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It’s all about Networking.  You read about it everywhere.  Looking for a job?  Network.  Want to meet people?  Network.  Energy grid, Facebook, mobile phones, gaming—it’s all about the network.  And then there’s the Supplier Network or more generally the Business Network, a nascent but promising form of collaborative connection of enterprises that may completely alter the way we do business in the coming years.  Will you be ready for it?  Or even more basically, what lies ahead for Business Networks?  The answer to the future, as we will see, can come from looking into the past.

A Business Network is a group of interconnected companies with common interests, is mutually beneficial for the collaborating parties, and can achieve joint results that the companies might not be able to achieve individually.  Participants may exchange ideas and information, find opportunities that they would not otherwise been aware of, discover more optimal suppliers for procuring, support mutual goals, and perform business and financial transactions.  An electronic Business Network facilitates all this by providing a virtual network, and allowing companies from around the world to participate instantaneously, efficiently and securely.

But what is the future for Business Networks?  In an Aberdeen Group study in March 2012, 43% of European companies surveyed and 66% of North American companies rate Business Networks as either Critical or Very Important.  In the same study, companies indicated that the percent of suppliers identified on the network is 34% currently, and the percent planned for the next year is 40%.  Similarly, Forrester Research data shows a 17% growth in Supplier Networks in 2010, and 22% growth in 2011.  Furthermore, in their Market Overview of ePurchasing and Contract Lifecycle Management 2012, Forrester pinpoints four forces that are keeping supplier networks dynamic and competitive: cloud, vertical focus, “smart computing”, and increased value of networks driven by the exchange of business documents such as PO’s and Invoices.

An intriguing question is to ask whether there is tangible evidence that the Business Network concept will succeed as projected above.  Is this hype, or the real thing?  Undoubtedly, there are many factors will that affect the success or failure of Business Networks, but three that stands out are

  • Critical mass of business partners
  • Concrete benefits for the collaborating companies (primarily buyers and suppliers)
  • Acceptable pricing structure

We are currently at a churning point, with different networks striving for critical mass, trying to ensure a mutually beneficial experience, and offering various pricing options.  To look into the future of Business Networks, I offer you a look into the past.  It is here where I will paraphrase a famous movie quote and let you know that I have just one word for you—plastic.

The credit card had a humble beginning.  Rewind the clock some 60 years ago, and we find a businessman having dinner at a swanky restaurant when to his dismay he realizes that he forgot his wallet.  He resourcefully pulls out his business card, signs it, and creates an IOU.  Now what if—the famous “what if” question that entrepreneurs seem to always ask themselves—there were a way to create an IOU card for diners that would be accepted at different restaurants?  Yes, a many-to-many mutually beneficial network.  This was a novel idea, because there were already some merchant-specific cards available, primarily from gasoline companies to fuel America’s 1950’s passion for, well, fuel.  From this kernel of an idea came the Diners Club card, the first independent credit card.  Bank of America would later catapult this idea and expand from a network of restaurant industry specific merchants to create a card network that would be accepted by many different merchants worldwide.  Underestimating the reach of a credit card network, Bank of America gave the card a rather geographically-limiting name “BankAmerica” card, which would later be changed to the more internationally acceptable term “Visa”.

Attaining critical mass became not only a goal for a successful network, but also an accelerator.  The credit card started as merchant-specific, expanded to business specific, and now encompasses a world-wide, cross-industry network.  As the network grows, so also does its value proposition and convenience.  The history of Business Networks has many parallels to the credit card industry.  As enterprise-level marketplace applications and networks began to form in the late 1990’s and early 2000’s, we saw a number of industry-specific networks.  This was soon followed by consolidated networks, and now truly global, cross-industry networks are emerging.

Providing concrete benefits is also evident in the history of credit cards. No doubt a credit card is mutually beneficial to both the customer (buyer) and the merchants (seller).  The customer has the convenience of not having to be limited by his cash on hand, and can transact virtually without exchanging hard currencies.  The merchant is assured a secure financial transaction (if the customer defaults, the 3rd party financial institution still pays), and has reduced expenses of not having to process checks and cash.  Both parties may end up doing more business, receive more desired goods and services for the customer, and generate more revenue for the merchant, than if there were no credit cards involved.  In many ways, a Business Network can also provide these same benefits at the enterprise level.

But here’s the rub: who pays?  Perhaps the most interesting and controversial parallel between Business Networks and credit cards is the pricing / value model.  Different credit card models have been tried, and the test-of-time model is one where the merchant pays in the form of both a “commission” fee based on the value of each transaction, as well as an “interchange rate” which is a cost per transaction.  If the customer pays in full and does not carry a credit, there is generally no fee for the customer.  This is not unlike eBay, which charges the merchant /seller a listing fee plus a value-based transaction fee.  An eBay customer/buyer pays no additional fees.  Newspaper ads, Amazon, Craigslist (for certain job-related postings)—they all effectively charge the supplier-side only, just like credit cards.  To look at just one Business Network example, the Ariba Network also utilizes a supplier-side pricing model.  No doubt there will be some level of resistance to any type of margin-reducing fees, but in example after example, many supply-side merchants have accepted or at least acquiesced to this type of pricing model.

 

So when we gaze into the crystal ball for answers to our questions about the future path for Business Networks, it might help to examine the impact of the plastic card in your wallet.  In many ways, the future of Business Networks is already written, and you might very well be sitting on it.

