-centric. This demands banks to carefully focus on how corporations are freeing up cash, where corporations are increasingly focused on running supply chain management practices as a source of generating extra cash flows and free up liquidity. Supply chain finance, therefore, in line with its nature of providing financial instruments that optimize the working capital of collaborative supply and demand networks, establishes itself as the business platform that supports both CFOs and corporate treasurers in their endeavor to strategically build relationships with trade and financial partners. Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
9 TMS: SCF TECHNOLOGY FOR TREASURERS As previously seen, corporate treasurers are the reference points for information and guidance on the financial performance of their organizations. The rate of change in the market and the multiplicity of data sources require the consolidation of data and filtering of the most relevant and pertinent information for sound and business-relevant decision-making. Treasurers understand that the CFO's focus is on them, and they are demanding IT systems that support them throughout their daily activities and responsibilities, not only in terms of automating manual operations but, more importantly, in terms of providing them with timely and integrated information along the value chain. The role of technology is to detect events, gauge their relevance against predetermined thresholds, and take action. While technology should not replace human decisions, it should be able to identify critical items and provide intelligence for sense-and-control-like operations. Product differentiation, pricing, service fees, the ownership of the technology platform are all differentiating factors for enhanced competition. Technology is still an important factor that automates the execution of financial products and a cheaper delivery. Although becoming a commodity, technology has not lost its influence yet as a strategic tool for competition. It is a fact that technology still plays a pre-eminent role in providing intelligence to a treasurer's daily life. Corporate treasurers are very careful in their choice of IT platforms, and prefer to select Web- based, multi-bank, and standards-based dashboards. They want to avoid being trapped into a bank-proprietary platform. They also want the freedom of choosing the best trading partner by exchanging transactions on the Web using globally accepted communication standards and protocols. The trend is one in which treasury, cash management, trade finance, payments, and foreign exchange are all interconnected within a single multi-bank and standards-based (i.e., "open") platform. At present, the limited selection of software that automates SCF arrangements tends to be bank-centric. This approach imposes yet another stand-alone system on corporations whose IT portfolios are already chaotic. Such imposition may be one of the key reasons why most corporations are not yet taking advantage of the generous returns SCF seems to offer. Software solutions for treasury have evolved from basic standalone treasury workstations, where automation would lead to the business objective of efficiency, to interconnected TMSs covering cash management, forecasting, and risk management tools. Treasurers will soon ask what intelligence the built-in software functionalities of the TMS provide to support business decisions, and treasury solution vendors must develop functionalities that provide transparency on what creates the decisions. It is anticipated that to better manage their duties and to fulfill the responsibilities they are charged with, treasurers will demand more integration of the software applications they use on a daily basis with the corporate enterprise resource planning (ERP), as the integration of the TMS with payables and receivables from the ERP increases the visibility of the inbound and outbound flows of cash. Treasury systems provide buyers with the capability to upload invoices from the ERP and execute payment instructions as a payment factory. From the same TMS platform, suppliers have the visibility of the approved invoices and can better forecast their cash flows. They also have the option to get the invoices financed. Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
10 Corporate treasury departments are the main counterparties of TMS solution vendors, and corporate treasurers are the main decision-makers in a SCF sales cycle. Therefore, it is very likely that in the not-too-distant future, software that automates the sourcing and application of SCF across all points in the financial supply chain will be offered as an extension of corporate treasury management systems. A key feature of this software will be its support for a virtual SCF marketplace, in which a corporation can invite a wide range of banks (and perhaps other credit providers) to participate in meeting a specific SCF need as easily as today's consumer can search airlines, hotels, and online travel booking engines for specific travel needs. There are several technology platforms for SCF provided by banks and specialist software vendors in the market today. There are problems related to technical integration and organizational complexity faced by companies, however, especially those smaller in revenue size and with reduced personnel in the treasury departments. The possibility to run SCF operations using the TMS as a "cockpit" (or dashboard) would certainly make treasurers feel more confident because the same system they use for their