06 Sep 2012 The trouble with supplier fees in government

The reason we founded Tradeshift goes all the way back to a very specific moment in 2005. At that time I was a student in the policy department of the Danish Ministry of Science, IT and Innovation. I was reading about a new law in the making and I could not believe what it said. The government was about to deploy a combined scanning and electronic invoicing solution for their 200,000 suppliers. That was not the problem. The problem was they had picked solutions that cost suppliers on average €2 per invoice.

I was stunned. Who would pay more to send something electronically than on paper?

I started asking questions, harassing people, trying to understand. I was a kid of the Internet age who sent thousands of emails on my broadband connection at a flat rate. If I had learned anything, it was that the Internet was about free communication. Together with Mikkel Hippe Brun and Gert Sylvest (co-founders of Tradeshift), we put an alternative proposal together. An open-source, open standard based e-invoicing infrastructure with no supplier fees. It was rejected. 

That same year the government went ahead and launched the paid version.

They had miscalculated. Politically, it exploded (in the middle of an election no less). Small business organizations went ballistic. It was on national news and the questions were hard. Why would the government launch an initiative to further burden small business in Denmark? What did the invoice fees cover? Did the government get a kickback?

Two months later the budget for our alternative project was approved and everybody suddenly thought this was the best idea ever and I was probably the first student project manager to get a government budget. We launched EasyTrade, as it was dubbed, one year later. It was offered as a free download from the government and we did not push anyone to use it. Instead we started spreading the word – there was a free open-source initiative available. Ten months later 70,000 companies had downloaded and were using EasyTrade to do business with the government.

Today 95% of all business done with the government is done electronically on EasyTrade. 

Fast forward to 2012 and I feel a heavy sense of déjà vu. Tradeshift is now participating in government tenders all over Europe and unfortunately we still face the same challenges as in 2005. Government organizations continue to consider networks that extract heavy fees from suppliers while being closed and proprietary. I think this is problematic, not just as a competitor who has a better model, but also as a member of a democracy. Here is why. The government should always provide a level playing field. Picking proprietary network solutions based on supplier fees is the opposite of that.

e-invoicing to government

Let’s consider a couple of scenarios:

Supplier A & B compete for the same government contract. Supplier A runs a lean organization trying to deliver a service at the lowest possible cost. Unfortunately they have to pay a percentage of their government business to the government’s chosen network vendor. So they never bid because they can’t remove a percentage from their margins.  Supplier B has bigger margins (more expensive) and therefore doesn’t mind paying a little grease to the network vendor to get the business with the government. How could A have competed? Well, only by adding the network fee to his costs. So everyone loses. The cheapest supplier doesn’t bid, the government entity ends up paying more and next time they want to do an electronic tender it’s only supplier B who is connected to the network. Supplier fees inherently create an uneven playing field as only those who are willing to pay the network tax will play.

Supplier A joins Network A to do business with the government. He now finds another network, Network T, that does business with some other government entities and he joins that as well. Realizing that he likes Network T’s service, business model and software better, he wants to switch all his business there. But the moment he does that he can no longer do business with his old customers who have chosen Network A. He is locked-in. Imagine it was the same case for mobile networks. Nobody would accept that you could not call friends that had another carrier. Why is it we do that in procurement? Even worse, this is the government creating an uneven playing field and limiting competition by the choices they make. Had the government instead dictated a set of open standards that everyone could follow to do business with the government then anyone could play.

Doing business with the government should never cost money or, even worse, be something the government earns money on (we hear stories of customers being offered part of the supplier fees to distribute as they want).

But aren’t these fees negligible? Well in one case we saw a supplier who had to pay $9,000 for sending a single invoice. And if suppliers want to do business with multiple buyers, costs quickly stack up.

So why does this still happen? Way too often it’s due to the political disconnect between buying organizations and their political leaders. In the UK, David Cameron has been fighting for de-bureaucratizing the public sector, creating better terms for small business and easing access to liquidity. With such an agenda you can’t at the same time launch initiatives that extract heavy fees from suppliers, lock them in and make their life more complicated. Openness and fair value must be default.

Thankfully, we also see a lot of organizations making the right choices. In Sweden, the government is offering completely free e-procurement services to suppliers (not a Tradeshift customer). We see this too with the Danish government (not a Tradeshift customer). In the UK, zero supplier fees was the reason NHS ASP selected Tradeshift. Same goes for the French Ministry of Finance (Tradeshift customer).

In the future I hope that with the growth of initiatives like PEPPOL we will see more transparency and openness in government procurement. We can’t afford anything else as citizens and taxpayers.

Christian Lanng is CEO of Tradeshift and can be found on twitter @christianlanng