Ariba’s supplier fee model and the killer anomalies.

Ariba’s supplier fee model and the killer anomalies.

Posted by Pete Loughlin in AP Automation, e-invoicing 15 May 2013

I don’t write much about Ariba. We don’t say much about SAP or Oracle either. They’re old news and there isn’t much to say that hasn’t been said before. Besides, there are better analysts like Jason Busch who understand the intricacies of the functionality of procurement software to a much greater extent than I do. But there is one aspect about Ariba that really intrigues me and that’s their pricing model.

Unlike many other commentators, I don’t have an issue with Ariba’s supplier pricing model – in principle at least. There’s a price and there’s the value that’s added and you can’t look at one without the other. A high price is perfectly appropriate when there’s proportionate value added. But in my view, there’s something very wrong with the model that Ariba has chosen to adopt especially when you look at it as it relates to e-invoicing.

e-invoicing supplier pricing models

Purchasing Insight logoIn basic terms, there are three models for charging suppliers to join an e-invoicing network. First is the model that organizations like OB10 and Basware use. It’s a combination of a network membership subscription and a fixed transaction fee. Secondly, there’s the free to supplier model offered by companies like Tradeshift and Taulia. And then there’s the value based transaction fee model that Ariba use. Like OB10 and Basware, they charge suppliers to join the network but the transaction fees are based on the value of the invoices.

The value based fee model isn’t a new concept. It’s how purchasing card merchant fees are calculated and unlike merchant fees, the percentage that Ariba charges is very low. In addition to that, the charges are capped and for very low volumes of invoices, suppliers aren’t charged at all. You can get all of the details of the Ariba charges on their website here. It’s explained very clearly.

So if the percentage is low and charges capped and for many suppliers there’s no fees at all, what’s the problem? And why is it especially a problem for e-invoicing?

Here’s the thing. Transaction charges based on the value of the transaction are appropriate in a purchasing transaction because, generally, the margin made by a supplier is proportional to the size of the transaction. The supplier makes a 10% margin normally and a merchant fee of 1.5% brings that down to 8.5%. It’s a cost of course, but there’s value added in terms of convenience and immediacy of payment. It’s not like that with an invoice. The cost of issuing an invoice has nothing whatever to do with the numbers on it. It costs the same for a $1 invoice as it does for a $million invoice. There’s no logic to charging a percentage of the value.

But the percentage charges are very low and capped, so again, what’s the issue? To really see the issue with a value based supplier fee structure you have to see how the supplier fees impact the whole of the supply base and to illustrate it we’ve developed a value based supplier fee modeler.

Supplier Network Fee Modeler

Based on a very limited amount of information, supplier spend and number of invoices, the supplier network fee modeller makes some high level assumptions about how spend is distributed across the supplier base and calculates what the supplier costs might look like. Have a go. (For anyone wishing to model a real situation, there is an advanced option that makes no assumptions.)

This modeler is based on the structure that Ariba uses and also uses their current published pricing but it is a generic model intended only to give an indication of what the implications of a value based supplier fee model might be.

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Naturally, the results vary according to the supplier profile but the modeler is very useful in illustrating the stark reality of this type of model.

In a real life e-invoicing program, low volume suppliers are low priority. For the buyer there’s little process benefit to be had from them and the effort required to on-board them is inordinate. The real benefit comes from the high volume suppliers and these tend to be strategic. This model is fine if your strategic suppliers send you high volumes of low value invoices but if not, this supplier fee model could put you in a position of charging significant sums of money to your most important suppliers simply for the privilege of sending you an invoice.

Charging suppliers to send invoices to their customers is a feasible model. There is value added if only in terms of reduced stationery and mail cost but the value add is small and it’s fixed. A value based fee model may actually cost many suppliers no more than the alternative fixed transaction fee but the problem is not the total cost to suppliers, it’s the anomalies that it produces and for some organizations, these anomalies are a killer.

