Successful GPOs Are About Value, not Cost Savings

Another good article in the recent edition of CPO Agenda is Collection Action by Nick Martindale. (It should be no surprise that I’d pick up on this one, as I’ve been known to preach the “Collaborate, Collaborate, Collaborate, Collaborate” mantra – see parts I, II, III, IV, and V, for example.)

The article starts off by noting that collaborative buying has yet to recover from the hefty blow that it was delivered in the nineties, after a number of GPOs quickly sprang into existence, and then failed even quicker, and that Group Purchasing Organizations are going to have to overcome some formidable obstacles if they are to grow and succeed.

One of the major problems with the original GPO model, which is still used by many of the GPOs still in the market today, is its myopic focus on cost savings. Organizations join because they think that volume-based buying will allow them to get their office supplies, energy, and contract labor cheaper, but end up saving very little and then develop a bad taste for the GPO model. Furthermore, many suppliers loathe GPOs because they believe that the whole point of a GPO is to compress prices and choose the lowest-priced supplier, and this means that it’s often hard to get your best suppliers to bid on the collective contract.

Just like Procurement needs to focus on total value on each and every buy they make, a GPO also needs to focus on total value on each and every buy they make on behalf of its customers. They need to look at the supplier from all relevant angles – cost, capability, service, and value-add. However, even more importantly, the GPOs need to encourage and enable their members to collaborate and share knowledge and best practices so that their interaction with the GPO does more than just save a few dollars on outsourced categories. With the right GPO, a member company should gain as much value from networking opportunities and shared knowledge as it gains from the cost savings associated with having a third party manage select spend categories.

One Response to Successful GPOs Are About Value, not Cost Savings

  1. Michael,

    We do a lot of work in this area helping companies “on-ramp” onto GPO contracts (sometimes contracts from one of the big GPOs like Novation/Provista, sometimes ones we have developed ourselves for our clients) and have absolutely found that a holistic sourcing approach is needed to ensure that the contracts meet the quality and service needs of the company. If this is done, however, the GPO path can indeed be a rewarding one. The company considering utilizing the contracts of a GPO should form an internal cross-functional team (and enlist the help of an sourcing consultant with expertise in GPOs if necessary) to ensure that the GPO contract(s) in question meet all of its unique requirements, including customizing metrics and SLAs if necessary. Treat it like an accelerated strategic sourcing exercise if you will but one with a pre-selected pre-qualified supplier. If these steps are taken we have found that GPOs can absolutely be the right option for a company that doesn’t want to go through a 4-6 month RFP exercise for a non-strategic commodity, particularly if it’s own leverage in the market is weak. The key is not to check your basic total sourcing principles at the door but to to apply cross-functionally driven total cost of ownership decisions to the GPO contract selection process.

Leave a Response