I’ll admit, for quite a long time, I found the philosophical concept of typical group purchasing organizations or consortia to be somewhat flawed. After all, any entity or intermediary that makes its revenue from suppliers tied to the volume of business passing through its virtual storefront doesn’t quite seem incented to get the best possible deal for procurement organizations, now does it? Yet I’ve changed my tune on GPOs after looking at the numbers. Perhaps it’s my age or maybe it’s the fact that I now realize that most companies don’t have the time to devote to truly sourcing and managing a multitude of indirect categories. Regardless, something has changed my thinking and I have to believe that for the majority of companies, exploring the GPO/consortia possibility should be a logical component of any sourcing portfolio. Our latest Spend Matters Perspective Research report, GPOs and Buying Consortiums Must Be on the Radar for 2011-2012 explains the how, why, what and benefits (and risks) such models can bring. Authored by Spend Matters’ Sheena Moore and partner-firm Allianza’s Keven Grey, the study provides an essential foundation to understand this type of sourcing model.
Perhaps first it makes sense to consider what the heck such a model entails (and what’s in a name or label). Call the model consortium, co-op, aggregation group, collective, purchasing alliance, GPO (group purchasing organization), buying group, leveraged buying organization, leveraged procurement group, coalition or cooperative business group or what-have-you — the model is actually far from new. Purchasing consortiums have been around for a hundred years. The first American healthcare GPO was established in 1910. Today, consortiums cross many industries, from food and industrial manufacturing to legal services and nonprofits, and the last few years especially have seen an explosion in this type of model.
Today, the averaged-sized consortium participant is a company with roughly $750M in revenue, with 5,000 employees. From a category perspective (outside of healthcare), the most popular categories for consortium are office products, pharmacy benefits, MFDs/copiers and relocation services. For typical consortium participants, each of these categories typical yields savings ranging as high as 18% and as low as 9% (we cover the specifics in more detail in the paper itself). From an adoption perspective, our analysis suggests that 15-20% of the Fortune 1000 currently use buying consortiums and 85% of the time, they’re seeing 10%+ of savings in the categories in which they put through a consortium model.
But cost benefit is only one rationale to join. Consortium represent a form of quasi-outsourcing, insofar as sourcing, contract management, and supplier management are handled by a third-party that takes responsibility for the softer aspects of a vendor relationship management as well. This is a great model for some companies who can put trust in an intermediary. For others, it’s not.
No doubt, consortiums are not right for every organization. At the end of the paper, we suggest that top performing organizations ask and answer a lot of questions before diving in. Among the nine critical success factors we list for companies that successfully pursue the consortia model for part of their spend, we suggest:
- Thoroughly evaluate the track record of the consortium/coalition/cooperative
- Focusing on the categories where you are most interested in participating
- Fully reviewing each consortium’s process (for those under consideration) of sourcing/awarding/managing the supplier contract for the categories of interest • Get references from present members and contact them
If you want to learn more about the opportunity that consortium present across such categories as office products, MRO, uniforms, relocation services, temporary staffing, MFD’s, Rx benefits, teleconferencing, IT supplies and more, we have no doubt that our latest Spend Matters Perspective report will fill in many of the blanks you might have. Download GPOs and Buying Consortiums Must Be on the Radar for 2011-2012by clicking the link, above.