The idea of a group purchasing organization, or GPO, has been around for years. A GPO provides cost savings to its member companies by aggregating the purchase of products and services. Between the combined volume and the GPO’s procurement expertise, members realize savings beyond what they could achieve on their own.
There are vertical GPOs whose members are all in the same industry — hospitals, for example. And there are horizontal GPOs whose members are in unrelated industries but have common needs for “indirect” purchases such as office supplies, pharmacy benefits, marketing services, telecommunications and facilities management.
What is new today is a more sophisticated horizontal GPO concept that creates value beyond simply leveraging purchasing power. The modern GPO is not a supplier, consulting firm, software provider or full procurement outsourcer. What it offers is a combination of pre-negotiated agreements across a number of indirect categories, rigorous contract management, continuing education and best-practices sharing among members, and collaboration with suppliers to create value beyond the contract.
A hybrid solution
This new approach has emerged as an attractive hybrid solution for large and mid-size corporations looking for external help to bring their indirect spend under better control. A 2011 study by the research firm Spend Matters found 15 to 20 percent of the Fortune 1000 were using a buying consortium. Those numbers are almost certainly higher today.
Analysts estimate that indirect spend accounts for 30 to 60 percent of a company’s total spend, depending on the industry. While corporate procurement departments have generally been quite successful in optimizing direct spend, significant savings opportunities are still to be found in the indirect spend area.
No wonder that a 2012 study by the Aberdeen Group found that 70 percent of procurement executives identified indirect spend as their top target area for reducing costs.
A two-fold challenge
Corporations face two challenges in pursuing this opportunity. First, in most organizations, large swaths of indirect spend are outside of procurement’s control, and the owners of these budgets have been reluctant to allow procurement “inside the tent.”
Second, indirect spend can span more than 100 different categories — most procurement departments lack the tools, know-how and staff to manage such a wide scope of work.
Partnering with a GPO addresses both challenges. Through the GPO, procurement gains access to an array of relevant, pre-negotiated agreements that provide the basis for meaningful dialogue with human resources, IT and other functional groups who own these budgets.
Then in outsourcing responsibility to the GPO for a number of categories, procurement gains access to the GPO’s contract management and category expertise and also frees up internal resources to focus on more strategic initiatives.
GPOs represent a lower-cost, lower-risk approach compared with other external procurement solutions such as total outsourcing or engaging a management consultant. Companies retain their data and direct relationships with their internal customers and suppliers while saving time and resources associated with sourcing and tactical supplier management. By accessing pre-negotiated agreements, companies realize savings almost immediately with the promise of more to come. ●
David Clevenger is the vice president of Corporate United, the nation’s largest horizontal group purchasing organization. Based in Westlake, Corporate United enables more than 200 member companies to manage their indirect spend categories for more than 30 leveraged agreements. For more information, visit www.corporateunited.com. Corporate United hosts a procurement and supply chain conference in Cleveland on Oct. 23 that is free to industry professionals. See the website for more information.