Wednesday, July 03, 2019

Financial Stability, a Critical Factor for Choosing a Business Partner, is Now Easier to Assess

Transcript of a discussion on new ways companies gain improved visibility, analytics, and predictive indicators to assess financial viability of partners across global supply chains.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: SAP Ariba.

Dana Gardner: Hi, this is Dana Gardner, Principal Analyst at Interarbor Solutions, and you’re listening to BriefingsDirect. Our next digital business risk remediation discussion explores new ways companies can gain improved visibility, analytics, and predictive indicators to better assess the financial viability of partners and global supply chains.

Businesses are now heavily relying upon their trading partners across their supply chains -- and no business can afford to be dependent on suppliers that pose risks due to poor financial health.

We will now examine new tools and methods that create a financial health rating system to determine the probability of bankruptcy, default, or disruption for both public and private companies -- as many as 36 months in advance.

To learn more about the exploding sophistication around gaining insights into supply-chain risk of a financial nature, I am pleased to welcome Eric Evans, Managing Director of Business Development at RapidRatings in New York.

Eric Evans: Thanks, Dana. I appreciate being on the podcast.

Gardner: We are also here with Kristen Jordeth, Go-to-Market Director for Supplier Management Solutions, North America at SAP Ariba. Welcome, Kristen.

Kristen Jordeth: Hi, and thank you very much.

Gardner: Eric, how do the technologies and processes available now provide a step-change in managing supplier risk, particularly financial risk?

Evans: Platform-to-platform integrations enabled by application programming interfaces (APIs), which we have launched over the past few years, allows partnering with SAP Ariba Supplier Risk. It’s become a nice way for our clients to combine actionable data with their workflow in procurement processes to better manage suppliers end to end -- from sourcing to on-boarding to continuous monitoring.

Gardner: The old adage of “garbage in, garbage out” still applies to the quality and availability of the data. What’s new about access to better data, even in the private sector?

Dig deep into risk factors

Evans: We go directly to the source, the suppliers our customers work with. They introduce us to those suppliers and we get the private company financial data, right from those companies. It’s a quantitative input, and then we do a deeper “CAT scan,” if you will, on the financials, using that data together with our predictive scoring.

Gardner: Kristen, procurement and supply chain integrity trends have been maturing over the past 10 years. How are you able to focus now on more types of risk? It seems we are getting better and deeper at preventing unknown unknowns.

Jordeth: Exactly, and what we are seeing is customers managing risk from all aspects of the business. The most important thing is to bring it all together through technology.

Within our platform, we enable a Controls Framework that identifies key areas of risk that need to be addressed for a specific type of engagement. For example, do they need to pull a financial rating? Do they need to do a background check? We use the technology to manage the controls across all of the different aspects of risk in one system.

Gardner: And because many companies are reliant on real-time logistics and supplier services, any disruption can be catastrophic.

Jordeth: Absolutely. We need to make sure that the information gets to the system as quickly as it’s available, which is why the API connect to RapidRatings is extremely important to our customers. On top of that, we also have proactive incidents tracking, which complements the scores.

If you see a medium-risk business, from a financial perspective, you can look into that incident to see if they are under investigation, or if things going on where they might be laying off departments.

It’s fantastic and to have it all in one place with one view. You can then slice and dice the data and roll it up into scores. It’s very helpful for our customers.

Gardner: And this is a team sport, with an ecosystem of partners, because there is such industry specialization. Eric, how important is it being in an ecosystem with other specialists examining other kinds of risk?

Evans: It’s really important. We listen to our customers and prospects. It’s about the larger picture of bringing data into an end-to-end procurement and supplier risk management process.

We feel really good about being part of SAP PartnerEdge and an app extension partner to SAP Ariba. It’s exciting to see our data and the integration for clients.

Gardner: Rapid Ratings International, Inc. is the creator of the proprietary Financial Health Rating (FHR), also known as RapidRatings. What led up to the solution? Why didn’t it exist 30 years ago?

Rate the risk over time

Evans: The company was founded by someone with a background in econometrics and modeling. We have 24 industry models that drive the analysis. It’s that kind of deep, precise, and accurate modeling -- plus the historical database of more than 30 years of data that we have. When you combine those, it’s much more accurate and predictive, it’s really forward-looking data.

Gardner: You provide a 0 to 100 score. Is that like a credit rating for an individual? How does that score work in being mindful of potential risk?

Evans: The FHR is a short-term score, from 0 to 100, that looks at the next 12 months with a probability of default. Then a Core Health Score, which is around 24 to 36 months out, looks at operating efficiency and other indicators of how well a company is managing the business and operationalizing.
We can identify companies that are maybe weak short-term, but look fine long-term, or vice versa. Having industry depth -- and the historical data behind it -- that's what drives the go-forward assessments.

