Supplier Network Fee Modeler: A Q-and-A With the Inventor (Part 1)

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!

Voices (3)

  1. LJones:

    I work in the mfg business. I’m a buyer and cost on parts Are already pricey, then companies make vendors join a systems program to be able to do business with customers. They have to pay so called “membership fees” based on the amount of business done. Kinda sounds a little like racketeering to me. Does anyone not understand that those fees our vendor pays goes right back into the customers cost. Come on. What ever happened to good ole negotiations. Best bid wins the business. I would really like to understand the purpose of systems like Ariba. What are the benefits to the customers and or vendor. I’ve had vendor flat out refuse to join snd I’ll have to buy from another vendor they buy it from the one that refused and the price get jacked up, but sometimes when they are the oem or mfg there’s not a whole lot you can do. All the while we are trying to manage a monthly spend budget and paying more with the cost of inflation and now Ariba fees on top of that. Please explain how to Ariba and companies like that are a good thing. They tell me that vendors are getting their names out there to get more business, well I’ve been working with the Ariba system since 2008 and not one of my hundreds of vendors have said a good thing about it. Not one have said they have gained more customers. Not to mention fellow buyers do not have a good thing to say either. It’s more time consuming, doesn’t work with any inventory system which means double the work for the buyer. Still have to call the vendor (most, if not on network) for pricing and availability. Type in a request in Ariba and then another po so that it will show in inventory when received. By the way that’s also double the work . Just crazy to me

  2. Patrick Chabannes:

    Ariba as well as IBX or some other vendor provide added value to the Suppliers if the process P2P is complete. Two issues in Ariba fees are fees based on $ AND fees starting when sending a P20.
    Those vendor asking for fees for a complete P2P reconciliation are right.
    Vendor giving for free, like Coupa, are questionable. A vendor giving for free a clear business added value and in a burning cash mode is oftenly a vendor with a clear exit. A Professional Procurement must ask himself question before decide between no fee/fee/fee vs aded-value

  3. Daniel Perry:

    “Suppliers hate fees…” may be true for some suppliers who use Ariba, but I don’t believe it applies to all suppliers and all eprocurement companies that charge fees.

    If think a truer statement would be, “Suppliers hate to pay for fees in exchange for no perceived value.”

    When eProcurement companies that charge fees provide measurable value, new business opportunities and treat their network suppliers as customers/partners, you may find their suppliers’ reactions to those fees can be significantly different.

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