Group Buying Power: History and Solutions Around Public Sector Consortiums (Part 1)

Spend Matters welcomes a guest post from Richard Waugh and Orville Bailey of Equal Level.

A recent Spend Matters Perspective Research report, GPOs and Buying Consortiums Must Be on the Radar for 2011-2012 makes a compelling case for more procurement organizations to consider the benefits of leveraging the aggregated purchasing power and efficiencies these models afford. While the private sector is often the "first mover" in adopting innovative procurement models or new technologies, the use of buying consortiums or cooperatives has been an established business practice for most public sector agencies for some time. Equal Level has partnered with U.S. Communities, the leading national government purchasing cooperative with over 46,000 participating agencies, to launch an on-line Marketplace where these agencies can shop across multiple U.S. Communities' cooperative contracts, easily compare products and pricing, and make efficient and transparent "best value" purchase decisions, saving time and money for their agency, and for US taxpayers.

A recent survey of public sector agencies published in the August/September 2011 issue of Ma href=>Go Pro, comprised mainly of state and local governments and special districts, as well as both higher education and K-12 school districts, shows just how ingrained cooperative purchasing is in the public sector. A resounding 95% of all respondents use cooperative agreements today and half expect their use to pick up over the next three years.

The widespread use of buying cooperatives in the public sector exists because of a near "perfect storm" of conditions, making them a key component of an agency's procurement strategy rather than an experiment used to test out the approach on one or two orphaned categories that don't merit a full-time commodity manager. For one, lower tax receipts -- a by-product of the collapse of the real estate market and resulting property tax shortfalls -- has put tremendous pressure on budgets at all levels of government. Already resource-strapped public sector procurement departments -- 88% of which have less than 10 FTEs according to an October 2011 NIGP (National Institute of Governmental Purchasing) survey of nearly 500 member agencies -- find themselves doing "more with less."

This is probably nothing new for their counterparts on the private sector side, but add in the stringent government purchasing regulations for competitive solicitations on all purchases, requiring at least three competitive quotes below a certain dollar threshold such as $25,000, and a formal competitive solicitation process (RFP) on expenditures above that level, and the resource challenge becomes magnified. In fact, 65% of agencies in the NIGP survey report conducting more than 100 written RFQs and 74% conducted over 50 formal competitive solicitations (RFPs) per year. For these agencies, being able to leverage competitively solicited cooperative agreements that can pass muster with their auditors may be more than a time saver -- it may be the only way to keep from drowning.

Not surprisingly, public agencies cite "Time Savings" from accessing contracts that have already been competitively solicited (89%), as the most compelling reason for buying from cooperative agreements, outweighing "Cost Savings" (80%) and "Program Rebates" (35%). While the time savings from avoiding a typically months-long, labor intensive competitive solicitation process by "piggybacking" on the work already done by another "Lead Public Agency" in soliciting the cooperative agreement is obvious, some agencies remain skeptical about the cost savings -- 47% said they thought cooperative pricing was "Not Aggressive Enough" -- perhaps accounting for the fact that for better than three-fourths (77%), cooperative buying amounted to 25% or less of their total spend, although 10% use co-ops for between 36% and 50%.

This is where e-Procurement Marketplace technology has the potential to take public sector cooperative purchasing to the next "Level" -- pardon the pun. One client, a K-12 school district, has deployed their own instance of the hosted software: a private Marketplace procurement portal, populated almost exclusively with cooperative contracts from multiple consortia, encompassing those commodities agencies buy most frequently from coops today, such as Office Supplies, which 68% of those in the Go Pro survey buy from cooperatives, or Information Technology Products (64%), as well as their own contracts for these and other commodities.

For a commodity such as office products, Marketplace users shop on-line catalogs from as many as six different cooperative contracts from a single search interface to obtain quotes, compare pricing at a line item level, and execute "best value" purchase decisions. The result is a fully transparent buying process that covers approximately 80-90% of commodity purchases while complying with all procurement regulations, including competitive solicitations and approval workflow processes. Of course, the agency still has to competitively solicit non-commodity purchases for large construction projects or other services, but with only one buyer FTE to support all purchasing for the district, the cooperative purchasing marketplace has emerged as the most scalable model for efficient, transparent, and compliant procurement -- one with the potential to dramatically increase the penetration of cooperative buying in the public sector.

Stay tuned for the second part in this series, where Richard and Orville will discuss how to overcome some perceived limitations around group purchasing in the public sector.

- Richard Waugh and Orville Bailey, Equal Level

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