Wednesday, October 28, 2009

The Short of It Again--With a Twist

In our October 6 Post we commented on the fact that an auction of short-duration invoices had been closed at a price that seemed to reflect an increased awareness of the cost, to both Buyer and Seller, of delaying the closing of transactions that will have a short life.

That particular auction broke a pattern of prices that had held for 15 straight transactions by that Seller of invoices due from the same Account Debtor.

Our friend “Oldschool” commented that the transaction represented “randomness pure and simple”. And in fact the next three transactions did revert to the old pattern, all selling on the same “pre-anomaly” terms.

However……….there have now been 8 transactions in a row at return levels that are HIGHER, on average, than the “anomaly” that spurred us to write on October 6.

To be fair, there are other dynamics that seem to be affecting pricing in the past couple of weeks; but the break of this long-term price level for this particular Seller/Debtor pairing does not actually seem to be random.

To make the point again---the more quickly the Debtors pay, the greater the impact of the fixed TRE fees on annualized return. Auctions that are bought at low return levels face significant effective return dilution if they are paid too quickly. Full stop, as the Brits say.

Here’s another twist on the same theme.

There is a regular Seller on TRE that groups the invoices of three Account Debtors in its auctions. The average days-to-pay of two of those Debtors exceeds 40 days. The average days-to-pay of the third is less than 20 days.

In this case, holding constant the assumed auction parameters, the composition of the auction will significantly affect the ultimate effective yield. The greater the weighting of invoices due from the short-duration Debtor, the greater will be the dilution effect of the rapid payment.

Until now there has been no evidence that Buyers have been considering the weighting of the invoices of the three Debtors in determining how to approach bidding on a particular auction.

It now appears possible that an auction heavily weighted with invoices from the faster-paying Debtor is being looked at more closely and that the pricing is being affected. It’s too early to really tell…but it WOULD be appropriate.

We’re all learning things as this first year of TRE operation draws near its end: Buyers, Sellers and TRE, itself.

How could it be otherwise in such an innovative environment?

Is it out of line to suggest a TRE-sponsored gathering on the anniversary of the first transaction? There's still time!

Wednesday, October 21, 2009

The Ariba Distinction

In our last post we addressed recent changes to the TRE invoice verification procedures. Two thoughtful and important comments have been posted in response and I’d call your attention to both.

The second of those comments, by Drew Hofler of The Ariba Supplier Network, highlights an issue that will (I hope) become increasingly important to all TRE Buyers.

Because a Seller that belongs to The Ariba Network brings added value to the table.

First of all--what is Ariba?

Quoting here from a press release:

“The Ariba Supplier Network is the world’s leading business collaboration platform, which combines technology and services to better match buyers and suppliers, automate transactions and optimize payments. Buyers and suppliers in 115 countries leverage the network to engage in transactions worth more than $110 billion a year and process one purchase order every two seconds. Leveraging the reputation and power of the Ariba Network, suppliers can lower the cost, risk and time associated with accessing capital.”

So, for our purposes, Ariba represents a VERY substantial volume of B2B receivables-creation, with a payment process that incorporates an automated, controlled, protected, invoice approval process.

Ariba and TRE have had a strategic alliance for some time now but the volume of Ariba invoices offered for sale on TRE has been minimal. That might be because of a lack of Ariba member education. It might be because the actual mechanics of uploading member invoices has not been as user-friendly as it might be.

In any event, Drew posted welcome news yesterday that I’d like to make sure to highlight. I quote from his comment to yesterday’s post…..

“This issue brings to light even more the value of invoices that are uploaded to the TRE platform directly from a supplier network such as Ariba. In the case of an Ariba supplier selling an invoice processed via the Ariba Network, both the issue brought up in the blog (verification) and the issue in the comment (quality of invoices/errors) are rendered moot.

1) Verification: When the next release of the Ariba Network (AN) comes out (4Q09), Ariba suppliers will be able to click a button and directly upload their approved invoices for sale to the TRE platform. Approved invoices are delivered directly to the AN from the Obligor's ERP, and are then transmitted directly to the TRE platform with no opportunity for the supplier to change any of the data contained within. Given the unbroken electronic chain of data, the need for verification is obviated.

2) Quality of Invoices & subsequent error correction: The nature of the Ariba Network is such that buyers/obligors set parameters up front that suppliers must meet in order for a submitted invoice to be considered in good order. This systematic quality control ensures that the vast majority of quality issues are filtered out before an invoice is even received by the Buyer/Obligor. So the issues brought up by Mr. Schmidt are largely removed for Ariba invoices.

Combine the above with the fact that eInvoicing via Ariba reduces invoice approval times down to an average of less than 5 days, and invoices sold by Ariba suppliers directly from the Ariba Network will offer TRE Buyers a qualitatively better option to reduce risk and extend returns.”

The critical issue to highlight in Drew’s comment, I believe, is that the Ariba system will actually provide a MORE robust verification process than had been offered by TRE even BEFORE its recent changes.

If I understand the mechanics of the network correctly—and I invite Drew to correct me or to amplify here—the invoices posted by an Ariba Seller will not only have been verified with respect to authenticity i.e. that there IS an invoice matching the Seller’s posting in the Account Debtor’s AP system, but the Account Debtor will have ACKNOWLEDGED that the goods provided have met the conditions of the agreement AND that the amount of the invoice is payable as and when indicated.

This provides a significant level of additional security to a TRE Buyer, which should result in preferential pricing of invoices originated by Ariba members.

