Ariba’s supplier fee model and the killer anomalies.
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
In 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.
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.
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