When you combine the two, or look at them individually, you can identify companies that are maybe weak short-term, but look fine long-term, or vice versa. If they don’t look good in the long-term and in the short-term, they still may have less risk because they have cash on hand. And that’s happening out in the marketplace these days with a lot of the initial public offerings (IPOs) such as Pinterest or Lyft. They have a medium-risk FHR because they have cash, but their long-term operating efficiency needs to be improved because they are not yet profitable.

Gardner: How are you able to determine risk going 36 months out when you’re dealing mostly with short-term data?

Evans: It’s because of the historical nature and the discrete modeling underneath, that’s what gets precise about the industry that each company is in. Having 24 unique industry models is very different than taking all of the companies out there and stuffing them into a plain-vanilla industry template. A software company is very different than pharmaceuticals, which is very different than manufacturing.

Having that industry depth -- and the historical data behind it -- is what’s drives the go-forward assessments.

Gardner: And this is global in nature?

Evans: Absolutely. We have gone out to more than 130 countries to get data from those sources, those suppliers. It is a global data set that we have built on a one-to-one basis for our clients.

Gardner: Kristen, how does somebody in the Ariba orbit take advantage of this? How is this consumed?

Jordeth: As with everything at SAP Ariba, we want to simplify how our customers get access to information. The PartnerEdge program works with our third parties and partners to create an API whereby all our customers need to do is get a license key from RapidRatings and apply it to the system.

The infrastructure and connection are already there. Our deployment teams don’t have to do anything, just add that user license and the key within the system. So, it’s less touch, and easy to access the data.

Gardner: For those suppliers that want to be considered good partners with low financial risk, do they have access to this information? Can they work to boost up their scores?

To reduce risk, discuss data details 

Evans: Our clients actually own the subscription and the license, and they can share the data with their suppliers. The suppliers can also foster a dialogue with our tool, called the Financial Dialogue, and they can ask questions around areas of concern. That can be used to foster a better relationship, build transparency, and it doesn’t have to be a negative conversation to be a positive one.
They may want to invest in their company, extend payment terms or credit, work with them on service-level agreements (SLAs), and send in people to help manage. So, it could be a good way to just build up that deeper relationship with that supplier and use it as a better foundation.

Gardner: Kristen, when I put myself in the position of a buyer, I need to factor lots of other issues, such as around sustainability, compliance, and availability. So how do you see the future unfolding for the holistic approach to risk mitigation, of not only taking advantage of financial risk assessments, but the whole compendium of other risks? It’s not a simple, easy task.

Jordeth: When you look at financial data, you need to understand the whole story behind it. Why does that financial data look the way it does today? What I love about RapidRatings is they have financial scores, and it’s more about the health of the company in the future.

But in our SAP Ariba solution, we provide insights on other factors such as sustainability, information security, and are they funding things such as women’s rights in Third World countries? Once you start looking at the proactive awareness of what’s going on -- and all the good and the bad together -- you can weigh the suppliers in a total sense.

Their financials may not be up to par, but they are not high risk because they are funding women’s rights or doing a lot of things with the youth in America. To me, that may be more important. So I might put them on a tracker to address their financials more often, but I am not going to stop doing business with them because one of my goals is sustainability. That holistic picture helps tell the true story, a story that connects to our customers, and not just the story we want them to have. So, it creates and crafts that full picture for them.

Gardner: Empirical data that can then lead to a good judgment that takes into full account all the other variables. How does this now get to the SAP Ariba installed base? When is the general availability?

Customize categories, increase confidence 

Jordeth: It’s available now. Our supplier risk module is the entryway for all of these APIs, and within that module we connect to the companies that provide financial data, compliance screening, and information on forced labor, among others. We are heavily expanding in this area for categories of risk with our partners, so it’s a fantastic approach.

Within the supplier risk module, customers have the capability to not only access the information but also create their own custom scores on that data. Because we are a technology organization, we give them the keys so an administrator can go in and alter that the way they want. It is very customizable.

It’s all in our SAP Ariba Supplier Risk solution, and we recently released the connection to RapidRatings.

Evans: Our logo is right in there, built in, under the hood, and visible. In terms of getting it enabled, there’s no professional services or implementation wait time. So once the data set is built out on our end, if it’s a new client that’s through our implementation team, and basically we just give the API key credentials to our client. They take it and enable it in SAP Ariba Supplier Risk and they can instantly pull up the scores. So there is no wait time and no future developments to get at the data.
Once the data set is built on our end, we just give the API key to our client. They take it and enable it in SAP Ariba Supplier Risk and they can instantly pull up the scores. There is no wait time.

Jordeth: That helps us with security, too, because everybody wants to ensure that any data going in and out of a system is secure, with all of the compliance concerns we have. So our partner team also ensures the secure connection back and forth with their data system and our technology. So, that’s very important for customers.

Gardner: Are there any concrete examples? Maybe you can name them, maybe you can’t, instances where your rating system has proven auspicious? How does this work in the real world?