A substantial increase in Ariba Seller activity would be a very good thing for TRE and, I suspect, for Ariba also. Let’s hope all interested parties work hard to make that happen!

Monday, October 19, 2009

Whose Ox is Gored?

In July I wrote two posts on the “inconvenient essential” of invoice verification. (Please see the posts dated July 5 and July 8.)

I acknowledged at that time that many elements of a typical invoice verification process were sacrificed by the TRE model but I also pointed out that there were mitigating factors that, in my view, balanced the risks.

TRE has recently changed some of its invoice verification procedures, reducing the extent of the actual verification process and substituting, in some cases, a statistical sampling approach.

To its credit, TRE provided a comment period for all Members to give their opinions of these changes prior to implementing them. My own opinion was, and is, that the changes served only the purposes of the exchange itself and of Sellers in a hurry to get invoices to market. There is no credible argument, in my view, for a benefit being afforded the Buyers.

I quote below some passages from my comment letter:

“I understand that continuing to verify each invoice in cases where there might have been dozens if not hundreds of invoices paid without incident in a given Seller/ Account Debtor relationship might seem to be a waste of resources. I can also see that some Account Debtors might begin to complain when the number of verification requests begins to get very large.

I can also understand that, absent any problem, a substantial history of successful transactions between a Seller and an Account Debtor makes the probability of the nth invoice of the same type being problematic quite small. In such cases a sampling system can certainly make sense.


 I think it’s a little disingenuous to present this change of process as an “enhancement”…

 It just can’t be argued that this is not a further weakening of the verification process.

 What began as a third-party function, providing some level of independence in the process, morphed quickly into an internal TRE function of limited scope. Even though the scope was limited, it still applied to all invoices. Now the scope remains limited and the application will not be to all invoices.

 I can see that it will help Sellers get deals to auction more quickly and I can see that it will reduce the TRE workload and expense. The only group that I can’t find a benefit for is the Buyers!

 I’m certainly mindful of the need to ramp up volume and to bring on new Sellers and...I think there are situations in which some “sampling” activities might be justified. But based only on what I’ve seen, this makes me nervous...because of what it does to reduce the strength of the process...”

My comments also included reference to some details of the TRE process that Members are required to keep confidential but I think my concern about the changes comes through in the sections I have quoted above.

The Exchange, again to its credit, did follow up with a conversation addressing my concerns. I expect that all who submitted comments were given the same courtesy.

There is no indication that anyone’s concerns had any impact on the procedural changes, however.

I think it is important to point out a fundamental disconnect between the apparent analytical approach of the exchange and that of an individual Buyer.

TRE seems to want to analyze risk at the level of the entire portfolio of transactions that occur on the exchange. That, in my view, is not correct. TRE itself takes no transaction risk. There is no exchange-wide exposure from which a risk assessment at that level can validly be made.

Without the ability to buy what would amount to an “index” position in the entire TRE portfolio, a valid risk assessment can only be made from the point of view of the portfolio of an individual Buyer.

And Buyers will now only be sure that their invoices have been verified under certain defined conditions. Under any other conditions they cannot be certain.

To be sure, Buyers should be able to gain a sense of the probability that their invoices have been verified, but as long as the probability is less than 100%, the uncertainty should be reflected in higher required returns.

So the Sellers should ultimately wind up paying for their increased transaction velocity via higher returns to compensate the Buyers' increased risk.

And, in the end, only the exchange itself really appears to benefit.

Tuesday, October 6, 2009

That Made My Day!

I’ve been beating the table pretty strongly in this blog on the subject of short-duration transactions on The Receivables Exchange.

I’ve pointed out the fact that the shorter the duration of the transaction the more the Buyer’s return is diluted by the fixed portion of the TRE fees and transaction costs.

The same is true for the Seller. The shorter the duration of the transaction the higher the effective cost of the fixed portion of the fees charged.

The fact that Buyers have continued to pay higher prices (accept lower yields) on some short-duration transactions has been perplexing to me, and the longer the situation has persisted the more perplexed I have become.

Now, this might be an anomaly. I might be right back in my perplexed condition tomorrow. But as I sit here this afternoon I have to just take a moment and enjoy what seems to me to be a significant event.

A certain Seller regularly posts the invoices of a certain Account Debtor. The terms call for payment in 10 days. The actual average holding period following auction has been roughly 14 days. For the past three months or so these invoices have been bought essentially immediately at a price that, in my view, has not reflected the impact of the fixed fees and costs.

An auction by that Seller, of invoices of that Account Debtor, has just closed. This time it was different.

The offering was “live” for about 24 hours. Usually these auctions close within minutes.

No Buyer immediately hit the “buy out” button this time. A couple of bids were made but not until after some hours had passed and at yield levels significantly higher than had been seen for these invoices in quite some time.

You could almost feel the tension.

This Seller was used to immediate and very favorable responses and they were not forthcoming this time. The deal stayed live overnight and there was no further movement on the bid.

I found myself wondering whether the Seller was beginning to calculate the increase in its daily effective cost of money as the deal sat there without further action.Ultimately the Seller accepted the bid that had been “sitting there” for hours.

What was great about that?

It was the RIGHT THING to do!

The Buyers were right, in my view, by finally holding back and requiring higher compensation for the short term deal.

The Seller was right, in my view, by not allowing the deal to sit without further bids any longer, allowing its effective cost of money to rise.

The action was rational on both sides.

And that made my day!