The e-invoicing mandate and the reality of “free”

The e-invoicing mandate and the reality of “free”

Posted by Pete Loughlin in AP Automation, e-invoicing, Electronic Invoicing 19 Feb 2014

There’s a guy that wants to know how to learn how to negotiate. His friend, a professional buyer, explains to him that all he needs to do is to offer half of what he’s asked for when buying anything. Armed with this new skill, he goes off to buy himself a suit.

“That will be $200 sir” says the tailor. Our negotiator responds with an offer of $100.

“You drive a hard bargain” the tailor replies “but as I like you, you can take the suit for $100”

Our negotiator fixes the tailor with a stare. “$50” he snaps.

Realizing what’s going on and keen to serve other customers, the exasperated tailor gives the suit away. “Take it. It’s free. Just get out of here”

Negotiator: “I’ll have two”

Purchasing Insight logoI can relate to this. I have a Kitchenaid mixer. You know the sort. Every self-respecting celebrity chef has one. They look great and they’re not cheap.

Without going into the details, I have a contact who occasionally gets them for free. Nothing dodgy – they may be slightly shop soiled or have been used at an exhibition – that kind of thing. They’re as good as new with reliable provenance. And mine takes pride of place in the kitchen – collecting dust. I never seem to have an opportunity to use it. In any case, if I did, I’d only have to wash it up.

Recently my contact said she had another one available and did I want it? It would be nice to have a spare one I thought, in case the first one broke.

There’s an odd psychology to “free” – it makes us behave in irrational ways. What was I thinking? I already have too much of something and I want more of it. Why? Because it’s free?

There’s a growing number of players out there that have been seduced by the power of free. Inspired by successes like facebook, they see an opportunity to build a network by offering some sort of value add for free in the knowledge that the value of their network will grow, literally exponentially. Metcalfe’s law describes how the value of a network is proportional to the square of the number of connected users. It’s driven the success of social media and in the enterprise space, start-ups like Tradeshift. It was the driver behind the success of the supplier networks like Ariba.

There’s no such thing as free of course. Those that believe that facebook is free have failed identify what the product is. You, your likes, your favorites and your friends represent highly valuable data to marketers. Facebook isn’t the product – you are.

And Metcalfe’s law isn’t the only law in town. There’s another law – I call it Eflactem’s law? This law states that the value of a network is proportional to the square of the number of connected users – same as Metcalfe’s law – but it’s used to describe networks that fail to add a perceived value or those that are superseded by a more attractive competitor. Just as the network can grow exponentially, so can it disappear at a frighteningly fast rate – you could call it the Myspace effect.

I don’t wish to be misunderstood. Facebook, Linkedin, twitter – they are all good examples of how “free” and Metcalfe’s law can be exploited. Tradeshift exploited “free” and the network effect and they carved out a credible market share very rapidly. They are now, quite rightly, concentrating on the value add rather than the gimmick. But my concern with the fetish of free that the internet age encouraged is the level to which it is misunderstood and in particular, the interpretation of governments looking at encouraging the use of electronic invoicing.

One of the themes that has come out of the various government sponsored intiatives in Europe recently is the recognition that any mandate for e-invoicing, however gentle, should be couched in the language of “free” to suppliers. No-one would argue with the free portal option for micro businesses, but to extend the idea of free to medium sized and bigger businesses is bonkers.

Snail mail feels free, or at least very inexpensive, but it’s not. Scale a business that needs to send lots of invoices and the cost of franking machines and mail rooms starts to become important. They’re not free, but importantly, they’re less expensive than mailing invoices manually. And this is the point. The e-invoicing service providers – the OB10s, the Baswares, the Aribas and the Tradeshifts – they are the mail rooms of the electronic age. Delivering safely, legally compliant documents is what they do and if governments want to mandate that, they need to recognize that it can’t be done properly for free.

You get what you pay for. If you want free, you’ll get something that has no value. Free comes with all kinds of caveats, all of which represent a cost and if you buy a product for free, remember, you’re the product.

Pete Loughlin can be found on twitter @peteloughlin

  • Thordur Erlingsson February 19, 2014 at 10:02 pm /

    Spot on Pete.

  • Tony Duggan February 20, 2014 at 9:21 am /

    Interesting but rather prehistoric thoughts on “free”.

    We are, all in business, increasingly driven by our experiences in the consumer world, be that User interface expectations, pricing models or otherwise.

    Cost is driven by infrastructure and the efficiencies of your infrastructure. If you have an old clunky infrastructure (and there are many out there who still do) then your flexibility on pricing models is pretty limited.

    The key to “free” is as much about the development and use of scalable technologies such as cloud, server virtualisation, and open data standards. Do that well and free transaction processing is very viable as a means to drive market share.

    Of course, revenue has to be generated for any business but the value chain is no longer about high cost EDI solutions. Supply chain efficiencies enabled by traditional EDI have been banked by corporates.

    The value chain and revenue yield for successful future providers is now, about whether you can do to such things, as connecting the financial and physical supply chain and whether you have the depth of capability to support a breadth of business processes, beyond handling simple PO’s/Invoices.

    Doing that for “free” is the game changer and having smart systems like Crossflow Payments is how its done.

    “Free” has, as is highlighted, has driven significant market penetration for Twitter, Facebook etc. There is an inescapable reason for that growth.

  • Paul Turner February 20, 2014 at 10:34 am /

    G’day Pete,

    Another thought provoking post!

    I’d like to think though that we at Tradeshift ‘carved’ and not ‘calved’ out a market share! We offer lots of value-adding Apps. On our platform but animal husbandry isn’t one of them! 🙂

    Love you work!

    P.

  • Pete Loughlin February 20, 2014 at 10:38 am /

    Thanks Paul – the error is now corrected. That did give me a good laugh.

  • Christian Lanng February 21, 2014 at 4:02 pm /

    While I like the anecdote, it don’t have a lot in common with modern economics, services can easily be free for midsize or even large companies, ultimately it depends on the cost of operating that service, if you can make it really cheap to operate a service, you can decide how to structure the commercial model. We have customers who send 100’s of thousand of invoices through integrations that don’t cost us much more than those sending tens of invoices. That is a function of our technical architecture and a competitive edge, we would be stupid not to exploit and force the competitors to innovate (you remember the primary goal of free competition).

    On a bigger note, very few business models operate at Free (Tradeshift certainly don’t) the most common thing is either freemium or what is called a two-sided market model (economics 101), Google operate a two-sided market model, where very few users (advertisers) finance the functionality for everyone else (consumers) because it’s in their interest, ie. have value for them. The same is true for the Tradeshift platform, our customers finance transactions and the network for suppliers no matter what size they have because it have value for them (in fact proportionally so the larger the suppliers are). This is pure market economics.

    /Christian

  • Christian Lanng February 21, 2014 at 4:07 pm /

    Also a tailor or snailmail are hardly synonymous with bits on the internet, the material and time cost of both of the previous processes are substantial whereas bits are almost free…

  • Pete Loughlin February 21, 2014 at 4:23 pm /

    There’s nothing wrong with offering value add services for free – especially if by cleverly using technology a business can disrupt the marketplace and I completely agree with you Christian that you “would be stupid not to exploit [the technology] and force the competitors to innovate” – that is what Tradeshift has been good at.

    I also agree also with Tony Duggan to a large extent. My intention was not to justify old style EDI architectures and costs.

    The point I want to make is that “free” isn’t always a simple as it seems. It is not always desirable and can have unintended consequences and fetishising “free” is unwise.

    By the way, the tailor story is a joke.

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