Spend Matters recently conducted a detailed analysis of Ariba's planned network fee increase, starting in Q3 (September) of this year. You can download a copy of this free eight-page report by clicking here. This report was not underwritten or paid for by any Ariba competitors (or Ariba), sponsors, advertisers or third parties and is being made available through Spend Matters as a means of calling attention to the depth and quality of our new Spend Matters Compass research offerings (all of which are free for download). Spend Matters aims to be seen as the number one procurement/supply chain research and analyst site by the end of 2010 based on the depth and the quality of our research.
In summary, Ariba is increasing supplier network fees in September 2010 by a significant amount. One supplier group (higher spend/dollar volume, lower transaction volume) will be most impacted in particular, with the cost to process invoices potentially exceeding $100 per invoice in certain cases. Specifically, Ariba is raising network fees to 15.5 basis points (.155%) for suppliers meeting new, lower transacting volume thresholds, meaning more suppliers will be impacted. This represents a 55% price increase from the previous 10 basis point cost (e.g., a $100 invoice would incur a 15.5 cent versus 10 cent fee).
There is more to the fee increase than meets the eye, however. Spend Matters interviewed Ariba team members, Ariba customers and Ariba suppliers to get multiple perspectives on the planned fee increase and what it will mean. In this free research brief, we offer customer, supplier and investor perspectives on this business model evolution. Included in the analysis is an illustrative example of what the new supplier fees will look like for a buying organization transacting on the Ariba network.
The report suggests that Ariba's network fee increases will be negligible for small and medium-sized suppliers on the network (and large suppliers with minimal dollar transaction volume). Moreover, for suppliers engaged in low-dollar volume and/or high frequency transactions, Ariba's network fee structure can be materially less expensive than competitive fixed fee networks, despite bringing significant value. Yet for suppliers transacting materially large dollar volumes, the economics of the Ariba network may no longer make sense if other options exist (e.g., taking spend offline, using a competitive network, etc.).
This forthcoming network price increase marks the third pricing change in the 10-year history of the Ariba supplier network. Originally, the network was free to buyers and suppliers. In 2004, Ariba instituted a flat $550 per year charge for suppliers meeting certain volume/transaction thresholds. In 2007, Ariba raised network fees for certain suppliers by moving to a volume-based pricing model (with caps per relationship of $10K). The most recent pricing change builds on the 2007 price change by raising % fees and % caps ($20K per relationship), lowering the chargeable document threshold and implementing a new integration fee per supplier.
Ariba appears to be justifying the increase on a number of fronts, including their own competitive network fee analysis and their perception of value delivery to suppliers (e.g., increased revenues, decreased costs, and faster payment). For the latter, Ariba positions the ability of the network to reduce days sales outstanding (DSOs) for suppliers due to reduction in paper, automatic validation and PO-invoice reconciliation, and greater visibility into customer processes.
Ariba's research suggests that suppliers have realized 6-25 days faster payment with Ariba (Ariba's same analysis shows that a 6-day reduction in DSO covers their new fee level). Spend Matters analysis, however, differs, based on different cost of capital (borrowing vs. weighted average cost of capital) calculations, all of which you can read about in our free report (click here to download). If you are an Ariba buying organization, supplier or investor, this report can help you understand all sides -- and the specific supplier financial implications -- of the forthcoming network fee changes.
If you find this report valuable, we would also encourage you to read our free Compass Series research as well.