daily operations (e.g., cash forecasting, payments, bank accounts management) would also allow them to execute instructions for SCF such as reverse factoring or invoice discounting. As mentioned earlier, one of the most important functions of SCF is to align the execution of financial instruments with the movements of goods and payments along the supply chain. The expectation is that the TMS will further serve as the corporate platform for SCF by expanding its integration beyond ERP to also incorporate supply chain management applications and maximize the efficiency gains made possible from the introduction of improved IT-driven supply chain management monitoring. A process event in the physical supply chain (e.g., purchase order request) will trigger a corresponding series of processes on the financial supply chain (e.g., check the ordering client's credit limit, forecast the expected cash inflows consequent to the fulfillment of the purchase order, evaluate the working capital availability to complete the obligations of the purchase order). Once visibility of these processes in made available through the integrated TMS platform, it will be possible for the corporate treasurer to decide on the best options to properly fund the internal operations and, at the same time, evaluate the need for the suppliers' and distributors' networks to access external financial resources in case of momentary financial distress. Or, more simply, to instruct multi-bank and multi-currency payment orders from the TMS cockpit. Enriching the core payments franchise through process integration, improved reference data, and error reduction is one example that gets banks and corporations alike more accustomed to the financing opportunities linked to supply chain transactions. With the visibility and transparency provided by a TMS platform of trade transactions and the link between funding and trade activities, SCF lessens the risk associated with traditional lending. While traditional lending requires the knowledge and expertise of highly paid loan officers and strict management of collateral, SCF relies on the invoice as a key document in enabling lending. Using the visibility of the TMS gained through the invoice onto the tradeincluding the partners involved, the ability of the buyers to pay, and the expected receivables of the suppliersthe TMS-based platform can provide banks with information to make more knowledgeable judgments about the creditworthiness of trade participants. The final integration of the TMS platform with transactional applications that provide payment capabilities closes the SCF process loop efficiently and effectively for the corporate CFO and treasurer. Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
11 WHY CLOUD- BASED TMS CAN I MPROVE SCF DELI VERY Corporate treasurers find themselves ever more involved in helping their IT colleagues decide whether to opt for an internal treasury system or an external (i.e., outsourced) solution. The benefits of an internally managed system include insuring better control and security of data at the expense of dedicating more resources and maintenance activities. An externally managed system incorporates the outsourcing to a specialized partner all the development, maintenance, and update tasks. Nowadays, externally managed systems commonly take the form of SaaS delivery. Supply chain finance is based primarily on the foundation that data and information must be collected and integrated from different sources. Point-to-point connections, different communication protocols, and the existence of legacy systems make the effort cumbersome and almost impractical, whereas SaaS-based computing allows the task to be accomplished in a streamlined way. Corporate buyers generally prefer to start a SCF program with their preferred partner bank. Once the SCF program starts running regularly, the next step is to extend the reach of the program to other banks. A multi-bank platform is scalable and allows the number of banking partners to increase as well as switching from one bank to another. The fact that SaaS-based solutions have proven to be easier to integrate and that interfaces with external systems are easier to build makes SaaS a viable option for banks and their partner banks when sharing information and data. Connections on SaaS-based platforms can also be reused on the same platform with other partners, and this is especially valuable to banks that prefer to connect directly to their corporate client's systems and not through third-party intermediary hubs. The SaaS-based SCF platform resident on the corporate client's TMS offers the same benefits, eliminating the presence of such undesired mediators. With the full range of SCF options visible on their TMS, and with the ability to factor in TMS-based cash forecasting, analysis of investment options, and trade finance options available, sophisticated treasury officers are looking at ways to use their treasury systems to develop models that could continually compare different options for financing the supply chain and determine the optimum approach at any given point in time. A full-functioning SCF platform sitting on a cloud-based TMS that integrates with banks globally through a multi-bank portal might even allow the corporation to switch between bank-provided credit and its own capital during periods when surplus cash happens to be available. One of the major obstacles to implement a successful SCF program is supplier onboarding, which consists of convincing the suppliers to join and use the platform. A