The next BriefingsDirect 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 much as 36 months in advance.
Listen to the podcast. Find it on iTunes. Read a full transcript or download a copy.
To learn more about the
exploding sophistication around gaining insights into supply-chain risk of a
financial nature, please welcome Eric Evans, Managing Director
of Business Development at RapidRatings
in New York, and Kristen
Jordeth, Go-to-Market Director for Supplier Management Solutions, North
America at SAP Ariba. The discussion is moderated by Dana Gardner, Principal
Analyst at Interarbor Solutions.
Here are some excerpts:
Gardner: Eric,
how do the technologies and processes available now provide a step-change in managing
supplier risk, particularly financial risk?
 |
| Evans |
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 |
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.
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.
Listen to the podcast. Find it on iTunes. Read a full transcript or download a copy. Sponsor: SAP Ariba.
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