Global Trade Management Software –Execution, Visibility, Compliance …and that Darn Tax Wedge

Global trade and free trade agreements – they’re hot topics today and they are responsible for tectonic shifts in various industries and the economic welfare of many. But they’re also topics that require ongoing management by today’s multinational companies and their trading, logistics, and finance partners. Luckily, there is a software application for that.

A quick primer as I embark on the update to ARC’s Global Trade Management Market Research Study

Trade Compliance
That darn tax wedge. I consider trade tariffs to be a form of taxes, and in this context they can have the same detrimental economic effects on the supply and demand of internationally traded goods. Namely, they increase costs that discourage supply (exports to a given country) and demand (imports by a given country). Not only are tariffs an additional cost imposed on internationally traded goods, but staying compliant with the regulations, duties, and tariffs burdens importers and exporters with additional overhead costs. Global trade management (GTM) software solutions help companies manage trade compliance costs like duties and tariffs, and regulations such as restricted party screening that are overhead costs and pose risks for regulatory fines by government entities. The management of these processes, requirements, and transactions is the role of what ARC categorizes as the Trade Compliance functionality of GTM solutions. Typically, large companies engaged in substantial volumes of international trade will make investments in a GTM solution for trade compliance issues. The tariff and clerical burdens, along with non-compliance risks, are substantial enough to deliver a meaningful ROI from the implementation and use of GTM software. Meanwhile, smaller companies will either adopt a SaaS subscription to the GTM functionality they require, or often they will outsource much of the compliance responsibility to customs brokers or other 3PLs that are set-up to handle import/export processes for clients. And establishing a robust GTM system is a significant part of what the customs brokers do to set-up their trade compliance capabilities. This is a reason why ARC estimates that logistics service providers are such a large market segment for GTM sales (see ARC’s Global Trade Management Market Study).

Trade regulation complexity and tariff and duty burdens are an important contributor to GTM software sales. But there are several additional factors, including trade volume, that contribute to GTM software adoption. An increase in volume leads to an increase in clerical burdens and trade tariffs, all else equal. Increased trade volumes also contribute to demand for GTM solutions that provide what ARC categorizes as International Trade Visibility and Trade Execution functionality.

International Trade Visibility and Execution
International trade is complex and involves multiple parties. The lead times and large number of parties involved from purchase to delivery make these trade flows difficult to monitor and manage. Trade visibility solutions provide geographically dispersed trading partners with the ability to collaborate, monitor, and manage the steps within the procurement, production, and delivery processes and to make timely adjustments that are required to meet their business plans. The software functionality is typically (always?) delivered through a SaaS model and these solutions are often referred to as supply chain networks or global trade platforms. Adoption of these solutions is driven not only by trade volumes, but also by supply chain and product complexity, heterogeneity of materials and parts, and the degree of outsourcing within the supply chain. Event management capabilities that alert interested parties of key events in the supply chain is central to the value offered. These events include production volumes or lot completions, stages of production, delivery status, product location, and payment and billing status. For example, automotive supply chains are heavy users of these solutions due to the heterogeneity and cost of the parts and the complexity of the supply chains. Trade visibility solutions are among the best enterprise software applications for the cloud, as the connectivity delivered and network effect from increasing numbers of users is a primary determinant of the solution’s ability to deliver value. Although most enterprise software markets are experiencing consolidation, I believe that trade visibility solutions are especially well-suited for consolidation because the value of the solution increases with the number of users and degree of standardization.

Standardization is also a desired characteristic of International Trade Execution solutions. INTTRA, backed by a consortium of the largest ocean carriers, is a prime example of a trade execution solution for ocean freight shipping. Similarly, Champ Cargosystems provides an execution platform for the air cargo community. I believe that trade volumes are a primary contributing factor in the changing demand for International Trade Execution systems. These systems are closely linked to transaction volumes and the facilitation of those transactions.

Next on my GTM research to-do list:

  • Conduct a review and analysis of the WTO trade trends and forecasts and other publicly available information on global trade volumes
  • Review growth rates of publicly traded GTM software providers
  • Speak with public and privately-held GTM software providers
  • Learn about how GTM end-users perceive the relative value of the numerous features and functions offered by GTM solutions and the reasons for their recent buying decisions.

**If your company recently purchased or subscribed to global trade management software, please let me know (creiser@arcweb.com) about the factors that motivated your investment decision. Your input will be used only as context for our analysis of the market.