SaaS-based TMS platform is better placed to facilitate the onboarding process, as it is already used by the headquarters treasury team to centralize treasury operations. In this respect, the process of convincing peripheral treasury offices to accept the new system is comparable to an onboarding activity. Anecdotal evidence shows that this process is faster if it is offered in combination with an easy- to-use technology. Local treasuries are less reluctant to change the way they have to manage their business if they can use technology easily accessible through a single Web page and with easy-to-use applications. Onboarding through a cloud-based TMS can improve SCF delivery because it helps demonstrate to suppliers the ease of use of the system via a simple browser. Potential SCF suppliers can immediately learn that there is need for neither hardware integration nor any particular use of specific software to implement. Accessibility from the Internet provided Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
12 by cloud-based SaaS is very important, especially for small-sized suppliers with limited budget. Similarly, the benefits of cloud-based SCF platforms appeal to company subsidiaries that appreciate the non-intrusiveness of the SaaS platform, which preserves the corporate IT infrastructure. A SaaS-based treasury system helps trading partners (i.e., buyers, suppliers, and banks) exchange data via the Web with no installations and download data with export functions. Moreover, through the system, a supplier has visibility into his or her payments status. Such information can be easily linked to the supplier's treasury system, thanks to the non-intrusive integration capabilities of SaaS. Far-sighted treasurers might also offer to their selected suppliers some basic cash management features extracted from the buyer's TMS platform. Suppliers could therefore exchange data via the Internet with no installations and download data with export functions from the buyer's TMS cloud-based SCF platform. Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
13 WHAT IS THE LI KELY FUTURE OF SCF? A treasurer sees the company from both sides of the value chain, that is, as a company that is at the same time a buyer and a supplier. While this white paper has so far focused on practices and technologies that address the payables side of SCF, it is widely acknowledged that the expected benefits from SCF solutions deal with both sides of the trade relationship equation. There are many ways in which companies can influence the values of working capital through management practices of the physical supply chain. It is important to recognize that these practices go way beyond purchase orders, logistics, and inventory management. While these are, indeed, part of the supply chain manager's duty, additional activities, such as planning of production, supplier sourcing strategies, forecasting and distribution of finished goods, negotiation of purchasing deals, and managing returns and post-sales services, belong to the management of the supply chain and, therefore, to the reach of SCF instruments and technologies. The current market for SCF software is in strong demand for applications (named supply chain transactionsSCTenablers) that create an infrastructure. The most-offered SCT enablers are dedicated to managing invoices, payables, receivables, and collaboration platforms (including multi-bank, a real novelty for the banking world). The majority of SCT enablers are for open account transactions. On this infrastructure run software applications (named SCF enablers) that automate SCF transactions. Within the next three years, it is likely that we will see a strong convergence between software suites dedicated to open account transactions and documentary credit-oriented (e.g., letters of credit, guarantees, collections) application suites. With the vast majority of vendors selling directly to banks, financial institutions are finally realizing that it is more appropriate to turn to specialized providers to acquire software applications that support the execution of mission-critical SCF transactions rather than building software internally. Given that cash-rich corporations could finance their trading partners on a global scale by ensuring their own financial stability (enhancing business opportunities and market share growth), SCF will support stronger customer relationships by enabling credit policies that are beneficial to all parties of the global value chain. Collaboration in the supply- demand network is the key foundation of the SCF of the future, and all trading partners will enjoy the benefits of IT solutions that enable and accelerate the deployment and exchange of financial instruments that serve the business objectives of all parties involved. One example of where integrated platforms of SCT and SCF enablers are heading is represented by dynamic discounting auction platforms. This white paper has already described the process flows of dynamic discounting and the benefits for both buyers and sellers of adopting a solution that allows highly flexible negotiation scenarios based on sliding discount schemes associated with early payment terms. Dynamic discounting moves away from the traditional payables- centric role of static invoice discounting to become an SCF instrument that strongly merges with a corporate treasurer cash and liquidity management instruments. In fact, an invoice discount based on a sliding scale can either be requested by the supplier as an A/R-centric SCF instrument to anticipate their DSO term or offered by the buyer as an A/P-centric financial instrument to enjoy the benefits of a reduced purchase price while simultaneously facilitating advanced cash to the supplier. Dynamic discounting from the buyer's perspective becomes more of a suppler relationship management tool integrated with the SCF capabilities of the instrument itself. Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
