"Dynamic discounting" has been around since the early 2000s. Of late, though, the practice has earned new found admiration thanks largely to a recent shift in expectations among global AP process owners. Increased penetration of supplier network solutions, and their registered supplier base, have also helped fuel its growing usage and realization of Next Level popularity.
While conventional discounting has always had its place in the Procure to Pay world, emphasis on two-way communication and discount adaptability has led to a more dynamic and successful model for offering and realizing payment-related discounts. One of the principal attractions of dynamic discounting is the way in which it enables buyers to take advantage of sliding scale discounts.
Unlike traditional 2/10 Net 30 discounts which expire the tenth day, for example, buyers can capture sliding scale discounts throughout an invoice term. Discount amounts are reduced each day as the original invoice due date approaches. Such discounting fundamentally alters how invoice discounts are offered.
Under the traditional 2/10 Net 30 discount model, buyers take advantage of discounts only when offered by the supplier. When buyers negotiate invoice discounts under this model, the process requires that terms be set weeks or months in advance. Dynamic discounting, meanwhile, allows buyers to propose invoice discounts atop existing terms. And the dynamic discount can, by contrast, be offered at any point in the transaction cycle. All that is required to initiate the transaction is an ability for the buyer and seller to communicate electronically.
Baking the option into the system
More and more, buyers are proposing dynamic discounts using an interface that's baked into their P2P system. If the buyer wishes to pay a particular invoice early, they send a message to the vendor through the supplier network. The message typically states the invoice has been approved, and the buyer is willing to pay early in exchange for a suggested discount rate. The vendor may approve or decline the discount. In instances where the vendor is not a member of the buyer’s supplier network, the message is simply sent via email.
As an organization, you must have a sense of what opportunities exist between you and your vendors. Doing that type of due diligence means asking certain questions. Questions like: Who are they-are they large businesses or small, near or far? Have discounts (or extended pay terms) been previously discussed? Do you hold any leverage with these vendors (i.e., Is the business you do together of substantial importance to them) and might both terms and price be negotiable? Also, remember, many vendors use revenue-share models to manage cash, and are therefore committed to your success in these projects.
Critical points worth considering
Improve communication with suppliers, especially as it relates to developing feedback on ways to leverage a dynamic discount.
Even if your vendor contract doesn't address discounts it does not necessarily mean they are not available. A supplier may wish to take a discount—be it regularly, or under a unique circumstance—outside regularly contracted terms. These discounts can, for instance, be made available at specified price thresholds, which toggle said discounts to maximize the advantage for purchaser or supplier.
Discounts are but one way to assign value to a payment opportunity discussion; payments can be shortened or extended to optimize each opportunity as needed.
Formulate payment policy around discount negotiation. This allows organizations to document their procedures for enrolling vendors into discount programs, thus establishing an agreed upon "invoice date" with suppliers, and how invoices will be handled if you do not pay in enough time to capture the discount.
All necessary parties are involved internally, and you need AP staff to cover operations with that point squarely in mind: Treasury owns cash management. Procurement owns the vendor relationships. IT owns the technology, and Finance understands the impact these ownership stakes, properly managed, can have on the business as a whole.
Ultimately, as with most accounts payable processes, improvements in technology are changing the way companies can, and do, look at invoice discounting and its potential advantages to them. Simply stated: Technologies such as electronic invoicing and electronic payment are giving buyers more control over the discounting process. The extent to which dynamic discounting can continue build on the Next Level popularity it has only just begun to enjoy is limited only by the degree to which these technologies continue to be effectively designed and deployed.