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5 Reasons Why Consortia Buying is a Poor Solution for Indirects

Posted by Tom Lawrence on Thu, Sep 08, 2011 @ 05:11 AM
  
  
  
  
  
Tom Lawrence - Proxima

I thought I would briefly share some thoughts around limitations and pitfalls of consortia buying for Indirect (i.e. Non-Core / GNFR) Categories.

In almost every instance that we have encountered consortia deals, with the exception of small-to-medium enterprises, a better commercial deal and service levels are achieved by contracting direct with the supplier. 

Common reasons for their failure include:

  • Consortia create a confused contractual relationship, with poor supplier service often the result as suppliers are unsure who the end customer is.
  • There is invariably a great difference in the size of the spend of the members.  If one of the largest members decides to change supplier (e.g. due to a merger, or a major service issue) then all other members of the consortium will be effected.
  • Rebates often are introduced into the relationship, as a percentage of the turnover through the consortia, which gets paid to the organiser of the consortia.  This means that they have a strong incentive to encourage expenditure through the group, regardless of whether it is a competitive solution to the members.
  • Service levels vary from organisation to organisation, even in the simplest areas like stationery.  One organisation will have one site, with a single delivery point, whilst another will have multiple sites with delivery to the desk.  The commercial implications of these varying needs are great.
  • As aggregation can force an organisation to restrict their requirements in the market to a limited predefined scope, business units are often non-compliant as they go elsewhere to have their needs serviced.

Where consortia deals can work is in highly commoditised areas of spend (typically therefore in direct categories such as steel, cotton, etc.) where the item being purchased has material economies of scale, is easily and precisely specified and that specification has limited or no variation.

In the arena of indirects on the other hand, every organisation has unique needs.  Some categories face diseconomies of scale.  Many services get more expensive with scale – the largest accountants and lawyers are the most expensive because there is a cost to operating on a consistent scale across many geographies.

The cost of operating consortia have frequently outweighed the benefits as the need to compromise on requirements and the speed of collective decision-making required for there to be genuine co-operation are punitive.

Finally, the consequent reduction in agility through the compromises necessary to buy together is an impediment to innovation.

I'd be interested to hear your thoughts on and experiences in consortia buying / procurement.

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Comments

Not only the service levels vary, but the entire business optics: while one consortia member is mostly anxious about supplier's performance, the other one looks for "procurement savings" only, let alone the payment terms.  
 
Too bad, a good and sound reasoning is rarely heard when it comes to pocurement innovations and optimisation
Posted @ Friday, September 09, 2011 10:50 AM by Maksim
The value of the supply being marginal the supplier is expected to accomodate the variation in demands of the user
Posted @ Monday, September 12, 2011 4:23 AM by R V Abhyankar
Tom, 
 
Strong insight and very accurate.  
 
The only thing, however, we are seeing bring improvements to consortia buying to an more efficient manner is technology. As companies are effectively moving the consortia buy to a web enabled services P2P platform the effectiveness is increasing. Being technology agnostic we are seeing this area of functionality strengthen in many tool providers we work and implement.  
 
Most of the benefits that are being realized through the technology come in the form of transactional management and visibility which enable transparency to the program's real strengths and weaknesses. 
 
Our experiences show that implementing such technology solutions are helping the consortia gain greater traction.
Posted @ Monday, September 12, 2011 11:18 AM by Ted Weyn
Hi Ted - I agree with what you say in terms of the benefits that technology brings. However, you can achieve those benefits through a P2P solution, without having to be part of a consortia. 
 
 
 
For SMEs, consortia can be a good route, especially when you factor in the technology benefits - as you are benefitting from economies of scale. But for large organisations, I would strongly argue that they are not the best option. 
 
 
 
Tom
Posted @ Tuesday, September 13, 2011 7:24 AM by Tom Lawrence
Yes, P2P has inherent value beyond consortia buying, but the rigor that a true P2P brings removes some of the barriers you list in your piece by providing greater visibility to the contractual and ever-changing aspects of the consortia. It enables the user of the consortia to better manage the often unmanageable aspects. 
 
Thanks for the dialogue.
Posted @ Tuesday, September 13, 2011 8:19 AM by Ted Weyn
Agree with all the reasons in the link and wish to build on them. 
 
Consortia buying is based on a gigantic assumption that is often false: that larger volumes mean lower prices. Just one reason why it can be false is that a large volume has to to be covered by its full allocation of selling costs whereas, in a small incremental sale, all of the margin can be profit. 
 
Sellers are willing to discount deeply for strategic reasons: to build a relationship; learn a technology or a new business area; or reduce overheads. Dealing with a consortia is selling blind and, as your article says, the consortia can add its own overheads.
Posted @ Tuesday, November 15, 2011 3:48 AM by Bill Young
Management in my organisation are viewing consortium buying for indirect procurement as the means to reduce costs and increase procurement efficiency.  
When calculating the cost of operating a procurement activity through such a consortium, which costs have you measured and in which manner can these be easily captured so as to provide a figure on the REOI.
Posted @ Tuesday, November 15, 2011 3:50 AM by Boi-Lan Lemoine
I’d like to join in on this conversation and will state my organization up front, as we strongly believe the GPO concept works for our members and have the savings to prove it. I am the VP of Marketing at CoVest Sourcing Network - A GPO that focuses on Indirect Spend categories. 
 
