Supplier Enablement and P2P Roadblocks — Supplier Networks

This is a post of within a broader series looking at supplier enablement and P2P roadblocks. The material is based in part on our recent research paper: A Foundational Look at P2P Technologies. The paper can be downloaded for free via the above link.

The concept of a supplier network has become a catchall for many different elements of the P2P process involving buyer/supplier connectivity. The buyer/supplier connectivity capabilities of early-stage P2P tools often included only limited transactional capability interchange and archiving for POs, ASNs, invoices, etc. In recent years, many supplier networks and connectivity approaches have continued down this path to today, charging usage-based fees while providing no incremental value above and beyond what these free services originally provided.

Others have branched out to offer additional capabilities for buyers (e.g., supplier search) and for suppliers (e.g., discounting programs, third-party funding, etc.) Historically, supplier networks largely started out as buyer-funded or no-charge models, although many have evolved in ways that now capture a piece of the transaction between buying and selling parties.

Consider the evolution of Ariba's pricing model as an example. Before 2004, the Ariba Supplier Network was a free service. But seven years ago, 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 change builds on the 2007 price change by raising % fees, raising % caps ($20K per relationship), lowering chargeable document thresholds and implementing a new integration fee per supplier. Spend Matters believes that Ariba's pricing justification (and that of other, largely supplier-paid competing networks) goes back to the expensive precedent set by card providers. Today, even the most expensive networks cost a fraction of the extortionist APRs banks get from suppliers for their card business.

Our analysis suggests that vendors attempt to justify supplier pays models based on the following types of criteria:

  • Competitive analysis (e.g., compared with what suppliers pay for EDI enablement, p-cards)
  • Increased revenue for suppliers
  • Decreased costs for suppliers
  • Working capital improvement for suppliers (i.e., faster payment) from reduction in DSOs
  • Ability to gain greater flexibility through less-costly factoring and other "value added" benefits of certain systems
  • Ability to win new business

Despite these benefits, supplier networks can bring huge incremental value to buying organizations and Spend Matters believes that buyers, not suppliers, are the ones who benefit the most from standardized, network connectivity between parties. Still, supplier funded models are gaining more traction in the market today than anytime in the past. These funding models are also gaining favor in the supplier management market (including supply chain risk, supplier credential/profile management, etc.) although some are beginning to generate negative PR as well.

Despite the ascent of these models, our research suggests that suppliers view network fees as a tax on transactions and our analysis suggests that vendors will find a way to charge-back (often creatively) for onerous fee structures. Moreover, many observe that electronic invoicing and data connectivity do not guarantee earlier payment. Our research suggests that large suppliers tend to put up the greatest fight against network fees based on percentages of transaction value. Generally speaking, only a minority of suppliers see themselves taking advantage (today and in the near future) of additional value-added services from networks that might justify base-level fees.

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What is the future of supplier networks? Our research suggests that supplier-paid models are here to stay, but we believe material transactional premiums will only be justified longer-term based on value-added services. Moreover, Ariba's network price increase has accelerated select customer movement to competitive solutions among some legacy CD clients (SaaS P2P users do not have the option of changing network providers), although the movement this quarter appears more positive in Ariba's favor.

At the same time, the move to "lock-in" supplier-paid revenue is one that buying organizations often don't fully understand when they sign up for SaaS P2P solutions today. On the supply side, our discussions with vendors suggest that per-document or fixed annual fee network enablement models have the most appeal in the market among suppliers. Perhaps most important of all, one thing has come out in our discussions with both procurement organizations and suppliers: companies should not denude themselves into thinking that supplier-paid fees (above and beyond a small, fixed amount such as $100-$1,000 per year, per supplier) will somehow not be charged back to them.

Jason Busch

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