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14 Comments

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    1. David Wong Post author

      Thanks for your comment (and thanks for reading)!  The analogy came from a session and a conversation I had with Ariba at the SIG Innovation Forum on 9/6/12.  Once again, it’s all about networking.

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  1. Tridip Chakraborthy

    Hi David, David Wong

    After quite a while on the SAP Procurement side of blogs and grafitti, i am refreshed with this new post of yours prior to the earlier one you did on the Dutch Auctions. Its great to see how you connected the concepts that we use in routine life that resonate with enterprise terminology like Crowd-sourcing, Network approach and more known Jargons.

    Here is my POV on some of the nuances of the Network based approach

    1) If there is a percentage of the spend that needs to be compensated for hooking to the network, that has to be evenly cut out b/w the Buy and the sell side, most times, suppliers are the easy bait for pressing and accommodating any cost in the equation, as they consider, all these aspects as logistics that help them be a supplier of choice and Business continuity with the customer. Only in situations, where the Supplier from an economy of scale is huge compared to the Customer, there could be friction

    2) Trying to convince already established customers that are currently on a Point to Point comminucation framework to switch into a Network based approach is going to be a challenge

    3) Trying to fit a Hybrid model of marrying the Network model with the already running Point to Point communication would be rated complex and de-duplication from a process and interface stand-point

    4) User Adoption for the Buy and Sell side is also a big influence for choosing the network based approach unless the transition is seamless and uncanny

    But, as a forward thinker, I have been constantly guiding the customers to graduate to the Network Based approach (both B2B and P2P networks) than to lie low on the Point to Point approach using a middleware and a custom/enterprise Supplier Self Services Portal for Order and Invoice Collaboration to start off with, then graduate to Catalogs and Real-time Analytics on the go.

    Future…

    Really excited, how the top 2000 Global companies that spend 12 Trillion Spend today, going through an SAP application take the spend into the Cloud via the Ariba Supplier Network, when the acquisition goes through, will be a game-changer for the way Procurement looks at the Cloud and the Business Network based approach.

    Note: ASN being the largest cloud procurement engine houses only 319 Bn of that 12 Trillion spend that we were referring to.

    …..and your blog is fresh and inspires one to relate with the Power of these networks with objects that we use in routine life

    Thanks for putting this out

    Cheers Tridip

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    1. David Wong Post author

      Wow, thanks for your in-depth comments to this blog.  You bring up excellent points that must be considered especially upon the closure of the Ariba acquisition.  Thanks!

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  2. Neetin Datar

    Great blog, David! Enjoyed it very much.

    You may know Amazon recently announced AmazonSupply, an e-commerce b2b business network that offers industrial supplies such as MRO items, fasteners and power tools etc. This has sent a few shivers down the industrial distributors’ spine, so to speak!

    IMHO, AmazonSupply is likely to raise the game for all industrial distributors. I think these distributors can still win as price isn’t everything. MRO requirements are complex in nature and distributors will have to deliver on rich multi-channel sales experience, technical knowledge of salesperson stationed right at their customers work sites, same day delivery and not the least seamless integration with customers’ backend systems.

    As you said, business networks are the future but it will have to be complemented by superior domain specific service. With the Ariba Network coming our way via our acquisition it will be great to watch this co-opetition unfold between us and Amazon!

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    1. Tridip Chakraborthy

      Thanks for the clarifications and insights into the AmazonSupply network Neetin Datar

      I was just about to ask you experts, about how that fits the bill, but dont know, how you read my mind via the 6th Sense route 🙂

      This was indeed great information and thanks for posting it right on David’s blog on SCN

      Future, indeed is interesting to see where the game takes its course

      Cheers

      Tridip

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    2. David Wong Post author

      Hi Neetin,

      Great observation.  Looks like the jury is still out with AmazonSupply, but we should keep a sharp eye out on them.  You also bring up an important point regarding services (rich multi-channel sales experience, technical knowledge of salesperson stationed right at their customers work sites, same day delivery) and backend integration, all of which is required in combination with the network itself to ensure competitive differentiation, optimal value, and mutual success.

      Thanks!

      David

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  3. Steven Kim

    Very interesting blog, David!    I like the credit card analogy and Amazon comparison.    With Ariba Network coming to our way, it is very exciting time at SAP.   I expect to see a new wave of network based services, leveraging the network, big data and mobile.  Hopefully, those value added services will be so beneficial to network participants and they will not even think about the fees they pay to participate in the Network.    Just like how we think about credit card fees today.

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    1. David Wong Post author

      Hi Steven,

      Thanks your blog comments.  In less than one business day after you posted your comment above, the Ariba deal was finalized and announced.  Let the excitement begin!

      David

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      1. Tridip Chakraborthy

        Hi David Wong Steven Kim

        I think you should on-board twitter as a vehicle to help promote these great thought leadership content on Social Media.

        I have cross-posted you blog on twitter and there are several track-backs

        Pls give it a thought, as there is great potential discussing the future stories around the Network approach at breadth

        Carolyn Beal and I can help set you up

        Cheers

        Tridip

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  4. Jagamohan Padhy

    Nice blog David!! I liked the concept of credit card and you have beautifully described networking… Now that Ariba is also an SAP company.. Really interesting to see things a head…..

    Once again really appreciate the narrative 

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