The services spend space is unique in several ways compared to goods spend. One of the primary differences is the use of a “supplier-funded” approach to pay for the deployment of a spend management solution.
If you’re not familiar with the supplier-funded concept, it entails a service provider short-paying a supplier up to 3% on each invoice. It also requires that the service provider take over settlement responsibility for these transactions. For example, for a $100 invoice on a 3% supplier-funded model:
• The customer pays the service provider $100
• The service provider keeps $3
• The service provider pays the supplier $97
From a customer standpoint, it looks like the proverbial “free lunch.” The customer gets a services procurement solution without a significant investment. It seems cost-free to deploy, and a few suppliers, usually on the staffing side, accept this tariff as a cost of doing business.
But is it really the best approach?
For many non-staffing suppliers, especially smaller ones, this supplier “tax” is actually a large burden – a chunk of margin they cannot afford to lose. Some of those suppliers will eventually leave the program, or allow their rates to slowly creep up to recover margin. So the customer ends up footing the bill anyway.
Furthermore, once you get out of the typical staffing areas, like professional services, legal services, facilities, and so on, many of these suppliers will resist joining this program once they hear of the cost. Thus the supplier-funded model can actually hinder the customer’s ability to increase services spend under management, thereby stalling the program.
If a supplier is going to contribute to the funding of the program, the supplier has to see value from joining. The current approach of arbitrarily taking a cut from suppliers without any obvious benefit to them will continue to hinder enablement and adoption.
The bottom line: Ask your service provider what benefits suppliers are receiving from paying for this program. Also ask them what their plan is if you need a supplier that is, for one reason or another, unable to participate in this approach.
Next week: How the supplier-funded approach impacts customers....
-Henry Hwong
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