Musings on GPOs and Ariba Express Content

The fact that Ariba has finally unveiled its Express Content GPO-like offering is in itself unremarkable -- it had been rumored for years. But what is remarkable is how much a solution like this is needed in the market. Consider the great masses of small -- and sometimes large -- indirect and MRO categories which go un-sourced by companies or un-implemented in an eProcurement system because procurement organizations are too busy fighting other fires or going after larger potential spend areas. It's precisely this type of approach to supplier content, enablement and commerce that will enable procurement organizations to achieve an 80% solution on spend categories where they're currently getting a 10% one -- at best.

But at its core, is a GPO model -- even a next generation one like this, which differs from the traditional types by being a truly virtual type of model -- the right one for procurement organizations even in select categories? Academically, it never is. And that's because the incentive of the GPO is never to get the best price for buyers. Rather, the GPO makes more money the larger the transaction or unit price size, so its incentive is really with suppliers. In other words, the price discount from a GPO only needs to be good enough for procurement. An analogy here is working with a buyer's agent in the real estate world -- which is probably the most idiotic thing a good negotiator would ever want to do for a large transaction.

The reason for this is that a buyers agent's incentive is actually aligned with the seller's goal -- their motivation is always to get the buyer to pay the highest possible amount that they would for a property because they profit more as a result based on receiving a percentage of the transaction as compensation. A better choice from a sourcing perspective in the real estate world when larger numbers are involved is always to contact the seller's agent directly and work out a set fee or rebate that would have been the buyers agent's commission. Or an alternative is to work with a buyers agent on a fixed fee or hourly basis, paying for advice and getting a percentage-based rebate back after deal close.

However, the real estate world is not the procurement world. In real estate, most of us are only buying a single property at the same time and given the size of the typical transaction relative to our net worth, it makes sense to pull out all stops to achieve a result which is in our best possible interests (just as you would in a strategic or leverage spend category). In contrast, procurement organizations will never have the time to give all spend categories a similar time and investment. They must focus on spend triage based on potential savings, risks and other factors.

Those categories which don't make the cut from a prioritization standpoint internally are in fact ideal for models like GPOs (or for outsourcing). But unfortunately, GPOs have gotten a bad rap over the years because of their central role in health care -- an industry which is so backward from a procurement perspective that GPOs typically serve as a band-aid over a massive gash, rather than healing the minor scrapes which they are best suited to cover in the first place.

Will Ariba help turn around the image of GPOs? Only time will tell, but along with Corporate United and a few other newer models, they've got a chance to breathe life into procurement business model that makes practical sense in the market (even if academically it will never be the optimal answer). Perhaps this even signals the potential move to a business model for Ariba on the procure-to-pay side where they will get out of selling software entirely, instead opting to give it away in exchange for taking part in the transaction value or making money on the finance side. Only time will tell!

Jason Busch

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