Suppliers and Ariba: Prisoners or Not?

- December 28, 2012 1:12 AM
Categories: Commentary | Tags: , ,

Last Friday, we shared a competitor’s perspective that “Ariba doesn’t have customers, it has prisoners” – at least in the case of its suppliers. But to gauge whether or not these are willing prisoners, wanting to stay within the protected walls of a network, perhaps it makes sense to walk through a few hypothetical examples.

First, let’s consider the case of an “occasional” supplier of something made-to-order like business cards, stamps, or the like. A supplier like this, which does a good job of finding new customers through Ariba for a typical order size, say between $150-$250, will pay less than a buck per transaction for each PO it receives and/or invoice it sends through the Ariba network. Not a bad deal. We see a vendor like this as a willing prisoner at worst – and a member of the general supplier population wanting to scale a wall to get in on the free meals, heat, shower and exercise facilities inside the Ariba version of Club Med at best.

Next, let’s consider the case of an MRO supplier serving eight customers (most of whom they’ve worked with for decades) through the Ariba network. Let’s assume each customer has fifteen facilities, each which spends roughly $10,000 per year with it, billed in various drips and drabs (some potentially large invoices, some small). If you do the math, this supplier is billing roughly $1.2 million through the Ariba network each year, which would result in transactional supplier fees of $1,380.

If this supplier was previously billing offline, it likely would have accrued significant expense in producing manual invoices. Yet if it wasn’t compelled to transact over the Ariba network, it could still bill via the same cXML standard using Tradeshift, OB10 or an alternative and pay from nothing to a buck or so per transaction. A prisoner? Well, perhaps. But it’s not necessarily one who will be too upset, especially if they take advantage of early payment opportunities through the network.

Finally, let’s turn to our third example, a marketing agency that previously billed its customer by sending invoices manually via email or snail mail (or directly from its accounting package via a virtual printer). Let’s assume this agency is now compelled to use the Ariba network with three of its middle market clients (even if all the complexity of the “buy” happens offline or is measured via specialty analytical tools).

If the average monthly agency bill were $150,000 including all activities, then it would spend roughly $6,210 with Ariba over 12 months in transactional fees just for pushing a few dozen invoices back and forth. And if this agency is billing its suppliers for pass-through expenses and costs (e.g., media buying), it will have to pay fees on this dollar amount as well. If a supplier could be a prisoner, this demographic case would come closest, given how it could easily hit the $20,000 transaction cap with Ariba if ancillary or pass-through fees are also billed through the Ariba supplier network – especially given it would have no choice in the matter if the customer insisted on using its Ariba tools.

Based on these examples, perhaps it’s not fair to label each and every supplier on the Ariba network a prisoner. But there’s no way for them to escape the fees, rather than bill them back to customers in the form of higher costs in the long run. So in the end, perhaps it’s the procurement and accounts payable organizations who are the ultimate prisoners of network fees – by choice!

- Jason Busch

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Comments

  • Christian Lanng:

    Jason, great analysis, no doubt the customers are those who ultimately are locked-in in this game, this is also the reason we always encourage customers to take a hard look at supplier fees when they do their business case, how much will seep back to them and if that happens what can they do. I do no think they are the prisoners though, for one simple reason, they chose their poison, yes they are locked-in to it after, but they sign the contract and make the choice.

    As to the suppliers, I think it’s fair to say they are prisoners, for one simple reason. If offered an alternative they would switch, they just don’t have one. I don’t think there are many software business models like this one out there. It might be a padded and nice prison, but if given a choice they would chose something else and they dont have any choice, at the same time Ariba clearly knows this as they are set to increase supplier fees again, which again will only increase the tension on the inside of the "prison".

    That is why competition is so important, it’s forcing the vendors to actually innovate and deliver value to the suppliers. Switching a supplier who is already sending XML based invoices from one network to another is trivial. So suppliers will get choice and those offering solutions (and those buying them) need to consider the supplier value as well.

  • Senthil:

    You are probably right on the point, "If offered an alternative they would switch". Provided the alternative is sustainable, provides the needed value and works closely with the customers on various pain points being faced by all the stakeholders. Also, if "Ariba Supplier Fee" is such heartburn to the suppliers and thereby increasing the total cost of the supply chain, hope SAP won’t be foolish to let this happen for ever. Rather they would try and stagger the cost across the stake holders to reduce the pain and put more on a player who would complain the least, though the overall cost might still remain the same?? Technology and innovation alone could drive this in future and a healthy competition would definitely throttle Ariba’s milking history though! Once such a competition arrives and Ariba feels a pinch, by that time the so called “Supplier fee” thing might have seen a drastic shift in model and customers could see more optimal ways of doing businesses. Also Ariba likes and other suppliers would shift gears to make their pie from a different area where the bottom would have not yet reached and there continues the cycle of milking! One other alternative is continue to use different players in the market say Ariba or anyone else to transact business and segregate the one off high value transactions from the likes of Ariba network and innovatively find an alternative player to transact those businesses if that makes sense, and in cases where per unit price of invoice / PO is above certain value. This would help the community in a longer run by supporting other players in the market and thereby optimizes the total cost.

  • The Godfather:

    Oh, this topic is so 2012…

    Let’s think of how many different scenarios are exactly the same…
    - I’m a MasterCard merchant and have to pay a transaction fee (Nuts, my customers want Amex)
    - I’m paying my suppliers by wire transfer and pay the bank a fee (I’m changing banks)
    - Ah, years ago I had a large client who required EDI through a network (cost me more than the deal size)
    - If I want better market penetration I sponsor a web site and pay click throughs (oops, sorry about that example)

    Basis points on transactions are not a fee, they’re a cost of doing business. Supplier costs are ALWAYS past through to the customer. Whether it’s advertising costs, increases in materials cost, or transaction fees margins will push it through to pricing.

