In this guest post, Procurement Leaders invites Forrester Research’s Duncan Jones to explore whether network fees are fair charge for value or an adoption barrier.
A topic that generates a lot of discussion among users of eCommerce is the question of whether suppliers should pay to use a network, or whether the buyer should fund the cost. Ariba is the leader of the Yes camp, while many of its competitors take the opposite stance and bash what they call the "Ariba Tax" at every opportunity. But should we be thinking more carefully about this fee?
I’m currently doing a detailed analysis of the leading eProcurement software providers for a Forrester Wave to publish in May; an important requirement for candidates is an eCommerce network that enables suppliers to immediately receive purchase orders that the software has raised and to communicate back acknowledgements, shipping notices, invoices, etc.
It may be a controversial viewpoint, but I support Ariba’s position that suppliers should pay for the value they receive by being part of a network, such as greater visibility to buyers and streamlined order-to-invoice processes. The network fees are really just a B2B equivalent of what Amazon charges its merchants (and at a fraction of the rate too). However, in a market in which many networks are free to the supplier, procurement chiefs should consider whether that’s the right approach for them.
In particular they should ask themselves:
- Will idiosyncratic pricing model penalise some of my suppliers? What’s been termed the ’Ariba tax’ is ok in theory but problematic in practice because the %-of-transaction-amount price does not reflect the value suppliers get. Firstly, it undercharges providers of low value high volume categories such as office supplies or MRO but overcharges low-volume high-value transactions such as professional services and direct materials. Secondly it fails to reflect whether the supplier is getting extra business from the network or merely receiving POs it would have got anyway.
- Will suppliers pass their costs back to me via higher prices? Some of my clients, particularly those from large enterprises, don’t care about the impact on their suppliers of requiring them to use a specific network. They believe their buying power and negotiation excellence gets them the best possible price and the supplier’s margin is its problem. Others feel less confident about their leverage and assume that the fees will come back to them hidden within higher prices. Both could be right. Ask yourself how important you are to your suppliers and whether you can prevent them recharging the fees to you if they decide to do so.
- Can I offer my suppliers a choice of networks? That would let them use a free network if they want to but pay a fee for a service whose value justified its cost. A buyer with reasonable integration technology should be able to support multiple networks. Moreover, if the buyer handles this complexity then that saves the supplier from having to do so, connecting with dozens of networks and self-service portals mandated by various customers. This will save the supplier money, which may translate into a discount to you (if it can recharge the cost to you then surely it should share a saving with you too).
Bottom Line: Enabling eCommerce with suppliers saves you money and them too, but can take a lot of effort from procurement chiefs and their teams.
Enrolment can be a challenge, so choose the provider who will best help you get maximum adoption by your suppliers. That may be one of the providers who all claim to be the world’s largest and believe that they can charge a fee to suppliers to let them connect with their attractive populations of buyers, or it may be one that is free to the supplier – you have to decide based on your context.
Duncan Jones is vice president and principal analyst, Forrester Research. For more of his posts, visit the Forrester blog here.