In the world of nature, an ecosystem is made up of all the animals and plants in a particular area, and the way they relate to each other and to their environment. It comes from the word ecology, which The Cary Institute of Ecosystem Studies in Millbrook, N.Y., defines at a deeper level. To the institute, it’s “the scientific study of the processes influencing the distribution and abundance of organisms, the interactions among organisms, and the interactions between organisms, and the transformation and flux of energy and matter.”
There’s an ecosystem in the business world, too. It’s called a network. According to a recent study by Boston-based Ardent Partners, business networks are at the core of a paradigm shift in the way trading partners communicate, transact and collaborate. More companies are using business networks more frequently and achieving greater results, says Andrew Bartolini, chief research officer at Ardent Partners, and author of the study: “Selecting the Right Network: Collaboration and Networks for a New Economy.”
While more companies are using business networks more often, he warns that establishing a good network is not just plug and play.
“Not all networks are created equal,” he says. “While many offer compelling benefits, the focus, features and models of different networks can and do vary greatl,y making the selection of a network significantly more complex, but also significantly more important.”
The TCO Approach
Much of the complexity comes from the rapidly accelerating speed of business combined with shifting, expanding, merging and emerging markets in an interconnected global marketplace. The pressure to remain competitive can be excruciating. Ardent Partners, which focuses on supply management strategies, processes and technologies that drive business value and accelerate organization transformation, says the right network can be identified by using a total cost of ownership (TCO) approach.
TCO is a method to determine the value and cost of an investment. The approach, Bartolini says, “gained popularity in the 1990s among procurement and sourcing professionals. The idea is to move beyond looking solely at purchase price, and incorporate all costs associated with purchase and maintenance of the item or service over its lifecycle to calculate total cost.”
The best way to understand TCO is by looking at a case in which it wasn’t followed. Remember the Yugo? If you bought one, you do. In 1985, the Yugo looked like a value. Standard features and a list price thousands cheaper than most other cars. Sales grew rapidly. But, as often is said, if it seems too good to be true, it probably is.
Soon owners were complaining of engine failures, faulty transmissions, bad brakes, poor electrical systems and horrible dealer service. The total cost of ownership was significantly greater than the purchase price. Just a few years later, Yugos were no longer sold in the United States.
So, what do you do? Before analyzing the costs and benefits of a specific network, the first decision is determining what kind of network best meets the requirements of your organization.
“The overall growth of the network market has driven the emergence of a number of different types of networks that offer distinct value propositions,” Bartolini says. “Some of the questions that should be answered include: Is there a specific business process [or several] that must be supported? Is there an interest in conducting transactions with partners in a distinct region or vertical market? Are there technical requirements that must be met? Are there specific value-added capabilities that can benefit the business?”
The Ardent report focuses on six different network types, each with a specific target audience:
- Global business (B2B), focusing on sourcing, procurement, supply management and accounts payable operations within global enterprises, sales, marketing and finance.
- Payment, focusing on accounts payable departments.
- Data standards, focusing on supply chain.
- Industry, focusing on trading partners in one specific industry (oil and gas, energy, aerospace, retail, etc.)
- Category, focusing on trading partners in one specific category (MRO, contingent labor, logistics, etc.)
- Country/regional, focusing on trading partners in one country or region.
As the interest in business networks grows, competition in the arena is growing along with it, so Ardent predicts that different networks adopt different strategies and develop different capabilities in an attempt to win market share. Along with the cost of choosing the right network, value generated from different offerings must be weighed in the final outcome. Ask these questions.
1. How many existing and active suppliers are in the network? It stands to reason that the bigger the network, the greater the percentage of an enterprise’s current suppliers is active on that network. That results in a reduction of time and effort to onboard suppliers. That’s a definite plus because it should drive more gains more quickly.
2. What is the geographic reach of the network? This is very important because some networks specialize in ensuring compliance with the unique trade policies and regulations of specific countries and regions. There also are global networks that manage these issues in most major trade regions in the world and show an ability to enable suppliers in the most remote places on the globe. Specific language support also is important.
3. What is the vertical focus or expertise of the network? In addition to driving high supplier match rates, networks that can aggregate supply markets, identify excess capacity, set industry standards and promote best practices add extra value. Based on their sheer size, the largest business networks often are able to develop this type of market depth and expertise while remaining horizontally focused.
4. What are the capabilities and information available to buyers and sellers? The easier the method of collaboration, the stronger its impact on supplier relationships and performance. Bartolini says that “collaboration between buyers and suppliers today is primary conducted via traditional methods, such as phone calls, emails and meetings. Networks, however, can enable a higher level of connectivity between trading partners, and can increase the time available for strategic interaction and communication by decreasing the time spend on tactical matters.”