Evans: GE Healthcare did a joint-webinar with our CEO last year, explained their program, and showed how they were able to de-risk their supply base using RapidRatings. They were able to reduce the number of companies that were unhealthy financially. They were able to have mitigation plans put in place and corrective actions. So it was an across the board win-win.

Oftentimes, it’s not about the return on investment (ROI) on the platform, but the fact that companies were thwarting a disruption. An event did not happen because we were able to address it before it happened.

On the flip side, you can see how resilient companies are regardless of all the disruptions out there. They can use the financial health scores to observe the capability of a company to be resilient and bounce back from a cyber breach, a regulatory issue, or maybe a sustainability issue.

By looking at all of these risks inside of SAP Ariba Supplier Risk, they may want to order an FHR or look at an FHR for a new company that they hadn’t thought of if they are looking at other risks, operational risks. So that’s another way to tie it in.

Another interesting example is a large international retailer. A company got flagged as high risk and had just filed for bankruptcy, which alerted the buyer. The buyer had signed a contract, but they had the product on the shelf, so it had to be resourced and they had to find a new supplier. They mitigated risk, but they had to take quick action, get another product, and some scrambling had to be done. But they had de-risked some brand reputation damage by having done that. They hadn’t looked at that company before, it was a new company, and it was alerted. So that’s another way of not just running it at the time of contract, but it’s also running it when you’re going to market.

Identify related risks 

Gardner: It also seems logical that if a company is suffering on the financial aspects of doing business, then it might be an indicator that they’re not well-managed in general. It may not just be a cause, but an effect. Are there other areas, you could call them adjacencies, where risks to quality, delivery times, logistics are learned from financial indicators?

Evans: It’s a really good point. What’s interesting is we took a look at some data our clients had around timeliness, quality, performance, delivery, and overlaid it with the financial data on those suppliers. The companies that were weak financially were more than two times likely to ship a defective product. And companies that were weak financially were more than 2.5 times more likely to ship wrong or late.
The whole just-in-time shipping or delivery value went out the window. To your point, it can be construed that companies -- when they are stressed financially – may be cutting corners, with things getting a little shoddy. They may not have replaced someone. Maybe there are infrastructure investments that should have been made but weren’t. So, all of those things have a reverberating effect in other operational risk areas.

Gardner: Kristen, now that we know that more data is good, and that you have more services like at RapidRatings, how will a big platform and network like SAP Ariba be able to use machine learning (ML) and artificial intelligence (AI) to further improve risk mitigation?

Jordeth: The opportunity exists for this to not only impact the assessment of a supplier, but throughout the full source-to-pay process, because it is embedded into the full SAP Ariba suite. So, even though you’re accessing it through risk, it’s visible when you’re sourcing, when you’re contracting, when you’re paying. So that direct connect is very important.

We want our customers to have it all. So I don’t cringe at the fact that they ask for it all because they should have it all. It’s just visualizing it in a manner that makes sense and it’s clear to them.

Gardner: And specifically on your set of solutions, Eric, where do you see things going in the next couple years? How can the technology get even better? How can the risk be reduced more?

Evans: We will be innovating products so our clients can bring in more scope around their supply base, not just the critical vendors but across the longer tail of a supply base and look at scores across different segments of suppliers. There could be sub-tiers, as a traversing with sub-tier third and fourth parties, particularly in the banking industry or manufacturing industry.
We will be innovating so our clients can bring in more scope around their supplier base, not just the critical vendors but across the longer tail of a supply chain and examine the scores of different segments of suppliers. It could be third tiers and fourth-parties.

And so that coupled with more intelligence or enhanced APIs and data visualization, these are things that we are looking into as well as additional scoring capabilities.

Gardner: I’m afraid we will have to leave it there. You have been listening to a sponsored BriefingsDirect discussion on new ways that companies can gain improved visibility, analytics, and predictive indicators to better assess the financial viability of their partners across their global supply chains.

And we have learned about new tools and methods create a Financial Health Rating system to determine the probability of bankruptcy, default, or disruption for public and private companies.

So a big thank you to our guests, Eric Evans, Managing Director of Business Development at RapidRatings in New York. Thank you so much, Eric.

Evans: Thank you, I appreciate it.

Gardner: And we have also been here with Kristen Jordeth, Go-to-Market Director for Supplier Management Solutions, North America at SAP Ariba. Thank you.

Jordeth: Thank you.

Gardner: And a big thank you as well to our audience for joining us for this BriefingsDirect digital business risk remediation discussion. I’m Dana Gardner, Principal Analyst at Interarbor Solutions, your host throughout this series of SAP Ariba-sponsored BriefingsDirect interviews. Thanks again for listening, and do come back next time.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: SAP Ariba.

Transcript of a discussion on new ways companies gain improved visibility, analytics, and predictive indicators to assess financial viability of partners across global supply chains. Copyright Interarbor Solutions, LLC, 2005-2019. All rights reserved.
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