14 Dynamic discounting becomes particularly appealing to cash-rich companies that want to securely invest their assets while keeping them sufficiently liquid to cushion any credit constraintsnot unlikely under the current financial and economic turmoil conditions. Rather than ensuring return on the principal, corporate treasurers are much more cautious to ensure return of the principal. Dynamic discounting appears to be a valid solution to handle short-term liquidity with a flexible and collaborative IT tool. The collaborative nature of this SCF instrument further increases its appeal when the auctioning feature is added. In short, dynamic discounting is also somehow based on predetermined sliding discount scales, which not always respond to the suppliers' need for immediate liquidity and risk appetite. Auction-based dynamic discounting solutions sit on a liquidity "pool" set by the buyer. Suppliers are not presented with established discount rates but are invited by the buyer to participate in an online auction event. Participating suppliers can place bids at any time or gather online at the designated time and present the percentage discount on their invoices they would be willing to offer in exchange for an early payment within an established time window. They have visibility of the chances to win the bid (i.e., draw liquidity from the pool) and have the ability to continuously offer new discounts. At the same time, the buyer can see the bids arriving from the competing suppliers and immediately evaluate the new income and the equivalent return generated. The "pool" cash allocation can also be adjusted based on the bids offered by the suppliers. Auction-based dynamic discounting illustrates how SCF will evolve in the next three to five years, in association with other innovative collaborative SCF instruments, such as purchase order-based financing, asset-based lending, and inventory financing, which move beyond buyer- and supplier-centric financing.
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15 CONCLUSI ON Treasury has upgraded its role in the company and is now expected to be the knowledge steward of the CFO. Decisions on how to best invest available cash or on how to extract cash trapped in working capital require new discipline and knowledge of SCF instruments. Supply chain finance practices and technologies are a reality, and corporate treasurers need to become familiar with their adoption. Clarity on terminology and nomenclature for SCF is important to turn it from an academic concept into usable and easy-to-deploy solutions. Although the SCF ecosystem of solutions is vast, the current most-adopted SCF solutions are concentrated in reverse factoring and invoice discounting, with its additional sophisticated dynamic discounting version. Supply chain finance has been for long time under the tight control of banks, providing fruitful results to the institutions as they took almost no risk. Now that risk appetite and entrepreneurial approach are the paradigm for the "new normal" economic environment, corporations are starting to look at SCF as a set of practices and disciplines they can deploy by themselves. In order to do so, traditional manual operations must be replaced with technology support that provides visibility and a collaborative environment to all parties involved. Instead of relying on yet another layer of technology, treasurers prefer to run SCF software applications from the existing foundation they use for their daily duties. That is, the treasury management system. SaaS-based technology can extend the reach of a TMS to incorporate additional SCF features that make the TMS a "cockpit" for the corporate treasurer from which all cash, trade, payments, finance, and foreign exchange transactions are launched and controlled. The likely future of SCF is a set of financial applications (e.g., reverse factoring, dynamic discounting, auction-based dynamic discounting, pre-shipment finance, receivables and payables finance, and digital letters of credit) that sit on a cloud- based foundation and integrate seamlessly with the corporate ERP, TMS, and supply chain management enterprise applications.
Treasury Management Systems and Supply Chain Finance June 2013 2013 Aite Group. All rights reserved. Reproduction of this report by any means is strictly prohibited.
16 ABOUT AITE GROUP Aite Group is an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry. With expertise in banking, payments, securities & investments, and insurance, Aite Group's analysts deliver comprehensive, actionable advice to key market participants in financial services. Headquartered in Boston with a presence in Chicago, New York, San Francisco, London, and Milan, Aite Group works with its clients as a partner, advisor, and catalyst, challenging their basic assumptions and ensuring they remain at the forefront of industry trends. AUTHOR I NFORMATI ON Enrico Camerinelli +39.039.21.00.137 ecamerinelli@aitegroup.com CONTACT For more information on research and consulting services, please contact: Aite Group Sales +1.617.338.6050 sales@aitegroup.com
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