Your guide to 3 super-duper best practices for 800% growth in discounting

West Coast utilities company Pacific Gas and Electric (PG&E) went from making $4 million in discount savings in 2008 to saving $32 million 3 years later.

This article examines the three best practices that created this switch, or inflection point, and enabled PG&E to save $10 million in savings per $1 billion of spend.

First, some background: Established in 1905, PG&E is over a century old. Some would think such longevity might make a company slow to mobilize, but for the most part, the opposite is true for PG&E. With its staff of 23,000 and its $17.1 bn turnover, this company occasionally moves with the herd, but mostly is in the position of early adopter.

This early adoption is plainly evident in the company’s P2P automation journey.

P2P automation chronology:

In 1990 the company implemented EDI. Twenty five years ago, this was still pioneering technology, and the only way to receive an electronic data file.

In 1996 SAP was installed, along with SAP's integrated imaging and workflow. Paired with this focus on automation was a focus on process compliance, and goods and services were moved on to purchase orders.

You can start to see here that with a workflow function and with invoices compliantly quoting POs, PG&E was beginning to set the scene for accelerating approval time. More on this later.

PG&E took EDI to the hilt, and in 2003 they realized they had gone as far as they could with this technology, so they looked for other automation tools that could also offer dynamic discounting.

During this time, discounting was not uncommon, but the flavors it came in were few – it was mainly based on taking 2% discount up until the 10th day of the 30 day term, after which the discount died. What was new in the early 2000s was “dynamic” discounting, where buyers could avail themselves of a range of discounts, starting with 3% off if they paid on the day they received the invoice, and gradually tapering off to a fraction point as the final term date approached.

As PG&E were looking for a solution that could take e-invoicing further, and offer discounting, they found Xign – a company started by the “Father of Dynamic Discounting” Tom Glassanos.

PG&E started to see savings: In 2005 they realized $2 million in savings, and doubled this by 2008. The Xign implementation seemed to be moving at an encouraging pace.

However, in 2006, banking giant JP Morgan acquired Xign for just over $70 million, and a few years later JP Morgan senior management decided to change its business model, and start charging suppliers.

PG&E felt uncomfortable with the concept of charging suppliers, and began looking around for an alternative.

The Super-Duper Best Practices:

This exploration ushered in the first super-duper best practice, which was to find a solution that could apply discounts to all invoices, not just those that passed through the portal.

PG&E found Taulia, a certified SAP tool that could sit within SAP, and work with all invoices types. This caused the needle to move significantly.

Closely tied to this was the second super-duper best practice: The Chief Procurement Officer took on ownership of the dynamic discounting program, becoming its champion – spreading the word, generating enthusiasm, and helping to educate key stakeholders. He was keen to double the savings from dynamic discounting each year, and then double them again.

The third super-duper best practice that made a material difference to results was the shift to starting the discounting clock from the date of invoice received, rather than the date of the invoice.

The combination of these three best practices meant that the savings ballooned from $4 million a year to an impressive $32 million – an increase of 800%.

And PG&E didn’t stop there. Between 2011 and 2012 savings jumped again – nearly 50% – up to $46 million, where it’s remained steady ever since. $46 million represents $10 million of savings for every $1 billion of spend at PG&E! 

10 tricks you should know:

So what are the other learnings we can glean from PG&E's story?

1. Getting back to the earlier point, you need the technology and process to enable accelerated approval. This means installing supplier portals, electronic invoicing, and workflow – and ensuring high PO compliance.
2. Your vanilla ERP cannot do this. You can build this yourself, or you can recognize the simpler route – we are in a maturing market, and there are options available. Familiarize yourself with the solid solutions on the market.
3. You need to be able to validate the invoice at the point of entry. Only e-invoicing or supplier portals can facilitate this – EDI cannot. Incidentally, PG&E now no longer use the EDI they installed in 1990, having successfully switched 100% of suppliers over to e-invoicing.
4. Savings that came from deploying e-invoicing were strong (headcount dropped from 24 in 2002 to 5 in 2014 for 1 million invoices), but it’s dynamic discounting that generates the material savings. So look at e-invoicing as being central to speeding up approval time.
5. Suppliers are often looking for financing – especially the smaller suppliers. Their cost of borrowing tends to be much greater than for the larger suppliers, so offering them a less expensive financing line not only presents huge savings for you, but also inexpensive liquidity for them.
6. Suppliers prefer to take the cash now and take a small hit – this is illustrated by the 66% of PG&E suppliers that take a discount in the 2.5% discount range (ie before day 10 of the cycle).
7. Make it easy for the suppliers to opt in or out – PG&E suppliers flag if they would like to be paid early once the invoice has been approved. Make sure the technology keeps the process simple.
8. Expand the “spend subject to discounting.” Dynamic discounting can be applied to 100% of spend and 100% of invoices. If you capture 50% of 100% of your spend, your program is looking better than if you capture 100% of only 10% of spend.
9. Credit the savings from the discounts to the purchaser’s budget to incentivise quick approvals and to deepen discount ownership.
10. Avoid supplier fees – you’re making good savings through aggressive supplier use, so keep that as the focus.

If you are venturing into a dynamic discounting program, use this article as a tool to get impressive results.