Purchasing Insight’s Pete Loughlin recently published a supplier network fee modeler. We covered its launch last week on Spend Matters. Supplier network fees are an increasingly important factor in calculating the total cost of ownership with indirect supply relationships. Suppliers are beginning to find ways of pushing back on them (both overtly and more discreetly) at their customer’s expense, as we featured in a recent Spend Matters PRO report on the supplier perspective on network fees. This analysis is based on the commentary from multiple suppliers participating in a live panel on the topic earlier this year as, well as additional off-the-record discussions Spend Matters has had with some of the largest suppliers on popular networks today.
For companies looking to understand the supplier cost of network fees, Purchasing Insight's modeler is an ideal way to quickly gain an understanding of the magnitude of fees based on anticipated spend and invoice levels going through a network. Users can also model estimated costs with greater granularity by using the advanced version of the toolset. Both are free.
I’ve tried the modeler myself, and based on my own spreadsheet estimates of Ariba’s fees – which we previously calculated in a downloadable PDF – it seems accurate, though I would still like to test it further to fully confirm. Still, users should be fairly comfortable with the assumptions the modeler makes as directionally accurate, at minimum. But as with anything free (or not, for that matter), test and validate!
After playing around with the modeler, I was curious to ask Pete a number of questions about it. Below, we feature the first part of a two-part Q&A between Spend Matters and Purchasing Insight.
Spend Matters: Why did you decide to build this modeler? What do you think its impact will be?
Purchasing Insight: On first appearances, there’s nothing unusual about the Ariba charging model. It’s based on a percentage of invoice value but a very low percentage and the total charges to a supplier are capped. It seems fair and reasonable and generally speaking it is. However, if you look at it in the context of a real life situation a whole set of anomalies appear. For some organizations these can be dismissed but for others they represent show stoppers.
Ariba’s charging model is actually quite complex and the best way to explain the potential for the anomalies is to build a graphical model. A picture paints a thousand words.
In terms of impact, I think it shines a light on why there is concern from some quarters over Ariba’s pricing model. I’ve made the point many times that you can’t just look at price. You need to look at it in the context of the value that’s delivered. And Ariba delivers great value. But it’s not the size of the price that’s wrong. It’s the shape of the price that perhaps should be revisited.
Spend Matters: Do you think most procurement and A/P organizations take the time to understand the true costs of supplier fees?
Purchasing Insight: No, I don’t. All too often the price to suppliers is seen as “their problem.” It’s not. It’s everyone’s problem. Supplier fees add to the cost of doing business the same way that high interest rates, unfavorable exchange rates and taxes do.
Spend Matters: In your experience on the "buy-side,” have vendors been transparent at sharing fees and how they add up for suppliers?
Purchasing Insight: This is a leading question, but the answer is of course they are not transparent. But let’s be real. Buyer beware. It’s not the vendor’s job to highlight the costs or indeed any downside to their proposition. And it’s unfair to imply that any of the vendors deliberately conceal costs, [just like implying] that procurement people unfairly and deliberately twist the arms of suppliers.
Spend Matters: In your experience, how do suppliers react to fees? Will they get smarter in the future at finding ways of recouping the fees from customers?
Purchasing Insight: Suppliers hate fees especially. It’s a tax for simply doing business and they will recoup them. Always.
Stay tuned for the second part of this interview, where we tackle questions such as network comparisons with p-cards and merchant fees, the cost of fees relative to A/P efficiency improvements (and the ROI) and what is next for Ariba/SAP regarding the network and volume-based pricing fees in Pete’s opinion!