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Supplier networks now offer buyers and sellers more than just a matchmaking opportunity.
David Rosenbaum, CFO Magazine
November 1, 2011
Founded in 1933 to make rubber stamps, MarkMaster is today the world's largest "custom marking" company, according to its website. How much demand remains for its original product? Plenty. "We make between 10,000 and 12,000 rubber stamps every day," says MarkMaster CEO Kevin Govin.
Still, selling ink pads and stamps with messages like PAID or DENIED hasn't been easy in the digital era. "It used to be when a bank opened, it would order $2,500 worth of rubber stamps. Now, due to fewer paper checks and envelopes, it's $250," says Govin. "I even pay my own bills online. I'm shooting myself in the foot, I guess."
MarkMaster has adapted to modern times in two principal ways: by diversifying its product line and by enlarging its pool of buyers. It did the latter by joining Ariba Discovery, a network that matches business buyers and sellers (and charges a fee for the service).
"We've grown 10% to 20%, compounded, for the last 10 to 11 years since getting on the Ariba system," Govin notes. "Someone says, 'We need to order 10,000 name badges,' and they see us on the Ariba network. Our banner business is booming. The purchaser that used to go to Thomas Register [once a paper catalog, today an online discovery platform] now goes online."
As does just about everybody these days. Like many suppliers, MarkMaster joined a supplier network to get itself in front of as many buyers as possible. Buyers, meanwhile, typically use such networks "to improve communications with suppliers," says Constantine Limberakis, senior research analyst at Aberdeen Group.
Metrics Beyond Matchmaking
Matchmaking is only one function that supplier networks perform, and for some companies it may not be the most important one.
For example, companies can use networks to rein in ad-hoc buying by employees from unapproved vendors and improve their so-called spend-under-management. "Our studies find the percentage of spend captured by companies using supplier networks is 75% as opposed to 63% by companies not using them," says Limberakis. "That means there's less maverick spending at firms using supplier networks for procurement." (Ariba CMO Tim Minahan points out that nothing can be approved for purchase on the Ariba network without being run against built-in business rules.)
Limberakis says supplier networks can also lower a company's "cost of poor quality," the expense associated with purchasing subpar stuff. That cost is 7% for companies using networks, says Aberdeen, versus 10% for other companies. Still another metric improved by networks is on-time delivery: 77% for companies that use them, 69% for companies that don't.
Minahan believes his network's greatest value lies in its ability to create a web of business partnerships. On the network, he says, "you can see a supplier's capabilities and its reputation. We've partnered with Dun & Bradstreet to make financial-risk scores available on Ariba Discovery. Now you can say 'a supplier is financially sound, let's do business.'"
One Network or Several?
According to Metcalfe's Law, the value of a network is proportional to the square of the number of connected users of the system: more users, greater value. That's why Ariba, which a recent Forrester Research study identified as the network with "the most complete range of functionality and the best user experience," boasts of the many nodes on its network: close to 700,000 companies doing $200 billion in transactions for the 12 months ending Nov.1, 2011.
But no one supplier network can cover the whole business world, cautions Forrester analyst Duncan Jones, the author of the study. "I ask my kids why they use Facebook," he says. "They say, 'You have to or you won't know about all the parties going on.' If you're a supplier, you want to know about all the parties. But in the business world, there's never going to be one dominant player like Facebook. It's no good just to be on Ariba and miss out on all the other parties. If you're simply looking for suppliers, why pay a fee to Ariba? Why not just use Google?"
Ariba's main competitors are the big ERP providers — Oracle E-Business Suite and Hubwoo, based on SAP's platform — and Basware, a supplier network that Forrester scored highly for "its broad category support and its supplier enablement and integration capability." Unlike Ariba, Basware is an open network. "We partner with over 120 different networks," says Robert Cohen, Basware vice president for North America. "We think that's the only sustainable model. We're not trying to connect organizations to our network; we connect them if they're connected to any network."
The payoff for Basware's 320,000 companies and one million users, says Cohen, is the visibility companies get into working capital. Without that visibility, "when a commitment is made to buy something, finance doesn't find out until the invoice is received," he points out. And if the invoice is triggered without a purchase order, "you have very little choice on how or when to pay it, so you're losing the chance at early-payment-discount terms. Maybe you're even subject to late fees by the time the invoice gets to you." By automating these processes and improving collaboration between buyers and suppliers, "both sides can better manage cash flow," says Cohen.
Basware's advantage as an open-network provider won't last forever, as Ariba and other networks increasingly move to the cloud, thereby facilitating greater interoperability between networks. (Indeed, Ariba is strongly pitching its Commerce Cloud to SAP users.)
The Network Ahead
If the variety of supplier networks makes it difficult to choose one, it also makes it expensive to go to "all the parties." Ultimately, Aberdeen's Limberakis sees an "oligarchy of networks" emerging, where a small number of providers dominate.
Minahan of Ariba says "productivity improvement through community" is the future of supplier networks. "Tomorrow, Ariba's competition will be Facebook, Groupon, eBay, and Amazon," he predicts.
Until supplier networks become a commodity, it's up to individual CFOs to figure out where a network's ROI lies for their organization, says Limberakis. But they'd better not take too long. Last summer, the U.S. Department of Treasury announced that by 2013, any vendor submitting an invoice to Treasury will have to use the Internet Payment Platform. One can foresee a time when being on a network will be a requisite for conducting business anytime, anywhere, with anyone.
In other words, if an organization doesn't belong to a supplier network, it will be increasingly difficult for it to go to the party, let alone find a date.
David Rosenbaum is senior editor for technology at CFO.
Paperless? Not So Fast
For many companies, procurement still leaves a paper trail.
A recent electronic-invoicing study by The Institute of Financial Operations found that a little more than half of the companies surveyed (58% of those with annual revenues ranging from under $500 million to $1 billion) had the ability to receive and process e-invoices, and only 25% could send them. Forty percent sent invoices via e-mail, by far the most popular format. E-mails are received as unstructured data that has to be printed out and either scanned or manually entered into the buyer's system.
So even with all those customers transacting on Ariba and Basware; or OB10, which focuses on automating invoicing; or Ketera, which offers buyers tools for spend analytics and suppliers the option to publish catalogs; or Perfect Commerce, which offers applications to control spending (not to mention Oracle's and SAP's networks), the vast majority of small-to-midsize businesses are still using manual processes. — D.R.