What’s a fair network ‘take’ on B2B transactions?

SUMMARY:

As ecommerce evolves into the digital era, how much of a cut can network operators such as Ariba, GT Nexus and others justify taking from B2B transactions?

Business man jumping for golden dollar sign on fishing rod © Tsung-Lin Wu – Fotolia.comOne of the unwritten tenets of digital business is that the most reliable way to make money is by taking a cut in return for connecting buyers and sellers. This principle underpins the massive valuations of Silicon Valley hotshots such as Uber and Airbnb. But it’s by no means one that was invented by today’s hot startups.

Rewind back to the earliest days of electronic commerce — even before the advent of the Worldwide Web — and you’ll find businesses that made a lucrative income from connecting B2B buyers and sellers through what were then known as value added networks (VANs) using electronic data interchange (EDI) formats.

These early enclaves of proprietary advantage were seen as ripe for replacement after the advent of the Web, leading to stellar valuations during the dot-com boom (and later comedowns) for web-enabled e-commerce and supply chain platforms such as i2, Commerce One and Ariba.

Lessons for today

One of the lessons for today’s startups is that each generation brings technology and business model innovations that allow them to substantially undercut the take being charged by older, more established players.

Ariba’s monetization model was created by Bob Solomon, who has since become principal of Software Platform Consulting, Inc, which advises on development of B2B networks and platforms. Speaking in May on a panel at the Coupa Inspire conference, he warned that the model he created while at Ariba may no longer be relevant in today’s market:

So often the tools we’ve been peddling don’t add value. In every category, there’s usually some unique requirement that needs to be met …

It’s OK to charge suppliers when you add value. Where the networks have fallen apart, they lost focus on how much value they were adding relative to how much they were charging.

Certainly the Ariba model is roundly criticized by many suppliers who have no choice but to use the platform when customers adopt it to manage their procurement. Above a certain threshold of activity and spend, they find they must pay a transaction fee to Ariba based on the value they invoice through the network.

Customers or prisoners?

In a much-read article on the Spend Matters blog, the CEO and co-founder of e-invoicing network TradeShift, Christian Lanng, once summed up this approach as, Ariba doesn’t have customers, it has prisoners. He has an agenda of course — as does Coupa — in that these are rival networks that don’t impose a charge on suppliers. But the extensive and long-running comment thread to the Spend Matters post exposes how unpopular those charges can be. The most recent comment, posted late last month, is typical:

We have just one customer who uses the Ariba network. I can’t make head nor tail of it. Anyway, I have notified our customer, today, that we will not accept future orders through the Ariba network. Luckily the value of the invoices are small and the customer has another purchasing outlet which is simple and costs nothing. All we want to do is send our customer our own invoice, in the format we want. Simple. Totally resent being blackmailed into registering with a company whose system is complicated and just not needed or wanted. Grrrr …

It’s evident from reading the comment thread that many suppliers simply add on the Ariba transaction cost to their bills, so that the customer ends up paying it anyway. Several complain that it’s also an unnecessarily complex and clunky system that isn’t worth the fees that are charged. Of course Ariba will counter that it offers other benefits such as visibility into new business opportunities, the ability to track receivables and the opportunity in some cases to negotiate early payment. But that value is only relevant to those suppliers that need or want to take advantage of it.

Changing expectations

Meanwhile, technology moves on — perhaps less rapidly than we would like, but gradually, leaner competitors arrive on the scene. Last week, enterprise software analyst Cindy Jutras summed up the history as background to her commentary on Infor’s acquisition of GT Nexus:

Back then [in 2002] ‘trading exchanges’ weren’t much more than online dating sites for buyers and sellers, and very few offered value-added services like trade financing, logistics, electronic payment and settlement. Connecting these functions back to your ERP was difficult at best. Internet procurement was in its infancy. Most companies were still struggling with all the non-standard versions of ‘standardized’ EDI. And the smart phone and other mobile devices (apart from the cell phone) had yet to be invented, so most of us couldn’t even dream of being as ‘connected’ as we are today.

