Dynamic discounting continues to be an exciting space in payables. Here are 6 opinions related to dynamic discounting from Mark Thomas, Director Client Operations at C2FO.
1. “You tend to find a champion within an organization who sees the value of dynamic discounting.” This single champion is typically from AP. He or she will be the one who promotes the benefits of dynamic discounting internally to get buy-in from everyone and ensure the different functions (I.e. IT, Procurement, Treasury, and Finance) collaborate.
2. “When alignment doesn’t exist or you’re dealing with a single stakeholder, you reach a stage of a process where you realize you’re not as far along as you’d thought.” Having a single stakeholder banging the dynamic discounting drum won’t necessarily de-rail your project, but it could slow it down. It’s good to get multi-stakeholder buy-in early – at the stage where, as a company, you have conceptually decided that dynamic discounting is a ‘good thing’.
3. “It’s something you can dial up or dial down based on cash position and business objectives at that time.” Dynamic discounting isn’t all or nothing. You don’t need a consistent amount of cash that you pay out every day, week, etc. Dynamic discounting allows Treasury to release or retain as much cash as they want according to wider business objectives.
4. “In dynamic discounting, there is no need to change or update contracts.” You don’t need to constantly renegotiate contracts, add addendums, or sign new contracts. Dynamic discounting works off of existing contracts with suppliers and then a set of Ts & Cs that buyers and suppliers sign up to, usually through the provider.
5. “Dynamic discounting can give P2P a very clear ROI for improving process/systems.” Mark explains: “Say you want to invest in a new system to improve average approval time by 2 days. If you can then put a value on the dynamic discounting benefit generated by the additional 2 days, this will give you a very clear business case to purchase a system or change your process to achieve that.”
6. “Measure regularly, to inform the actions you need to take to improve the market for yourself and suppliers.” You want to look at the potential spend put through the platform and assess:
• The amount that is actually accelerated
• How many days it’s accelerated by
• The rate received on accelerated payments
When you are starting a program, you might want to measure key metrics on a daily or weekly basis. Once you reach a steady state with suppliers and understand your relationship, you might not need to look at these metrics so regularly. But it’s still a good idea to review quarterly and half-yearly so you can look back over the period and strategize what you can do to optimize the market going forward.
