Supplier networks and the battle against monopolies

Procurement people hate monopolies and being in a situation where an overly dominant supplier can exploit that position commercially. When I first moved into procurement, my boss sat me down and said something like this. (I’ve somewhat anonymised this story, but the essence is absolutely true).

“Right. You have two main objectives. In dairy products, break the virtual monopoly that xxxx has over the supply of zzz  in the UK.  And in terms of H******powder, find another supplier so we can stop getting ripped off by the b*****  at  H******”!

Yet there’s one area where procurement has been helpless to avoid their organisations getting thoroughly locked in over the years, and that’s what we might call “big software”.  How often do firms put their contract for ERP software out to the market for bid? Never, is the answer for most firms. The cost of switching is just too high to make it feasible.

So one of the great beauties of "software as a service" type products is that they do hold out at least some prospect at least of avoiding the worst of this lock-in. Flexibility for buyers to move away from their provider is key to keep any market healthy, competitive and innovative.

But now we’re seeing another important issue for procurement to consider – the whole question of supplier networks. Developing the biggest and best supplier network possible, to enable suppliers and buyers to trade together, work collaboratively, or even  find new buyers and suppliers, is a core strategic goal for many software firms, including Ariba (SAP), GXS, Hubwoo, Coupa, Basware, Oracle, Tradeshift, OB10.. the list goes on.

There are plenty of positives around this development, and we won’t rehearse them again here. However, there are also risk s for procurement at both corporate level and generically. For individual organisations, getting locked in, as I was to my supplier all those years ago, is not a good place to be. Having some flexibility in terms of “your” network, so if the provider ever gets greedy, you have an alternative, is key.  (And do note that could be your supplier getting greedy with your suppliers or with you directly).

And at a global level, we must hope that we never see a single de facto global supplier network. Because if we do, you can guarantee that provider will have almost literally a licence to print money. Once a single network had a highly dominant position, it would be almost impossible for a new entrant to break into that market, I suspect, giving the leading provider an incredibly strong position which could be exploited financially.

 I’m not suggesting there should be an overt co-ordination of approaches by large buyers here, perhaps unfortunately. But it is ultimately in all our interests that we never reach that point, and that competition continues to be vigorous in this market.

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