“Ariba Doesn’t Have Customers, It Has Prisoners”

- December 21, 2012 1:12 AM
Categories: Commentary, Jason Busch | Tags: , ,

You can always count on the young (and hyper competitive) Christian Lanng (Tradeshift’s CEO and co-founder) for a good one-liner on the competition. Earlier this week, I met Christian for a quick coffee in San Francisco to hear his perspective on the latest happenings in the US supplier network and e-invoicing market. About halfway through the conversation, he sprung the one-liner on me: “Ariba doesn’t have customers, it has prisoners.”

As someone who knows Ariba – products, customers, partners and a number of employees – at least somewhat well, I could have easily dismissed this statement based on the fact that procurement and AP organizations use Ariba’s tools willingly. After all, they’ve paid for these procurement and accounts payable tools. Yet Christian has a point. And it’s one that anyone who is in the market for (or currently using) Ariba SaaS technology should keep in mind.

Those in the market for purchasing and invoicing technology who have seen what Ariba offers are aware that it’s rare that a best of breed provider can price aggressively, at what appears to be the bottom of the market. One of the knocks on Salesforce, for example, relative to other CRM tools and platforms, is that once you start adding users, capabilities and modules, the price increases dramatically.

Yet Ariba can be inexpensive – at least based on volume, users, etc. – relative to just about all of its competitors, including upstarts such as Tradeshift (e-invoicing/supplier network platform) and Coupa (eProcurement and many related modules), especially if it knows there is competition for a deal. In fact, we can’t point to a single case where Ariba has lost a P2P deal on price (or at least price alone).

Ariba is able to price its modules so aggressively because of supplier fees. Ariba mandates its hosted P2P tool users also use the Ariba network for all connectivity with suppliers, even in cases where suppliers are connected to other networks that then connect to Ariba’s in the same transaction stream (e.g., sending a PO via Ariba but invoicing via OB10).

Ariba’s fees account for roughly 15.5 basis points (.115%) for vendors meeting certain volume levels. For those who have tracked Ariba’s supplier network history, this represents a 55% price increase from the previous 10 basis point cost prior to September 2010 (e.g., a $10,000 invoice now incurs a $15.50 fee versus 10 bucks before).

What do suppliers get for this? Well, visibility for one. They also save a stamp – or the time to send an email online. And lets not forget they can also factor their receivables through the Ariba supplier network or take a buyer-led discount. No doubt, whether the value equation works for suppliers depends on their invoice and volume mix, cash needs and the like.

But for these suppliers, the Ariba network is not optional. It’s mandatory if their customers are using Ariba’s tools in a cloud environment. And compared with other fixed cost or free e-invoicing options, it’s clear they’re paying more than they need to. Or would need to if they had a choice in the matter. But are they prisoners, as Christian suggests?

Drop a line or post a comment. We’re curious to know what you think.

Next Friday, we’ll share the hypothetical case of three suppliers with different profiles (customer mix, volume mix, etc.) and offer our own thoughts on whether each one is a prisoner — or not.

- Jason Busch

Comments

  • Henry:

    Jason, You noticed the price increase per transaction since 2010, but you failed to mention that Ariba eliminated the exception previously provided to our MWBE suppliers and lowered the qualification criteria to be a "chargeable" supplier. The lowering of the criteria is what drove the increase in supplier fees and any growth posted by Ariba during this time.
    The beauty of this for Ariba was that they previously had few competitors with truly competitive solutions and a better model for supplier enablement and participation. Because that has changed, SAP may be surprised to find out that they bought at the peak.

  • Christian Lanng:

    Hi Jason,

    I’m glad you picked up on the fact that we are competitive, for me competition is always two dimensions value offered and price point. On the buyer side you can always argue about a certain price in relation to the value the buyer get, what tools they need and how there process is, but the end result we most often see is that none of that matters if their suppliers don’t use the chosen solution.

    On the supplier side, I’ve never met a SINGLE supplier who were willing to stand-up and say, yes it has value for us to pay 15.5 basis points to send an invoice, no matter their invoice mix, volume or size. I’ve met plenty though that say they will do it because their buyer have forced them to. That’s not a customer, but a prisoner.

    That is why we reverse the model, offering free transactions to suppliers increase the uptake the buyer gets and the business-case for both sides, it’s win-win.

    /Christian

  • e-Sourcing:

    Great point Christian and keep putting up a good fight.

    The "supplier pays" model is hugely flawed in our view as well. It hinders adoption and it is akin to blackmail (give us money else you won’t get paid!). If both parties received tangible value from the product, then it would be fair to make both pay, otherwise just the one side should.

    Inevitably, if we were a supplier on such systems, I would increase my pricing to account for the invoice fee. So, who is paying then? The buyer. Twice.

    In fact, this is exactly what we have done when we registered for one such catalogue here in the UK, as that demanded a 1% fee per transactions.

    Now we both become prisoners to the system!

  • Jason Busch:

    Coming to Ariba’s defense (since no one else will) … few quick thoughts.

    1) The price of visibility into invoice status and payment date is valuable for a small business (trust me on this one — especially trying to get year end receivables from clients paid!) We can assign something to this.

    2) If a customer is not using a capability from someone like a Taulia or OB10 which provides discounting and/or various early payment capability types, then at least Ariba has an option for suppliers whether a buyer "opts in" by having an internally managed program.

