Author: Martin Kelly, CEO, INNOVO
Disruptive platforms like Apple, AirBnB and Uber have revolutionised B2C industries. Apple’s App Store is a platform which has opened up vast new horizons for software engineers to become App Developers. In 2015, there were 1.4 million Apps on the Apple platform which had cumulatively generated $25 billion for App Developers.
The Platform Business Model has now arrived in B2B markets and it expands procurement horizons enormously. It revolutionises the reach and the bottom line impact that the procurement function can make for the organisation it serves. The Platform Business Model enables professional buyers to reach far beyond the conventional ‘procurement box’ of negotiation limited to their direct suppliers. Now Buyers can interact with the whole Platform ecosystem encompassing all goods and services which automatically generates value. Buyers and Suppliers use the free Platform to create and share savings – and make a difference.
From Downsizing/Outsourcing to the Resource Expansion of the Procurement Function
All too often in the past, the procurement function has been downsized or even outsourced. It has often been perceived by senior management as just a necessary administrative overhead rather than a substantial source of real value-add for the organisation. The Platform Business Model yields new, real savings which are paid by the Platform to the Buyer’s organisation proving in monetary terms the new value created by the procurement function. The scale of the savings actually paid provides new commercial return on investment to motivate senior management to expand the procurement function. The Platform Business Model provides a direct financial correlation between procurement resources and the level new savings it generates from the Platform ecosystem.
How Does the Platform Unlock New Savings
Traditional business has two very costly areas of waste for the Supplier:
- Conventional sales and marketing activities to win new customers suffer from conversion rates of only 1% - 5%. Suppliers don’t know when a new customer is in the market to buy so 95% to 99% of their sales and marketing approaches are at the wrong time and wasted.
- These very high selling costs also leave the supplier with wasted spare capacity that is too expensive to sell.
Suppliers have to price in both of these costs. Wasted selling costs can account between 5% and 20% of the selling price. In addition to this, Suppliers would be able to offer lower prices to new customers buying wasted spare capacity. Most Suppliers are only too painfully aware of these two very substantial costs. Most Buyers are much less aware of these costs because they are priced in and because the Buyer can only buy what the Buyer needs. A single Buyer on its own cannot usually make a big impact on a Supplier's wasted spare capacity.
The Platform enables Buyers to make it easier for Suppliers to sell to them in return for a share of the savings arising at the Supplier in wasted selling costs. Additionally, Buyers can procure wasted spare capacity at lower prices. As more and more Buyers progressively buy up all of the Supplier’s wasted spare capacity, the Platform enables them all to share in the savings from collectively buying through the Platform. The Platform’s ecosystem acts like a consortium without being a consortium.
Average savings being offered through the Platform are typically 6% for saving wasted selling costs plus 9% for saving wasted capacity, i.e. 15% in total. The Platform collects these savings from the Supplier and shares them with the Buyer, introducers, the Platform and good causes.
The expanded Procurement function can generate further savings by encouraging their direct Suppliers to seek savings themselves from their own Suppliers.
The Platform Revolution is expanding procurement horizons in the same way that the Internet Revolution did. However, the Platform Business Model actually goes further, paying real cash savings providing measurable return on investment on substantially expanded procurement functions.