Supplier Network Transparency: Purchasing Insight Does What Ariba/SAP Should Have

Insurance salesmen and stockbrokers have been vilified over the years for taking advantage of uneducated buyers. The variable annuity could be the poster-child for a product that tends to have the most upside for a broker at the potential expense to the client. But the good news for consumers in the financial services industry is that there is a series of regulations, checks and balances designed to protect stupid people from making stupid decisions – or at least to reverse them (and/or to bring censure to those participating in such charades) when salesmanship convinces your geriatric aunt to make a dumb decision with her nest egg.

Unfortunately the same is not true of the B2B world, at least not when it comes to procurement software where smart (we hope) people routinely make stupid decisions. I continue to be dumbfounded at the number of procurement and A/P organizations that don’t fully grasp the impact that supplier network fees could have on their entire supply chain (I carefully use the word “supply chain” here because invoices and POs cascade through multiple tiers as orders beget orders – and the potential exists that firms like SAP/Ariba could be paid multiple times for a given product or service ultimately sold to a business or consumer).

Even though I tend to think that government is best when it gets out of the way of citizens (and businesses), I’ve come to believe that we need some type of regulation or disclosure around P2P and supplier network fees because, simply put, too many people in procurement and A/P are either too lazy or too aloof to model the fee impact on their supply chain for basic PO/invoice transactional connectivity on a volume basis. But until this happens, we fortunately have social media to do our homework for us (hold this thought for a minute).

If you currently use (or are even remotely considering using) a supplier network with a fee component paid for by suppliers for basic connectivity – especially connectivity where suppliers pay based on dollar volume – you owe it to yourself to spend some time modeling your true costs. Because supplier fees will, as a recent Spend Matters PRO piece shows that reports the supplier perspective on network fees, come back to cost you in the end.

Purchasing Insight’s Pete Loughlin, who I’ve had the good fortune to get to know professionally and personally, has recently slaved away creating an interactive modeling tool that can show the true cost of the supplier side of network fees on an annualized basis. His modeler comes in two flavors: basic and advanced. Any company going through a req-to-pay (eProcurement or e-invoicing) selection process involving vendors that charge network fees owes it to themselves to model the costs of network fees on their immediate tier one suppliers.

(Click image to enlarge.)

supplier network model

As you’ll see if you play with the tool, a typical Global 2000 company can quickly scale to a point with eProcurement and e-invoicing deployments where suppliers are paying hundreds of thousands of dollars (or more) per year. The cost per invoice for larger suppliers involving larger POs and dollar amounts can add up fast (hitting $15, $20 or more per invoice with realistic assumptions modeled).

Next week, we’ll feature a detailed review of Pete’s work and our experience using it to model additional realistic cost assumptions – and what it means for procurement organizations. In the meantime, we thank Pete for his diligence and work in developing such a model and making it available for free on his site.

Voices (4)

  1. Pete Loughlin:

    I think Daniel is missing the point. In the Taulia case, there is an exchange of value – a discount in return for early settlement – and that transaction only takes place when it is beneficila to both parties. This is also true of e-invoicing – when the charges are in proportion. What the calculator shows is that these charges are often totally out of proportion to any value added.

    1. Daniel Perry:

      Ariba are pretty clear on the value they believe they bring to suppliers:
      http://exchange.ariba.com/groups/supplylines/blog/2013/03/26/a-guide-to-business-commerce-integration

      But it’s good to see people are trying to keep them honest about the “true cost”.

  2. Daniel Perry:

    What I think is funny is that one of the sponsors of Purchasing Insight is Taulia, whose motto is “Pay early – Pay less”, so if the supplier earns less on every invoice, what makes that any different from a supplier paying a “fee”? Where’s the calculator on that? 😉

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