Friday Rant: Negotiating Supplier Network Fees

Here at Spend Matters, we believe that it's time for buying organizations to tackle the network fee question head on. Yet few organizations we talk to have the market intelligence necessary to create strategies to minimize and negotiate supplier network fees as they would more traditional software licenses or SaaS/cloud agreements. Why? First, in looking at the network fee question, it's important to realize that charges – regardless of whether buyers or suppliers pay them, or both – can come in multiple formats.

There are models based on an EDI-like per document model (potentially with minimum commitments which become increasingly cheaper the more volume you sign up for). There are all-you-can-eat as well as free and "freemium" models (you may or may not get what you pay for, mind you). And of course there are models, such as Ariba/SAP, which are based in large part on transaction dollar volume (e.g., a single large invoice could trigger a three, four or even five figure network charge).

The diverse landscape of charging models has created confusion in a market that is just beginning to explore network options for supplier eProcurement enablement and e-invoicing connectivity. Fortunately, Spend Matters is taking up the charge in providing recommendations for minimizing the impact of supplier fees on overall P2P ROI. Over on Spend Matter PRO this week, we began to publish a two-part series that describes ten different tactics for reducing and negotiating supplier network fees that procurement and finance organizations can leverage.

As we observe on PRO, supplier network fees don't need to become an unbudgeted expense for procurement organizations when implementing eProcurement and electronic invoicing solutions (when suppliers find ways of passing on costs to their customers). In fact, there are a number of negotiating tactics and approaches that one can leverage when working with such network providers as Ariba/SAP, Basware, OB10, Hubwoo, IBX, TradeShift and numerous others to reduce the overall cost of network fees.

This series describes ten ways that procurement and finance organizations can gain an upper hand when approaching these fees with providers. Spend Matters PRO readers should note that some providers (including Ariba/SAP) claim that network fees are not negotiable. While we encourage procurement organizations and those advising them to attempt to challenge these assertions through some of the tactics and approaches listed in our series, we also suggest that the focus should be on designing P2P programs (including system selection) that do not create "lock-in" to a given provider in the first place. For example, companies that sign up for Ariba P2P in a SaaS/cloud model are locked into using the Ariba network option and having suppliers pay network fees relative to other competitors that may provide greater flexibility.

Gaining the upper hand in negotiating supplier network fees requires that companies not only do their homework upfront, but that they're aware of the somewhat misleading tactics that vendors may engage in to assure procurement and AP organizations that suppliers do not mind being charged fees. Moreover, it also requires an informed approach to sourcing. For example, one of the ten tactics we provide on Spend Matters PRO suggests that where basic connectivity/transactional supplier fees are involved, procurement organizations should request proposals that include the costs to assume supplier fees themselves under different scenarios at minimum including:

  1. Supplier fees paid up-front based on anticipated/forecasted value volume levels for a given time period
  2. Supplier fees paid up-front based on anticipated/forecasted value volume levels for the entire contract lifecycle
  3. Supplier fees paid as incurred (monthly or quarterly). Ask network providers for this information in multiple ways to understand cost breaks (and to serve as the basis of further negotiation).

Using these approaches, we suggest in our PRO research that procurement and finance organizations are likely to find that they will be able to negotiate substantial (double-digit) fee savings by taking this approach. Moreover, given that basic economics dictate that suppliers will find a way of charging suppliers back for connectivity (in future higher prices or through other means – e.g., discounts taken against volume rebate payments, etc.), investigating the cost to assume these fees is an exercise every buying organization should take, again ideally during initial platform and network alternative selection.

Spend Matters readers interested in this level of insight into supplier networks, P2P solution capability and related areas can check out the benefits of Spend Matters PRO themselves on a trial basis. Contact Sheena Moore (smoore (at) spendmatters (dot) com) for a free seven-day trial of our PRO service.

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- Jason Busch

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  1. Jason Busch:

    Thanks for sharing such detailed thoughts here. The original title of this post (and series on PRO) until it was edited down for space was “Negotiating and Reducing Supplier Network Fees”. So apologies if the final title did not capture the entire essence of the argument. Alas, SEO favors shorter titles …

    To counter your argument below, I would suggest you explore the series in depth (see my offer at the end of this note). There are multiple ways of reducing the potential impact of fees on suppliers and lowering the overall TCO of a supplier network solution.

    Also, I think that philosophically your argument is incorrect as I could cite other examples which run counter to it in the financial services and network world. For example … Does Tesco pay the same to swipe a Visa card as a smaller retailer? Does Goldman Sachs charge the biggest hedge funds it does business with the same to make a large trade as it charges smaller clients? Does JP Morgan Chase charge the same fees to clients (e.g., wire fees, foreign ATM transaction fees, etc.) as Chase retail? Does GXS or Sterling/IBM charge every buyer and supplier to transact using the same EDI hub and standards? The answer in each case is no. And in the case of supplier network fees, there are multiple ways of reducing overall costs even in cases with vendors who claim they won’t negotiate.

    Overall, I agree with you that the value proposition of supplier networks is tremendous but I disagree with your argument that just because the value proposition is so strong that we should be locked into a fixed fee schedule. Try telling that to procurement organizations that negotiate for a living or regulators considering anti-trust issues.

    In terms of PRO, we’re in the process of working out discounted seats for practitioners with some large member organizations (and even potentially seats that are packaged with certain corporate memberships to these groups), so we suspect the adoption will increase at a very, very significant rate in 2013, far beyond what we could scale with just web marketing and a direct sales force. We even just signed a deal with a provider that is going to give seats to its clients and prospects (they’re buying them from us to distribute). So while these ideas may not be in the public domain, they will at least be widely read and distributed among an increasing base of subscribers.

    On PRO, we also highlight overall current and future eProcurement, e-invoicing, supplier management and supplier network value propositions extensively – very extensively. And we tell organizations and those advisers negotiating on their behalf how to more effectively negotiate and manage overall supplier enablement, connectivity and information management costs.

    Thayer, I encourage you to sign up for PRO and read it for yourself. Drop us a line and we’ll get you a free trial. You might not always agree with us, but I promise coverage that is significantly more frequent and deeper than any other analyst research service looking at supplier networks.

    Have a great weekend!

    – Jason

  2. thayer stewart:

    Jason, I was not aware that some networks will negotiate supplier network fees, so that is news to me. Candidly, we explored this years ago, but realized it is difficult to manage and doesn’t scale from a network operator perspective. For me, the whole concept of negotiating supplier fees flies in the face of a many-to-many network; the way you describe it sounds very "one-off" and "EDI like". Buyers don’t negotiate merchant fees when they use a pcard program, or lockbox fees when the pay via ACH, and using a supplier network should be no different. I think you are touching on a larger question which is supplier pricing models and value proposition. I agree that the pricing models are all over the map, and the industry must start to norm in order for broad scale acceptance to occur. But, i also think that commentators in the space, and some of the new venture-backed upstarts, must also acknowledge that there is a tremendous value proposition for suppliers, which many suppliers will (and have) publicly attested to. I think it is counter-productive to have a discussion about negotiating supplier fees (or frankly proposing free to all) before we collectively acknowledge that there is value and attempt to quantify what exactly that is. Perhaps that is included in the intelligence you provide in the Pro Series. If so, you would do a great service to the industry by making that public. Because, even if a network operator were willing to negotiate, that would have to be the logical starting point.

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