For those of you considering an e-sourcing implementation project, there are a number of alternatives for you to consider that have varying degrees of performance risk, up-front investment, and assignment of cost and revenue to the buying organization, suppliers, and the software provider.
Over the years I have had many discussions with public and private sector organizations about ways to fund an e-sourcing program. As a company focused on providing good software, we leave the funding source up to our clients. However, for those of you considering an e-sourcing implementation project, there are a number of alternatives for you to consider that have varying degrees of performance risk, up-front investment, and assignment of cost and revenue to the buying organization, suppliers, and the software provider.
The major funding alternatives that we discuss in this article are:
- Buyer Funded
- Buyer Funded – Collective
- Supplier Funded – Subscription
- Supplier Funded – Success Fee
- Supplier Funded – Transaction Fee
As you consider these different alternatives, consider the implications of your decision on your e-sourcing project:
How much market leverage does the buying organization have?
Will the choice reduce or increase supplier competition?
What administrative resources will be required to collect fees?
Will my choice impact the time for implementation?
What is the risk that my funding choice could reduce the probability of successful implementation?
If I choose to share the implementation with other organization, how will this impact the project objectives because of the need for consensus?
If you are the buying organization and you can make the business case for internal funding, this is the easiest approach to implement without having to make the case to your suppliers. In particular where your goal is to increase your supplier database and/or to avoid putting up any barriers to competition, as in the case of a supplier diversity program, this is your best alternative.
Buyer Funded – Collective
If you can find a group of other organizations that are buying the same supplies and services, you can not only share the cost of a sourcing platform but leverage the collective buying power to generate participation from relevant suppliers. This is almost entirely a public sector approach.
Supplier Funded – Subscription
A monthly or annual supplier subscription fee can be used as a funding source. The key to success is matching the cost to a value received. Suppliers will resist unless they have a clear value proposition; there must be sufficient, relevant bid opportunities compared to the cost. Suppliers may initially participate but will not renew if they do not see enough business opportunities for their business.
Supplier Funded – Success Fee
In this model, fees are paid by suppliers that are awarded contracts, either as a percentage of the contract value or spend, flat fee, or combination. In this his model, suppliers can participate in sourcing events at no cost, avoiding the initial barrier to participation that comes with a subscription model. There is a significant administrative overhead in collecting fees from awarded vendors, particularly if the success fee if based on contract spend information that must be collected and then invoices generated periodically based on the spend.
Supplier Funded – Other Transaction Fee
We have seen many other transaction fee funding models, based on fees per sourcing event, file storage, sourcing document pages, or suppliers buying a capacity to submit a number of bids. These specialized funding mechanisms are typically matched to a specific market application, such as a “plan room” that may charge for posting sourcing documents, based on the number of pages in the bid package.
These individual alternatives can be combined to create a unique funding approach for your business to combine fixed and variable costs or to allocate costs between buyers and suppliers. We have worked with all of these approaches, and in some cases invested along the sponsors of an e-sourcing system.
We look forward to hearing about your ideas and experience in funding an e-sourcing project.