The statement that better deals can be had by contacting the vendor directly is false. However, the comment that “Consortia buying is based on a gigantic assumption that is often false: that larger volumes mean lower prices,” is accurate. Both volume of spend and process discipline during a sourcing exercise are what produce results. Through our partnership with AT Kearney and by combining the spend of our Member companies, CoVest achieves impressive results. To illustrate this: the average savings a new Member can expect when joining CoVest is around 12%. (Our target member is a $2 - $10B company) 
 
Rebates: Yes, CoVest is paid a rebate from our vendors based on spend. This works as our members pay zero fees to CoVest and keep all savings identified during the benchmarking process. Membership to CoVest is free, but only qualified companies are asked to join - giving us control over contributing spend so all members benefit the group vs. a handful of members carrying the load.  
 
Service: For most of our vendors, CoVest is a significant customer. Because of this, we interact with supplier employees fairly high up the ladder. If an issues needs to be addressed, we speak directly to a decision maker with national reach. 
 
Not every company will benefit from the GPO model and not every category makes sense for a member. We understand that, but chances are 3, 4, 5+ contracts we currently have will bring significant savings to a company’s total Indirect Spend. Curious, let CoVest benchmark some spend data and present our savings offer.
Posted @ Tuesday, November 15, 2011 3:51 AM by Patrick Russo
I would like to join this discussion as well. I am an Executive Partner at Paladin Associates, a management services company focused on strategic sourcing cost reductions for our clients. We provide Spend Analysis, Commodity Analysis and Benchmarking, Category Subject Matter Experts, Sourcing Strategy Delevelopment, Sourcing Event Managment, e-Sourcing and e-Auction Services, Contract Negotiation Support, Desion Support, and Contract Impliementation Support. Most of our services are provided to mid market cleints on either a performance fee or daily fee basis.  
 
We support and use several different Leveraged Purchase Agreements (Consortia or cooperative buying groups) for several different indirect spend categories. Our experience is that in most cases, the Leveraged Purchase Agreements provide significant value to our clients not only in generally the initial reduced unit prices, but also in better contract terms, improved price increase controls during the contract period, active contract and category management services, and new contract negotiation and price benchmarking. The service levels are also generally better and the problem resolution is faster since the supplier risks loosing a lot of volume (rather than just one company's volume) if they deliver poor service or don't resolve problems. There really is 'strength in numbers'. 
 
Not all GPOs or consortia agreements are created equal so it is important to review the GPO or consortia to pick one that bests fits your business. Various GPOs cover various spend categories and none have all indirect spend categories covered by leveraged agreements. The membership agreements, contract terms, and unit prices vary between the GPOs. It does require some due diligence to ensure a particular GPO works for a particular company. 
 
Not all companies will want to use a GPO and not all companies will want to use GPOs for all spend categories that are under contract by the GPO.
Posted @ Tuesday, November 15, 2011 3:53 AM by Don Hoeppner
It's good to see some providers and supporters of consortia deals joining the debate. 
 
Clearly, there are organizations that will benefit by joining a consortia for one or more categories of spend. But these are likely to be organizations that can't afford to have in-house all that they need to effectively manage the category. If a company is truly managing their indirects effectively, the additional benefits of joining a consortia will be limited if not zero. I know this the case as we have not only looked at it several times ourselves, but have been challenged to do so by our clients as well. (I note that where they can work is in a few highly commoditised Direct areas). 
 
Truly effective procurement pulls on the levers of price, demand, specification and risk. A consortia approach can only ever address one of these four - price. The truth is that the really big benefits from procurement come from changing internal behaviours, processes, business rules, specifications, innovation, etc., which in turn influence what it is you are seeking from the supply market. A simple example would be: negotiating discounted room rates with a hotel to achieve a saving, versus investing in video conferencing and achieving multiples of the saving that the hotel deal would have achieved by enabling people to not have to travel. 
 
What concerns me in some of what I hear about consortia is that people believe it is the answer to managing their indirects. The answer to effective management of an organization's indirects is not simply consortia deals. Likewise, it is not just to employ some technology. The answer lies in a combined package that addresses the whole picture. 
 
So I concede that there is a time and a place for consortia deals - due to organizations generally not investing sufficiently in the management of their costs. Indeed, an organization widely using consortia deals is probably a barometer for its overall in-house procurement capability. 
 
A sustainable total solution to an organization's indirects is a completely different ball game.
Posted @ Tuesday, November 15, 2011 3:54 AM by Tom Lawrence
When you look to engage a GPO/Consortia the key to determining this as a viable solution is based on the culture within your organization. If your organization does not look to engage ideas outside of your four walls then a GPO/Consortia will not work. Most groups are supplier funded so on the surface why wouldn't you engage a no cost opportunity to help improve your organization! 
 
The key to finding value is that you want to align with an organization that provides more than just leveraged contracts and hard dollar cost savings. Most companies today are faced with time and resource constraints and to have the ability to utilize a third party as an extension of your team is a winning proposition. 
 
Other areas to consider are that several models offer value in terms of Functional Alignment, Lifecycle Management and most importantly Leveraging Knowledge from other members in the group. A transparent model is key!
Posted @ Tuesday, November 15, 2011 3:56 AM by David McCarty
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