Ask Spend Matters: Is a Group Purchasing Organization (GPO) Right for Me?

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A reader recently wrote in with a question about how to find a group purchasing organization (GPOs) or purchasing consortium. This individual is a U.S.-based sourcing manager at Heidelberg, a multinational company that provides equipment and services for the print media industry. The reader told us that his company is thinking about bidding out for copiers next year, and he became interested in looking into GPOs after hearing about them at a local ISM meeting.

However, a casual internet search for GPOs yielded no shortage of results. The sourcing manager wanted to make sure that he did his due diligence in searching for a GPO or buying consortium in order to get buy-in from upper management. If the copier project is a success, it can serve as a test model for future purchases.

What is a GPO?

Group purchasing organizations, consortia, co-ops, collectives, purchasing alliances, leveraged buying/purchasing/procurement groups – these are all terms that tend to be used interchangeably to refer to an arrangement where two or more organizations band together and combine their individual purchasing power in procuring goods or services. Theoretically, this aggregated purchasing power would lead to discounted prices and more favorable terms and conditions.

There are vertical consortia, which are industry-specific (all member organizations are from the healthcare or food industry, for example). There are horizontal consortia, where member organizations come from different industries. And there are also master buyer consortia, where large multinational companies extend their own supply agreements to customers, adding in a baseline percentage.

This may lead one to assume that GPO participation is more common among small businesses. However, earlier Spend Matters research estimates that 15%–20% of Fortune 1000 companies take part in some kind of purchasing consortium, and the vast majority of those that do are seeing savings of 10% or more.

That all sounds great, doesn’t it? GPOs should be on any sourcing manager’s radar, but that sourcing manager will also have quite a bit of research to do.

Overcoming Decision Paralysis

Too much choice can be overwhelming. Unfortunately, this often is the case with finding a GPO that best fits your needs, as there are simply so many of these organizations and buying services out there. Where does one even start?

Tom Finn, principal editor at Healthcare Matters and an analyst for Spend Matters, suggested that the first step to narrowing down your choices should be to look for GPOs that are specific to the category of what you’re looking to buy.

The next step should be to do some research on the business model of the GPO. Is it for-profit or not-for-profit? If you use the GPO, would you become a member or a customer? Do you have to commit to a certain volume, or can you access the GPO’s contracts at your own convenience? Do they develop their own tools or resell tools? Are they being paid by suppliers? These are all questions that will give you insight into how the GPO makes money.

Then there’s the matter of whether the GPO carries inventory. Is the GPO more like, to use Finn’s words, “a toll booth on a bridge,” in that it only facilitates the transaction? Or does it actually take inventory and distribute it?

“The big tension in the GPO industry these days is where GPOs do not aggregate and commit volume, but simply provide access to contracts,” Finn said. “That’s a great convenience to customers, but they’re not paying competitive prices. The fact is that those contract prices generally are closer to the ceiling in the market as opposed to the floor, because there are no commitments with it.”

GPO = Lower Prices? Not Necessarily

The most prevalent misconception about GPOs is that they by definition offer better prices as a result of aggregated volumes, according to Finn.

“That is the case in certain GPO models, but it is definitely not the case in a number of GPO models, especially those that are fed by supplier fees,” he explained. “If you’re the group purchasing organization and you’re getting paid a percentage of the sale by the supplier, then does it sound like that’s a good recipe for getting the best price?”

Therefore, any sourcing manager who is looking into a GPO should find out what its economic model is, for that will be a vital clue into the kind of prices you will get.

“I personally wouldn’t go near a group purchasing organization that didn’t insist that I commit my volumes in the categories of spend that I intended to purchase through them,” Finn added.

On Benchmarking and Technology

Another common misconception, Finn said, is that GPOs are on the cutting edge of technology. On the contrary, they tend to be generations behind.

Benchmarking services can be a double-edged sword. “The data services [GPOs] provide can be extraordinarily valuable to the extent that they are deeply penetrated in a marketplace and know what is going on,” Finn said. However, a tricky problem here is that you’re being benchmarked against other members of the GPO, which will not necessarily provide an accurate appraisal of how you’re doing.

“The GPO loves to tell you that you’re doing great relative to your peers,” Finn said. “What they don’t tell you is that the people who don’t use their GPO are not just performing 5% or 10% better, they’re on a completely different curve.”

