Closed or Open Networks – the choice is obvious!

Tuesday, May 26, 2015

4 minute read

Closed or Open Networks – the choice is obvious!

E-invoicing today is dominated by two network models; closed and open. So what is the difference and more importantly why should you care?

Let’s start by defining both network models and examining the pros and cons of each:

Closed Networks allow the buyer and seller to send or receive invoices electronically. This is without risk of data issues, compliance issues or fraud. The benefits are weighted towards the buyer who gains from the supplier only submitting 100% valid invoices, matched to their orders and with mandated tax information. Closed networks will enrich the invoice data to create the perfect invoice and therefore, the suppliers will need to use this new invoice as their tax record. Typically the supplier will pay to connect to the network and only be able to send invoices to other customers on the same closed network. If they sell to customers on other networks then they will need to set these up as additional connections. Slowly creating an overly complex billing process.

The closed network is great for bullying suppliers into ‘your way’ of doing business and paying for the privilege of having you as a customer. More importantly, the closed network provider takes ownership of your suppliers, removing the burden of post procurement relationships. So, what are the disadvantages of the closed network?

The closed network creates a hidden cost barrier between the buyer and supplier. The supplier will put up their indirect costs to support the higher cost of sale created by using a closed network. The buyer will not see the critical suppliers that move away from doing business with an expensive customer due to the provider taking control of the relationships. The link between poor payment and poor supplier management can become damaging to the buyers brand – e-invoicing should benefit the supplier and not just improve the buyer’s cash flow. The final impact is that the buyer loses visibility of their supply chain and costs.

Therefore, a closed network is like an exclusive club with members, guests, rules and privileges. If you want to talk with the members, you pay the club to do so but only as a guest. If you want to connect to someone outside of the club, then you’ll have to join yet another club. An alternative analogy, not liked by closed network providers, I might add, is for a supplier to pay and join multiple phone networks to talk to each of their customers.   

The two largest closed networks providers are Tungsten OB10 & SAP Ariba. Both have models that are on the outside beneficial to the buyer, whilst forcing the supplier to pick up the burden of change and all the costs. Unfortunately, for the buyer, the damage within the supply chain and to their brand is hidden.

So, Open Networks are like todays postal or mobile phone services. The Open Network providers make the connections between buyers and suppliers, they join the dots whilst looking after invoice content and quality - leaving the buyer and supplier to get on with doing good business. Open networks are just as secure as closed networks, they still act as gatekeepers for tax compliance and ensure the sender or receiver gets the invoice content they need to their finance systems. 

What most open networks don’t do is enrich the invoice - they will match content against PO and vendor data. But as with paper, if the sender gets it wrong, the receiver rejects the invoice. This ensures that everyone’s own system of record is correct. Importantly, both organisations now meet their own business controls from a tax perspective.  

The result of adopting an open network approach is quickly seen down the supply chain with faster on-boarding, closer collaboration and a relationship where pricing becomes keener. Whilst, both organisations can start to look at financing tools to optimise working capital. Some of the leading Open Networks providers are; GHX, UnifiedPost and of course Basware. 

As a buyer, why should you care if the network is closed or open? Quite simply, if you believe you can force every supplier to change how they do business and then they pay for the privilege; the closed network is for you. If you’d like to gain from a strengthened supply chain with optimised pricing and strong critical relationships regardless of how you do it – then open network is for you.

For the final word, before you buy into an e-invoicing network, pick up the phone and ask your credit control or receivables network what they think of closed networks! The answer may contain the following words; difficult, painful, hate them, worst customer, never again, oh no, costly……I think you get the picture!

As a buyer the choice is yours, closed shop or open for good business. As a supplier, get ahead of the game and use the sales advantage offered by open networks such as Basware.