So yes, we have come a very long way. But through that progression, our expectations have also risen. We no longer simply ‘outsource’. We participate in a networked economy and we look to the cloud to keep us all connected. We also deal in a much more global economy, including emerging economies in countries that were hardly industrialized a short decade ago. The speed of business, as well as the speed of change has accelerated beyond anyone’s expectations.

Talking up value add

The question of fees and costs in the GT Nexus network was one that I raised with Infor CEO Charles Phillips when we spoke by phone last week about the acquisition. He emphasized the low cost of technology implementation compared to other solutions, noting that the core GT Nexus customer base of fashion and apparel businesses were highly cost-sensitive. But when it came to transaction fees, he talked up the network’s value-add compared to the competition:

All participants pay something to fund the network. It depends on their position. They all participate and they all get value out of it.

Suppliers are much more likely to see value in this network because we also supply financing. If a buyer orders from a supplier and they decide they want to get paid early, the network takes care of that. If the supplier wants to factor some of their receivables, the buyer can say, ‘I’ll pay some of that early and arrange that financing.’

Paying and financing on the network is based on actual payment and so the finance aspect here is very valuable and doesn’t exist on most of the networks.

While finance is a strength of the GT Nexus proposition, stemming from its acquisition of Tradecard in 2013, it will need to keep investing in other aspects of its value add to ensure it remains competitive. As Cindy Jutras points out in her commentary, the expectations of buyers and sellers are evolving and becoming more demanding day by day.

Meanwhile, many of the players in the supply chain and procurement space are continuing to bulk up their capabilities. In addition to the headline-grabbing Infor acquisition of GT Nexus, another transaction announced last week was Tradeshift’s purchase of product information management provider Merchantry for $30 million in cash and stock.

My take

I noted earlier this summer that the whole category of spend management has been something of a backwater of enterprise software. It’s a category that’s overdue for transformation, and we are now beginning to see signs of that overhaul beginning to gain momentum across several dimensions:

  1. More digitally streamlined processes to cut cycle times and reduce administration
  2. Lower network participation costs that reflect the reduced operating costs of more efficient digital processes
  3. Increased convergence of finance provision within the network
  4. Network providers making money from offering optional added-value services and applications alongside the network rather than from access or transaction fees alone
  5. Increased competition from digital newcomers emerging in specific industries

In that emerging environment, I’m convinced it’s going to be difficult to continue to charge flat-fate percentage transaction fees that aren’t directly related to specific value-added services being delivered and actually used.

Disclosure: Infor and SAP (which owns Ariba) are diginomica premier partners. Coupa is a diginomica partner and paid the author’s travel expenses to attend Inspire 2015.

Image credit: Business man jumping for golden dollar sign on fishing rod © Tsung-Lin Wu – Fotolia.com.

    Comments are closed.

    1. says:

      Thanks for the mention.  I think it is important to note that the “take rate” can come from either buyers, or suppliers or both.  Networks that do not charge one side, just tend to charge the other side a bit more (or try to).  The key is for the network/marketplace to keep the value proposition for each side in line with its fees for each side.

      1. Phil Wainewright says:

        Thanks for the clarification Bob. I found the chart in your blog post on take rates for B2B marketplaces was very helpful in breaking out the different types of value add and the going rates for each:

        http://www.softwareplatform.net/2015/08/06/take-rates-for-b2b-marketplaces/

        I think the practice that bothers me most is one that forces suppliers to pay a fee simply because their customer has adopted a specific platform. This is in effect a hidden subsidy of the price the buyer pays for the service, and thus doesn’t allow the buyer to make a true assessment of the value delivered (because they do not see the full price being paid by the ecosystem – which may end up being charged back to them anyway). 

        I’m all in favor of people paying a fair price for value received but they should be able to make that choice freely and not be coerced into it.