The network effect states that the value of a network grows exponentially as the number of participants in the network grows.  This hockey stick growth in value tends to give those that have early high growth a huge advantage, hence limiting the number of highly successful networks within a given arena or marketplace, often to just two or three. For example there are dozens of social networks but Facebook  dominates completely in personal networking and it appears LinkedIn is dominating in business networking.  Will the same thing happen in the case of supplier networks, where only two or three are successful? Probably not.

Different Networks, Different Purposes

One reason is that different networks serve different purposes. As you look across the lifecycle from source to pay, different networks are emerging:

• Supplier Discovery - Allows buyers to more easily discover suppliers that meet specific criteria (e.g., capabilities, location, certifications, etc.) and quickly onboard them.  Some providers include Aravo, Ariba, CVM, Elemica, Exostar, and Rearden Commerce/Ketera.

• Procurement Transactions - Enables buyers and suppliers to transact, sending purchase orders, confirmations, ASNs, invoices, etc. Transaction networks include Aravo, Rearden, Hubwoo, Exostar, Elemica, and others.

• Invoice and Payment - Enables electronic invoicing and payment. There are dozens of these networks, for example, OB10, Basware, Conexa, Cortex, Ariba, Rearden, Hubwoo, and Syncada.

• Financing - Connects lenders to buyers and suppliers to provide receivables financing and supply chain financing such as in-transit or pre-shipment financing. Providers include The Receivables Exchange, Ariba, PrimeRevenue, Orbian, and GSCF.

Some such as Ariba, Hubwoo, and Rearden span across most or all of the lifecycle functions. These have the advantage of automatically integrating information from one phase to feed the next (i.e., discovery/sourcing, procurement, and  payment).

Different Industries, Different Buyers, Different Networks

In some cases, we see networks such as Exostar in Aerospace and Defense or Cortex in Oil and Gas that focus on a specific industry. This is natural not only because industries may have very specific needs (e.g., very high security requirements in Aerospace and Defense), but because supplier-buyer relationships are clustered by industry.

Further, generally speaking, larger buyers decide which network they will use and then ask (or mandate) their suppliers to use that network. This means companies may participate in a few networks on their buy side, but many more on their sell side.

Functionality and Switching Costs

Finally, many of these networks are first and foremost solutions. In other words, while the size and makeup of the network is one factor companies consider when deciding which network to use, the overall functionality of the solution is usually a more important factor.  Implementing one of these systems can be non-trivial, especially when integration with other systems is required. Once implemented, companies are loath to switch. This is in contrast to other networks such as switching to a different social network or cell phone network. High switching costs dampen the network effect.

For all of these reasons, we will not see the consolidation of supplier networks down to just two or three successful ones.  Instead, we will see networks succeed along the lines of functional capabilities and industry concentrations.


                                                   The Outlook

2011 saw a lot of activity in supplier networks. In 2012 we will see even more, as other vendors throw their hat into the ring, existing networks add new capabilities, and everyone vies for more members and traffic.
 

Keywords: Supplier Relationship Management, Sourcing & Procurement Solutions, Technology, ChainLink Research, Supplier Diversity, Supplier Discovery, Supplier Solutions