The Ariba – Orbian partnership is something I expected everyone and his dog would be picking up on and writing about, but with the exception of Mickey North Rizza‘s (AMR) and Jason Busch‘s (SpendMatters) analyses, I haven’t really found anything of note, which is surprising given the potential significance of the partnership (if Ariba pulls it off right).
Ken Roche, CEO of Orbian, notes that By providing low-cost receivables financing and certainty of payment timing and amount to suppliers, buyers are able to achieve cost savings or better trade terms. Additionally, suppliers generate incremental free cash flow, improving their [days sales outstanding (DSO)] metrics and capital efficiency, by gaining access to the entire value of the receivable, at a low cost.
According to the press release, The ASN (Ariba Supplier Network) serves buyers and sellers in 115 countries and has combined transactions exceeding $95B annually. The ASN lets the buyers trading the $95B approve the invoices and notify Orbian. The suppliers view and Orbian provides payment within 48 hours of the decision to the supplier. This slashes the model to 2 days from the previous 30.
Mickey notes that:
- Ariba is for many others a best-of-breed suite that is wrapped around their ERP system, such as Oracle or SAP. And while the two systems, Ariba and ERP, may work together, this presents an even greater opportunity for ERP-centric companies to tie into the ASN and take advantage of the Ariba partnership for greater working capital.
- The partnership [also] moves Ariba ahead of its competition by offering three
opportunities to improve working capital for the buyer and suppliers: earlier payment with electronic invoice presentment and payment (EIPP) and cards, dynamic discounting, and a third-party supply chain financing opportunity.
- The Orbian strengths are in its diversified pool of investors that provide
liquidity outside of the traditional bank credit line. With a low cost, plenty of capacity from investors, and a tiered structure, the opportunity is vast for immediate cash flow improvements. This is a huge differentiator for CFOs, treasurers, and CPOs who need additional resources that won’t adversely affect their balance sheet debt.
And Jason Busch notes that:
- The real advantage for the original parties is that involvement with Orbian does not detract from the commercial paper pricing for suppliers. In other words, it’s a legitimate form of off-balance sheet financing which does not limit the ability to borrow in other ways.
- I’d speculate that the global supply chain finance market opportunity will top a trillion dollars annually in the next decade (in deal volume).
But Supply Chain Finance goes well beyond just EIPP, early discounting, and third party financing. It also includes, among other aspects, virtual consignment financing, true optimization of working capital, increased analytics capability, and real-time visibility into program activity and the status of each customer. And this partnership could allow customers to take each of these aspects of supply chain finance to the next level as well.
For example, the platform could be used to facilitate greater virtual consignment financing, where the buyer buys the raw materials with added leverage and sells them to the supplier at cost, since buyers could also take advantage of this third party financing and still get the supplier a better rate. If the supplier needs to borrow anyway, when you consider the buyer could negotiate a better rate on both financing and on the raw material cost, this will still save money.
The platform can also be used to better optimize working capital – which goes beyond just early payment discounting. A supplier can calculate how much money it needs in any given week and optimize which payments to take early, which payments to take on schedule, and, which payments to accept late – offering yet another form of financing, but this time to a buyer.
And the platform can be used to give each supplier greater real-time visibility into the financial activity and status of each customer, giving them visibility into the financial side of their supply chain they may not have had before. It also gives the buyer better visibility into not only the financial status of their suppliers, but how much a buyer is willing to accept on an order to get paid quickly. This not only helps buyers manage risk, but could help sourcing teams negotiate better deals if they could turn around payments faster.
In other words, this is a partnership that could significantly advance the supply chain finance side of e-Procurement if done right … but only time will tell.