The Dirty Secret About Supplier Fees

May 25, 2013 Joe Hyland

secretLast week Purchasing Insight released a calculator that allows organizations to view the true cost of a fee-based supplier network model. Pete Loughlin, Purchasing Insight’s Managing Editor, modeled this calculator based on Ariba’s published fee structure for suppliers. Ariba has a few components to their supplier fees, but essentially there is a 15.5 basis point (.115%) fee charged on the dollar value of each invoice, as well as an annual subscription fee. Jason Busch, Managing Editor of Spend Matters, has been reporting on the logic of this supplier fee model for years. Busch noted that in September 2010, Ariba increased their transaction fee by 55% when they moved from a 10 bp fee to today’s 15.5bp cost structure1.

Now this might not sound like a lot, but these fees can add up. As Ariba lists on their website: “The NTS (Network Transaction Service) fee for any customer relationship with an annual transaction volume exceeding 12.9M USD is capped at 20,000 USD per year.” As you can see, such a program can be quite expensive for an organization’s largest suppliers. The issue with this is that these large suppliers are often the most strategic, important trading partners. Does it really make sense to charge them money just to send you an invoice?

Putting aside for a moment the risk that charging suppliers has on the health of your supply chain, Busch goes on to add:

“Supplier fees will…come back to cost you in the end…Any company going through a req-to-pay (eProcurement or e-invoicing) selection process involving vendors that charge network fees owes it to themselves to model the costs of network fees…”

After playing with the Purchasing Insight Modeler, the total cost to a typical Fortune 2000’s supply chain was astonishing. A sample organization with 5,000 suppliers and $10B in annual spend would see an annual cost of $11.5M being charged to their suppliers (see below).

Ariba Calculator

For larger organizations, with $20B in spend for example, this figure jumps to just below $20M annually. As Loughlin goes on to say, “suppliers will always recoup costs.” This is a critical point. When “taxed” for no value, meaning having to pay simply to send your customer an invoice (a mere request to be paid), suppliers find a way to get this money back - often by ever so slightly increasing the invoice value to account for the fee. So while charging suppliers is quite profitable for Ariba, they are removing money from the buying organizations supply chain, which can amount to taking money from the buyer’s own bottom line.

At Taulia, we don’t believe in charging suppliers. For one, we think it’s wrong, but it also doesn’t help our buying customers. Supplier acceptance is critical to the success of any eInvoicing or Dynamic Discounting program. If suppliers don’t see value in the offering, they wont use it and the result would be a failed program. It is our belief that suppliers should not be charged. They should be able to submit invoices in a variety of different electronic formats, be able to see the status of their invoices and ultimately opt to be paid early (if they so choose) at a discount that benefits both parties.

As Busch adds, “I continue to be dumbfounded at the number of procurement and A/P organizations that don’t fully grasp the impact that supplier network fees could have on their entire supply chain.” We feel the same way.

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