In the same way that social networks impacted personal communication and interaction, the quality of communication can be improved by embedding it within a transaction, or around a specific network issue or opportunity.
5. What are the types of business processes and documents supported? Certain networks may specialize in one business, like vendor payments or a sub-process like managing inbound receipts. Other, more advanced business networks support and expand series of processes. “Those that focus on the source-to-settle process,” says Bartolini, “offer cloud-based and network solutions that include spend analysis, sourcing, contracts, procurement, supplier catalogs, supplier information management, master data management, invoice processing and payments.”
6. What is the network business model? Process automation can reduce transaction processing costs by up to 75 percent and that benefit alone can justify the business case for network adoption. However, there are different models that must be evaluated. Some networks, for example, charge subscription fees for network access that are either direct charges for the network or bundled in with the cost of using any on-ramp applications, while others take a volume-based approach to fees, charging buyers and often suppliers based upon the number of documents, transactions and catalogs, or the dollar value of the transactions processed over the network. Some networks take a hybrid approach, charging both for access and some level of transactions. Others view one side of the transaction as their core group of customers, and may only charge buyers or use a supplier-funded model, while others charge fees from both groups.
7. What associated services are offered? Beyond a network’s core services, it—or third-party providers—may also offer services to enhance network value, including public auction and public catalog functionality, or supplier enablement services to receivables factoring and search-based advertising.
8. What are its related technologies or solutions? Enterprises need on-ramps to access networks, and most of the business networks provide it by selling software solutions that automate all or part of the source-to-settle process. As such, Bartolini suggests, a decision on selecting a business network often is part of a larger technology decision. “The reality is that there can be significant differences in the types and quality of solutions offered by network providers, and where the same solution footprints are offered, there can be great variance in the available features and functionality. A powerful network experience can be eroded if the software used to access it is below grade.”
9. What are its integration capabilities? Different networks have different approaches and experience with integration to other systems. While pre-built adapters and streamlined integrations can be seen as a benefit, integration capabilities—or lack of them—can create significant costs.
Using TCO to Select a Network
Ardent’s study indicates that an investment in a network is a very strategic decision that can have an impact on operations and results for many years. “It warrants a detailed analysis that incorporates the value derived from the network, such as expected benefits, incremental benefits and costs savings, as well as the initial and ongoing costs of accessing and using the network,” Bartolini says. Ardent breaks the format into value factors and cost factors, both from the buyer and seller perspectives.
Value factors include:
- Efficiency and effectiveness gains (the cost savings generated from increased process automation, improved visibility and resulting better decisions).
- Network characteristics (differentiators and the value they can generate, including number of existing and active suppliers, geographical reach, focus and expertise, partner ecosystem, capabilities, and information available to buyers and sellers, and more).
- Internal stakeholder value (the value of network participation can easily extend beyond procurement and accounts payable to include finance, treasury, information technology (IT), risk management, sales and more).
- Supplier value (which extends to several constituencies within the supplier organization, including finance, accounts receivable, supply chain and order management. They can leverage process automation to lower costs and improve performance).
Cost factors include:
- Network (buy side) access (the costs for a buying organization to gain access to a network include network license or subscription fees, IT and other integration costs, and training.)
- Network (buy side) ongoing usage (any buyer fees associated with maintenance, support and transaction or volume-based usage fees).
- Network access and ongoing usage (these are suppliers’ direct costs, and can vary by network and tied to access or volume-based usage. Some networks have no direct supplier charges.)
- Network access and ongoing usage indirect costs (including resources dedicated to enablement, training, and ongoing access and network usage.)
- Opportunity costs (a very real cost that is often overlooked and most significant in fast-growth and innovative industries like business-to-business networks).
As network providers continue to advance, grow and deliver new services, the factors involved in selecting the right network are expanding. These include current offerings and capabilities, complementary support and services, and many other cost and/or pricing options. Many enterprises assume that the value generated by all networks is equivalent, and fail to examine and analyze them beyond their initial start-up and usage costs.
“The selection of a business network is a strategic decision, and one that should be based on total value and cost, not simply price,” Bartolini sums up. “There are many factors and variables that go into the selection. By ignoring the benefits of a network’s unique characteristics, they fail to incorporate operational and financial factors that should influence their network selection. To avoid these mistakes, Ardent Partners strongly urges enterprises to use the TOC framework to ensure that the right network is selected.”