    3) Suppliers can bill back customers for fees. They’re doing it already in various cases we’ve seen, usually indirectly over a period of time. As long as procurement teams know this will happen, they can budget accordingly without a larger upfront or initial monthly commitment to Ariba. Think of it as more of a string of balloon payments on a lease overtime (to keep costs down upfront). If there is a prisoner in this case, it is the buyer. But they put themselves in jail by admission and design by supporting the fee structure in the first place.

  • Senthil:

    Point # 3 is more important as always the total cost across the supply chain matters at the end of the day. Shifting the cost to the buyer side from Supplier side would increase the total cost of the product or service in considerable cases. Most of the places suppliers’ overheads and costs are less compared to that of the buying side and buyer is more than ok to optimize the cost even if the supplier adds up the so called “Supplier fee” in the total cost. Also suppliers’ operate with volatile margins and bargain better to bring down the price and are more aggressive than the buying community who are in the other side of the table. This over a time decreases the total cost across the supply chain and results in reduced product / service cost. There are competitors for Ariba and nothing wrong to admit that though! But we need to see how many of them are sustainable, stable, innovative, financially well managed and offer the net value on the table at the end of the day providing an end to end solution to the customers. All the competitors’ benchmark product is Ariba and that shows the product credibility, leave alone the pricing mix which is where the competitors can target and crib about as they can’t point their fingers at anything else.

  • Christian Lanng:

    "Shifting the cost to the buyer side from Supplier side would increase the total cost of the product or service in considerable cases."

    That assumes that charging suppliers 0.15 basis points for sending some kilobytes of data is anywhere the real cost of an transaction, but it’s not. That’s the flaw of this model, the existing vendors all try to tell everyone it’s a zerosum game and if cost go out of the supplier side it has to be added to the buyer side, that is only true for them because they have inflated the prices to begin with due to a lock-in on the supplier population. We can easily remove the supplier side cost because it has never been factored into our model to begin with, never promised to our investors and not a real operational cost.

    I think you are right on the second point though, this is not going to be about price, but technology and product. An area where we have already proven that we have been setting a strong pace of innovation for the last two years, with products like CloudScan, Tradeshift Apps, and automated large scale on-boarding we have won deals, not on price, but the strength of our product and against Ariba in most cases, for us it’s always about the total value we provide to our customers.

  • U.K.:

    I wonder if this procedure complies with European competition law.
    Well, I guess it must, yet having my customer dictate which system to use – at my own cost – just does not sound right.
    If both parties benefit from the deal (i.e. significant process improvements and/or cost saving) it might be fine; in any other case it still sounds like blackmail to me.

  • Purchasing Solution Con for Suppliers:

    [...] The problem with these methods is that suppliers do not have the option to not pay these fees. Spend matters also comments on this issue in their article, Ariba Doesn’t Have Customers, It Has Prisoners, saying: [...]

  • Gary Stevenson:

    Whilst eProcurement is a specialist area, Cloud-based offerings are reducing the cost and commitment required to run an efficient and effective procurement process. As more and more organisations and departments use eProcurement, users will increasingly fall outside of the realm of procurement professionals. This is where the real win is and it means that the flexibility and usability will be crucial. It also means that systems that enable organisations to learn and improve their process rather than just upload and download documents will deliver the best value.

  • Andrea Gimbar:

    As stated earlier, the supplier is the prisoner, since they have no choice in the matter. The customer willingly signed up for the Ariba service. We charge back the fees to the 2 customer that have forced us to use Ariba to enter an invoice. The sad part of all this is the Ariba system is inefficient. We had an invoice that was overdue, requiring numerous correspondence with the buyer, requisitioner and A/P (who is India, by the way) to push the invoice for payment. When the invoice was finally paid, the Ariba system still showed the invoice was received but not scheduled for payment yet! The left hand doesn’t even know what the right hand is doing! What a waste of money for our 2 customers, who have contracted with this pathetic system. There is no way it is cost effective for the customer.

  • Michael Oelrich:

    “As a convenience to our customers, we automatically sign you up for our premier service package unless you respond to this email within 30 days.” I resent having to use their service at all – I’m one of the prisoners. But when they try and scam me out of an additional $500 every single year, my blood boils. They carefully hide the cancel button for the premier service deep in the bowels of their web page.

  • Mike Peterson:

    One of our longstanding customers decided to use the Ariba Network system to handle their invoice submission system. Prior to joining this network we sent them an invoice for services we provided them and they sent us a check. Besides creating and submitting an invoice to them for payment we now have to also resubmit this information on the Ariba Network. What’s worse is that Ariba now considers us a customer and charges us a quarterly fee based on the total dollar amount of invoices that have been entered on their system. If we don’t pay Ariba this quarterly fee then we will not get paid. I’m sure that Ariba is collecting a fee from both companies even though it’s only providing a service to our client. Our company feels as though it’s a prisoner of this Ariba system. Are we the only ones that get absolutely no benefit from this system but are nonetheless subjection to this quarterly extortion. And to make matters worse, they have a collection department that’s quick to come after you for payment even after funds have been withdrawn from your account. Has anyone in our position figured out a way to avoid paying these “fees” and still get payment for services provided to Ariba’s customers?

  • D. Phelan:

    As an Ariba ‘Prisoner’ I despise having to effectively ‘pay to get paid’.

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