    If there’s a more cost effective solution, get it out there. Business will migrate to the better solution. Even if they have to pay a transaction fee.

    Was that a horse moaning? Happy New Year Jason.

  • Jason Busch:

    Godfather, When did they let you out of prison? I thought you were still doing some hard time :-)

    Good to hear from you, Don. I look forward to further banter and exchanges in 2013!

  • The Godfather:

    I escaped… had to lay low.

  • Christian Lanng:

    Godfather, nice to meet you

    Unfortunately my quote was a little bit out of context in the original article. I speculated to Jason that SAP had never bought a company like Ariba before, they were used to buy software companies and software companies have customers who have chosen to use their software because of the value it brings, not because they have been forced to.

    A network is a very different beast. In the world of merchants the user base is very fickle as soon as there is a better solution if there is no real value add they switch, just look at Square’s recent success, so my real question is do SAP truly understand this or have they valued Ariba along the same metrics as their normal acquisitions?

  • SMP:

    forcing suppliers to invoice thru the Ariba Supplier Network is a white collar crime. The only party that benefits from this process is the buyer, as they are the ones forcing the supplier to use the supplier network. This being the case I believe that the entire burden of cost should be bestowed upon the supplier. It doesnt make sense for a supplier to pay for a buyers convenience. In addition the buyer may reject the invoices without providing a clear reason to the supplier, and thus force them to resubmit another invoice. This practice is not fair because if their net payment terms is 30 days, and the buyer reviews it 15 days into it and reject and force them to resubmit, then the supplier is forced to wait a longer period of time. Basically this whole process needs to be revamped, and give further rights to the supplier.

  • SMP:

    I mis wrote a statement in my posting, I previously said the burden of cost should be bestowed upon the supplier, I meant to say the burden of cost should be bestowed upon the buyer.

  • A big supplier on the network:

    I agree with the above statement that marketplaces are the cost of doing business. We are not prisoners. We are suppliers. In addition we should acknowledge that
    1.) the ariba network is the cheapest marketplace around. I will gladly pay their rate over any other marketplace around
    2.) Ariba is the only marketplace willing to engage and provide some level of support to suppliers. They are a pleasure to work with.

    Now for full disclosure. EInvoicing is truely eReconciliation. The buyers have made suppliers force their invoices to match the buyers PO. The cost of reconciliation has moved from buyer to supplier with no compensation. In addition the cost to support Ariba invoicing is > than paper invoicing due to the fact of reconciliation. The saving grace to ariba invoicing is the fact that it decreases DSO by 3+ days.

  • Another big supplier on the network:

    I also agree that marketplaces are a cost of doing business but Ariba (and other vendors) have to be careful to not price themselves out of the benefit of automation (is snail mail making a comeback! :) j/k). Most companies (suppliers) these days are looking at hard costs and while soft costs are beneficial, if the hard costs are so substantial that it hinders the relationship, it’s difficult to get to the soft cost savings. With razor thin margins in today’s economy, we have to maintain a microscopic view on costs.

    I find it very interesting of the different business models out there in the ERP vendor market. Some charge supplier fees, and some don’t, while still providing significant support to the supplier. I think buyers need to take a close look at how vendors treat their suppliers as ultimately, those supplier fees get passed back to the buyer. This should be considered in their decision making process.

  • JA Adams:

    Ariba is an astonishingly unethical company that extorts money from small businesses who are sometimes forced to create accounts as a condition of interacting with one of their clients. Our small company gained an account when one of our existing customers acquired an Ariba client. The new customer required us to create an Ariba account so we could provide our item numbers and pricing to them. I don’t know why they didn’t just ask for a csv spreadsheet; I’m sure that would have worked for whatever they needed to do. At any rate, we did not create a catalog ourselves and do not use Ariba to manage that relationship or solicit other business. Our industry is very small, there are only a handful of companies that make the type of products we do and everyone knows everyone. There is an ebb and flow to the business; we often gain accounts when heads of departments move to other companies and take our products with them. Conversely, we sometimes lose business the same way.

    After creating the account and sending the item list, we never logged in again and did not even have the password to the account. The client generates their POs through Ariba and we receive them by e-fax. We bill our customer on paper and they pay either by check or P-card, depending on the purchasing agent. We have never used Ariba to check payment status or whatever it is they do. The sum of our relationship with Ariba are the POs they email us and the regular spam of “business opportunities” for things that are utterly unrelated to what we do because ours is a highly niche market.

    Now, Ariba is sending me invoices and nasty-grams because we have received more than five POs and our client has passed some arbitrary spend threshold. It puzzles me how Ariba can charge both their customer and the supplier for the cost of sending a bi-monthly email, particularly when the supplier does not use nor desire the product and demonstrably, has never logged in since the day the account was created.

    Their collections department is telling me now that they are going to “determine the best subscription level to support [our] e-commerce program” and bill us for it, with the veiled threat “so [we] can keep our customer relationship active.” We do not have an e-commerce program! This is the only customer we have that uses their system, we were coerced to do it and they are actually threatening to interfere with our relationship with our customer if we do not purchase their service.

    If that is not extortion, I do not know what is. They are a vile, vile company.

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