Calculating the Value of the Ariba Network to Suppliers: How to Account for Decreased DSOs (Part 1)

Earlier in the month, we published a recent article and analysis highlighting the findings from a free Spend Matters research brief that examined Ariba's forthcoming network price for suppliers, taking place this fall.

In this new series of posts examining the price change, we'll excerpt a few of the highlights from the paper we think are useful either: A) as it pertains to examining the impact of Ariba's move on supplier costs; B) understanding what calculations to believe when it comes to benefits; or C) deciding if the Ariba network is beneficial and the right choice for all of your suppliers versus a subset (and what to do with those for whom the numbers might not add up). Today, we'll turn our attention to understanding one of the most touted benefits of the network: reducing days sales outstanding (DSOs) for suppliers.

One of the major benefits that Ariba suggests for suppliers on the network is the reduction in days sales outstanding (from an average of 46 to an average of 33, as one illustrative example). For very high volume suppliers / invoices (e.g., $15 million), Ariba suggests that its fees ($20K) are more than compensated by the reduction in float, resulting in a benefit to suppliers of $44K (assuming a cost of capital of 12% as Ariba defines it -- but more on that in Part 2 of this post). For lower volume suppliers / invoices (e.g., $100K), the benefit / value amounts to $273 through reducing float (assuming the same cost of capital and DSO reductions).

Our analysis suggests two potential areas of debate with this analysis. The first is that whatever dollar amount / term a DSO is in a particular receivables circumstance, it is already in contract. Hence, a legal, timely payment obligation exists even if companies have not paid all of their suppliers within the specified terms (e.g., Net 30, Net 60) historically. However, contractual obligations are obligations, and our research on the subject suggest that companies that aggressively follow up on DSOs tend to collect closer to or on the actual date than those who do not, regardless of their use of an invoice automation toolset. Moreover, larger organizations have more sophisticated A/R and collection operations than smaller companies, putting them at an advantage in terms of timely collections.

Check back for our second area of debate with the Ariba argument in Part 2 of this post.

Jason Busch

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