In defense of supplier fees

In defense of supplier fees

Posted by Pete Loughlin in AP Automation, e-invoicing, Electronic Invoicing 16 Jul 2013

There’s a perennial discussion about supplier fees for electronic invoicing. Should there be no fees to suppliers because all of the business benefit is on the buyer’s side of the equation? Should there be at least a small fee to suppliers that reflects the benefits of eliminating postage costs? Or should the fees be akin to purchasing card fees and be proportionate to the value of the invoice?

While some see it as an ethical debate, it isn’t. It’s a commercial discussion. Everyone’s in it to make money and the debate is no more than an industry squabble. The fact is, most suppliers see supplier fees as a cost of doing business – you don’t get anything for nothing – and as far as suggesting that suppliers will pass the costs back to the buyer, even a junior procurement professional knows how to mitigate that risk and insist on no increase in pricing. What’s really important is the benefits that are delivered in terms of efficiency.

This is one way of looking at it but there is another way and that involves doing the math.

Purchasing Insight logoHere’s a typical scenario using round numbers to make it easy. Imagine you are a $1 billion spend business. 80% of your spend is with strategic suppliers. You receive 100,000 invoices each year. Your business case says that you’ll save $50 per invoice if you move to electronic invoices. The scale of the supplier fees are the suppliers problem and you are confident you can ensure no increase in costs are passed on by your strategic suppliers. You’re not sure about the non-strategic suppliers but that only represents 20% of spend. So, you expect an annual saving of $5 million (100,000 invoices x $50 saving).

Let’s just test the logic of this business case. You can guarantee that the costs that your strategic suppliers will incur will not be passed back. But those costs are real and they have to be covered somehow. Those costs can be significant so although they won’t be passed back to you as a strategic customer, they will be passed on to “other customers”. And this is where the problem lies – because to your non-strategic suppliers, you are one of the “other customers”.

If your non-strategic suppliers increase their prices by just 5% to cover the costs they incur from you and their strategic customers, your total spend will increase by 1%. That’s $10 million a year. So it’s hello $5 million, goodbye $10 million. How’s that for a business case?

The thing that’s really wrong with this business case is it’s lazy. Supplier fees should always be factored in. Are they zero? Are they moderate? Or are they enourmous? If you are going to ignore them, why not ignore all the costs? In fact, why not include a blank check as part of your RFP process? Lazy business cases are bad business cases.

If you’re a decision maker in any organization that is looking at implementing electronic invoicing, ensure that supplier fees are factored into the business case.

Pete Loughlin can be found on twitter @peteloughlin

  • Richard Manson July 16, 2013 at 10:46 am /

    Peter – I’m sure you’d agree that in most circumstances supplier charging is a bit of a false economy. The majority of suppliers will see any sort of fee as a barrier that will prevent them from sending their invoices electronically. The net result is that supplier adoption is impacted and more paper will remain in the business. Not only that but the speed of adoption will also move at snail’s pace as different personal within the supplier’s organisation need to be engaged in order to get budget approval. The key to high supplier adoption is to make it as easy as possible for suppliers to participate. Of course, supplier charging is only one barrier – asking your suppliers to change their systems to send XML or EDI – or to duplicate their processes and log onto a portal in order to submit their invoice – has a similar impact on supplier adoption. But that’s for another day…

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