He continued: “Make sure the benchmarks are derived from sources other than the GPO itself, unless of course that GPO has got a statistically significant percentage of the market. Otherwise, you’re not necessarily comparing yourself against people you want to be compared against.”

If a GPO claims to offer thousands upon thousands of contracts available for instant access, that should be a red flag. Bigger (or broader) is not necessarily better, Finn warned. Any thorough GPO vetting process should look at how category-focused the GPO is. GPOs that span many different categories are less likely to offer competitive prices, and they’re more likely to be technological laggards.

Consider the Alternatives

But back to the question of picking a GPO. If you only want to buy one item for now, such as copiers, look for GPOs that organize spot buys. If you’re not set on using a GPO as a test model for potential future buys, however, it may make more financial sense to do the purchasing yourself.

“If I contact a group purchasing organization that happens to have copier contracts that I can access and I can buy a copier through them, nine times out of 10, that price isn’t going to be all that great,” Finn said.

However, if you are set on trying out a GPO, think about items that fall within the same category (say, office supplies, in the case of copiers) that you could possibly want, prepare a market basket and look for a GPO that organizes buys for what is in your market basket. You could get lucky and stumble upon a GPO that makes regular buys on what you’re looking for. Perhaps there’s a buy coming up in the next few months, and the money you’re spending would then be part of a $15 million buy.

“Now you're talking about having access to not just better pricing on a larger committed spend, but [also] really understanding the category and where the market levers are, because you'll be pushed in various directions to make sure that those levers are pulled,” Finn explained. “It would be an educational experience for sure. It would be the kind of thing where, if you had a good experience, you'd go, ‘That wasn't bad. I'm going to do that again [with] another category.’”

And then there are purchasing services that specialize in certain equipment. Finn cited the Chicago-based OpenMarkets as an example of such a software-enabled service or marketplace. (OpenMarkets specializes in healthcare equipment.)

“Basically, you go to them, and they aggregate what you want to buy and combine it with others who want the same thing,” Finn said. “They execute the event on behalf of the people who put their volume in, and everybody wins.”

Ultimately, you want to treat the GPO like a supplier, Finn advised. “You don’t ever want to put yourself in a position where it’s all or nothing with one group purchasing organization.”

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Voices (2)

  1. Mark Usher:

    As someone who in the last 15 years has been on both sides of the house as both a provider of GPO services and as someone sourcing from GPOs the majority of your points are in my experience accurate. As a GPO provider using your “toll booth” model our revenue model was indeed vendor fee funded. This didn’t mean we didn’t create savings for our customers relative to their previous pricing – we did – but would the savings have been higher without our 2-3% cut? Sure. But for the customer there was value in not having to deploy resources to source, negotiate and contract the category themselves. Putting my “sourcing from GPOs” hat on, however, I 100% agree with your point about treating a GPO as any another vendor. Some GPOs will approach you and say their pre-negotiated pricing is not negotiable but will deliver savings without you having to source (we did this). But what is sourcing? Its not necessarily setting out on a 6-month RFP process. It can be as simple as contacting 2 or 3 other GPOs (or non-GPO vendors directly) offering pre-negotiated contracts in the same category. Let the original GPO know that you are considering other providers and you will often find that their non-negotiable “pre-negotiated” pricing will mysteriously drop even further… There’s nothing underhand going on here, just good buying and good selling. As a potential GPO customer the key is to recognize that every type of GPO model out there is a fit for some type of buyer, perhaps you. But also recognize that any GPO worth its salt will also look to sell to customers “on the margin” who aren’t doing as thorough a sourcing job as they should, fall for the sales pitch, and underachieve on savings. Just don’t be one of those customers on the margin. Educate yourself, navigate the sales pitch, and select or don’t select a GPO based on good old fashioned Purchasing 101.

  2. Jason Busch:

    Great piece Sydney, great interview, Tom. It will fascinating to watch the continued roll-up of the GPO market, now outside of healthcare, and see if this translates to better deals for their customers. I see GPOs generally as struggling to be anything but select category specialists (outside of healthcare) — they have a hard time moving beyond a few categories with customers even if they offer dozens. The other big question is how GPOs “go tech” or how “tech” goes GPO — which Coupa is doing already. Fascinating times!

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