Important Disclaimer

The Supplier Network Fee Modeller attempts to be as accurate as possible based on information and content available via websites in the public domain, and the data provided is for information purposes only.  This site is provided by Purchasing Insight on an “as is” basis, and Purchasing Insight makes no representations or warranties of any kind, express or implied, as to the operation of this site or the information, content, materials, or products included on this site. You expressly agree that your use of this site is at your sole risk and the results of the calculations are presented here for you to draw your own conclusions.  Purchasing Insight reserves the right to modify at any time without prior notice these statements and the information contained on the site.

  • interested observer... May 16, 2013 at 9:27 am /

    good article – i would argue that the cost/value trade-off for suppliers under their network fee model that you mention isn’t really a true and objective exercise, as users of the Ariba network are treated more like ‘prisoners’ of the network rather than ‘customers’ – view Ariba’s lack of interest in supporting the interoperability agreements that form the fundamental philosophy of fairness for most other leading networks (and in itself adds additional value re ensuring the reach of network users is maximised re buyer/supplier connectivity).. this is naked profiteering.. short term.. it may be working initially, but the momentum behind other networks who are already offering rapid and fairly priced solutions to immediately capture ALL invoices across an enterprise (rather than the limited number of indirect-spend-related PO-invoices that Ariba is able to claim) is proving that SAP have an issue that’s about to hit them.. i.e. how to move from naked profiteering to more balanced, competitive pricing models without killing the cash cow.. let’s see what happens..

  • Purchasing Solution Con for Suppliers July 11, 2013 at 1:37 pm /

    […] is crucial to not just look into the broad costs, but to look into ALL costs. Recently, we read an article in Purchasing Insight, mentioning how some solution providers are using hidden fees as a way to […]

  • Roger December 30, 2013 at 6:19 pm /

    Ariba is pretty sketchy. They just start charging you based on other companies placing orders for your product through them, even if you don’t have a hosted catalog, and nothing to do with invoicing efficiency (those are options as well). They then threaten to shut you off unless you pay the fee, even though it was the customer who is using them, not you.

  • mike peterson September 12, 2014 at 7:38 pm /

    One of our customers started using the Ariba Network to process their invoices. All invoices that we normally submit to them for payment of services we provide them now must go through this Ariba Network. As a result, we have to pay a quarterly fee to Ariba based on the dollar amount of these invoices for the privilege of being paid. If both our customer and our company are paying a fee to Ariba then this seems a bit unethical. Even though we have explained to Ariba that we are not a customer of theirs they say nothing can be done, you have to pay to get paid. Getting paid is another matter, that can take a very long time.

  • Mary Colston June 16, 2015 at 6:50 pm /

    When a customer of mine first forced me into using the Ariba Network to process their invoices, I really couldn’t believe what I was reading! I would NEVER ask a vendor of mine to PAY to invoice me. No matter how large my company becomes! This started 3 months ago. Ariba and my customer are having trouble with their “electronic coordination” so none of my invoices have been processed. I’ve been asked by Ariba to resubmit them, which I did. However, they charged me for BOTH sets of invoices and, of course, double the revenue! Ariba and my customer are still working on the problem, I’ve reverted to submitted my invoices through the previous method (thank goodness) but I still keep getting the outrageous bill from Ariba. Needless to say, it has not been paid. Ariba contents I DO owe for the original invoices and agree their invoice will need to be adjusted. I say, I don’t owe for any of it. I keep getting invoices from them with no adjustment. So goes the battle. I will NEVER recommend Ariba or any other company that operates like this. This is ridiculous!

  • John July 30, 2015 at 7:54 pm /

    Electronic invoicing is of clear benefit to the client who requests it. They are able to set the format to integrate with their internal accounting system. We submit e-invoices for several dozen clients who request it. The issue for us is that each client has their own required format and/or a different third party provider. The initial set-up is therefore somewhat painful but the ongoing submission is usually smooth. Our “normal” standard invoicing, where we control the output is still the best. Uniformity always wins out when you have a process.
    We have one large client who demand the use of Ariba – paying for the privilege of submitting e-invoices drives me up a wall (quarterly). One of our billing line items is a pass-thru of cost we incur on the client’s behalf. Taking a haircut on that is very frustrating. I’ve taken this up with Ariba to no avail.

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