One sector of the procurement services market that has seen much change recently is that of horizontal Group Purchasing Organizations (GPOs). Unlike their vertical GPO and buying cooperative cousins that focus on specific industries, horizontal GPOs offer leveraged contracts for indirect cross-industry spend categories. From being an under the radar sourcing strategy a decade ago horizontal GPOs are making it on to the invite list for more and more indirect spend RFPs. They have also become targets for acquisition. One case in point is OMNIA Partners who through the 2017 acquisitions of Corporate United, Prime Advantage and US Communities created a buying giant that, according to OMNIA's website, boasts a total buy of $10 billion across over 30 industries. Several private equity firms have also been active, either buying GPOs or forming them internally to leverage spend acoss their portfolio companies.
When horizontal GPOs first gained traction a decade ago they were primarily targeted at mid-market companies using the "we have discounts you couldn't negotiate on your own" message. What do the recent changes in the horizontal GPO sector mean for those mid-market companies today? To help answer this question I spoke recently with Lisa Wylde, a purchasing manager for Valco US, a mid-market manufacturer of custom fasteners and hardware. In her time at Valco Lisa has utilized regional and vertical cooperatives as well as horizontal GPOs to secure discounts for a broad range of indirect spend categories including facility MRO supplies, industrial gases, uniforms, cleaning chemicals, copiers, office supplies and small parcel shipping. I think you'll agree Lisa's experience throws an interesting perspective not just on how recent events have affected the horizontal GPO's value proposition for the mid-market but also on how that value proposition was perceived originally.
Mark Usher: When did you start using pre-negotiated contracts as part of your procurement strategy and what type of providers and contracts were you using at first?
Lisa Wylde: When I started at Valco in 2009 we were already using a set of contracts from a regional cooperative of companies in the tri-state area. Valco paid a modest annual subscription to get access to contracts that covered areas like safety supplies, janitorial, personal protective equipment (PPE), small tools, hardware, fasteners, electrical, HVAC and plumbing. The same cooperative also had contracts for office supplies and computers but the pricing wasn't very competitive so we negotiated those on our own.
Mark Usher: What type of discounts did you get on the regional cooperative contract and were you able to compare these discounts to the market to see how competitive they were?
Lisa Wylde: We were selective in the contracts we used from the cooperative and only used ones we knew had aggressive discounts. Discounts were quoted from a list but the cooperative's contract also listed OEM part numbers. At least once a quarter we'd check price against other regional and the national distributors to make sure the contract discounts stayed competitive. A key point here is that the cooperative agreements were negotiated by someone at one of the regional companies. They had a vested interest in making sure the pricing was good since they were eating their pudding so to speak.
Mark Usher: What was your first experience of horizontal GPOs?
Lisa Wylde: In 2014 we put an RFP on the street for facility and industrial MRO. We weren't unhappy with our cooperative pricing but at that time but we saw the activity in the MRO vendor market, including horizontal GPOs, and figured we had just enough volume to interest the larger national distributors or GPOs. We left our regional cooperative in the mix and decided to take the approach of wait and see. We were prepared to move all our business to a national player if the pricing and service levels were right but also ready to parcel it out if individual vendors were more competitive for specific sub-categories. We ended up doing the latter by retaining our regional cooperative agreement only for janitorial, safety and electrical supplies (about 30% of the total baseline) with the remaining sub-categories split between a full-line national distributor (about 50%) and a horizontal GPO (about 20%).
Mark Usher: What was your criteria for the award and did you calculate a hard cost savings number for the new contracts?
Lisa Wylde: We decided to make our delivery requirements and service levels mandatory - essentially pass/fail - then assign 70% weighting to cost and 30% to supplier financial stability. Our feeling was these are non-strategic categories where we are looking for measurable savings and efficiency. Having said that if a supplier can't meet our critical spare lead time then savings are moot. Our split of the business by the various sub-categories was based purely on who provided better pricing. The national distributor certainly won big there but we were quite surprised by the horizontal GPO which was not competitive for many sub-categories and only had lower pricing for fasteners and hardware.
Mark Usher: Did you have volume commitments in the contracts?
Lisa Wylde: Short answer, no. However in the RFP we provided very detailed historical usage data and stated that future projected usage was expected to be similar within given plus or minus percentages for the different subcategories. We wanted best pricing upfront but did give vendors the option to include quarterly rebates based on trailing quarter volumes. We took these rebates - if offered in the vendor response - into account during the evaluation process by calculating total costs for each vendor under different scenarios of future usage. The regional cooperative and the national distributor provided rebate schedules, the horizontal GPO did not.
Mark Usher: So how have things gone since you implemented the new contracts and what are some of your learnings, especially about the horizontal GPO?
Lisa Wylde: Overall implementation was smooth. Luckily my commodity manager who led the implementation is very experienced in the roll-out, communications and training areas that can kill you in a contract implementation. So 6 months in we were 80-90% compliant and by a year maverick spend was pretty much zero. We're doing a reasonable job of price compliance although my biggest wish there is that we could change it from an after-the-event audit activity governed by my resources to more of a real-time activity where we know the price is right at the order.
The other learning for us is understanding vendor capabilities, particularly for an unfamiliar service model. The regional cooperative - essentially regional vendors - we understand 100%. In fact we both know each other's business as well as the other and very little ever gets lost in translation or negotiation. The full line distributor is straightforward too, he works the volume play.
The horizontal GPO I'm definitely still learning though. They can look like a full-line in some categories but then in others they are not competitive. During the RFP process they were very transparent about the fact they extracted fees from their preferred vendors and in some cases where the pricing was close with our regional cooperative I'm sure that fee was what lost them the business for that sub-category. The other reason I am a little wary of the horizontal GPO in terms of a broad match with our needs is that I suspect that their preferred end game may be services rather than product. Their account manager is often positioning value-added services to me like analytics and sourcing support. That's probably in demand from the larger companies but for us we don't have the cost base to warrant what I see as an outsourcing model. Having said that their pricing for our traditional MRO needs worked for 20% of our spend so I want to keep learning their model and their value going forward.
Mark Usher: Thank you Lisa for sharing your experience and your insights!
1 Procurement Place
Non-spin commentary on the world of procurement, supported every now and then by the occasional piece of factual information.
Mark is Founder and CEO of SpendWorx LLC, a provider of spend analytics services. Prior to SpendWorx Mark co-founded Treya Partners, a boutique procurement consultancy. Earlier in his career Mark held various positions at Accenture, GE Aviation and Rolls-Royce.