After processing over $12 billion of spend from over 70 public sector organizations as diverse as higher education institutions in California to cities and counties in New York, the data shows that nearly half (47.38%) of that spend is with vendors common to at least 2 of those organizations. There’s nearly $6 billion of spend with those common vendors. Over $2.5 billion is spent with vendors that 5 or more of the organizations already use. The closer together the organizations and the more similar their sectors (K-12 school districts and higher education for example) the higher the instances of spend with common vendors and in common categories climbs.
In order to better identify collaborative procurement opportunities, organizations need a way to break down their respective data silos. However the chances of a group of independent organizations implementing a common accounts payable or ERP system with the same data structures at the same time are slim to none, so spend analysis provides the most efficient and effective means to reach the desired end of bringing data together which provides the needed visibility.
We’ve covered data transformation in another article. The assumption in this article is that you’ve already brought together your expenditure and contract data from multiple organizations and transformed it into a consistent, normalized, and searchable dataset. So what are the benefits of carrying out a collaborative spend analysis to take advantage of this common expenditure?
Procurement Savings Priorities:
Whether it’s saving time, money or resources, there’s no reason to suggest that collaborative procurement is (or should be) about anything more than organizations looking to survive in a tough economic environment with reduced budgets. They may be asked to do more with less, or in extreme cases, to do less with even less. Collaborative spend analysis can have other benefits as outlined below, but there’s no escaping the fact that the main reason is and reasonably should be to get better pricing through economies of scale using common vendors, cooperating on spend in common categories, setting common specifications, and reducing the number of people carrying out the same competitive procurement exercise right next door to each other. Doing a collaborative spend analysis to save money really is a given, so what else is possible?
Transforming ad-hoc to proactive and reactive to strategic:
Most folks can imagine the scenario where their local purchasing group (NIGP chapter, local collaborative, council of government purchasing committee) gets together to discuss potential joint bids and contracts. The conversation begins with a representative of Organization A asking about who else is about to buy office furniture, in particular conference room furniture. While everyone in the room buys or has bought conference room furniture, they aren’t about to buy any right now. They either just bought some, running their own competitive solicitation, or are planning to buy some but not for at least 6 months. So the representative from Organization A goes back to their office and either competitively solicits for the conference room furniture themselves or searches the various cooperative contracts available from the large GPOs to fulfill their needs. In six months time, the process is repeated when the next organization needs conference room furniture. This is pretty clearly an inefficient process. In fact the problem is that the local purchasing group in the example lacks the ability to put this furniture requirement within context of the group’s spend or to plan ahead for the most effective time to carry out a collaborative solicitation.
One of the main benefits of a collaborative spend analysis is the ability to take what is typically a reactive and ad-hoc conversation about collaboration and transform it into a proactive and strategic discussion. A collaborative spend analysis project will provide the group with the visibility to plan the most effective time to carry out a joint competitive solicitation for a commonly procured good or service and to have a firm understanding of which members of the group are buying those goods or services already and from whom. Just as each individual organization should develop their own blueprint to deliver savings and efficiencies which is driven from historic spend data, the group should use aggregated data as the basis for generating a powerful group collaborative strategic plan. It won’t meet every need for every member at every time, but it can go a long way towards delivering savings and efficiencies for all involved.
Leverage to the public:
Where the goods and services needs do overlap between organizations, the balance of information in most cases still lies with the vendor in competitive negotiations. The vendor typically has better information on the spend patterns of a group of local organizations than the organizations themselves may have. Furthermore, the vendor knows whether or not they are charging different organizations different prices for the same goods and services, how much each is buying and exactly what they are buying. Bringing data together in a collaborative spend analysis can often correct this informational power imbalance. If the group knows how much it spends with all vendors on a particular category of goods and services, it can arrive at the negotiating table with buying power that the vendor doesn’t even know exists. The group can also approach a competitive solicitation with a very good idea of the total values and volumes of spend to pass on to the respondents in order to get the best pricing.
Reduced vendor risk, reduced pricing:
Not surprisingly, vendors don’t just set prices based on market conditions and cost of sale. The more risk in the contract, either from a lack of orders being made or in not being able to scale up fast enough to deliver the volume of goods and services required, the greater margin the vendor factors into their pricing for contract risk. For indefinite quantity contracts (into which category the vast majority of GPOs and state contracts fall), the risk to the vendor of getting anywhere between 0 and too many orders is huge, and this risk is reflected in the pricing offered. If the vendor knows that based on history, they are going to supply roughly 1,000 widgets to a group of organizations, they can determine their pricing based on 1,000, rather than anywhere between 0 and too many. The reduced contract risk to the vendor can often translate into lower costs for the buying entity or group in addition to price decreases due to the economies of scale for the vendor.
This isn’t all to say that Cooperatives, GPOs and state contracts are bad because they are indefinite quantity contracts. There certainly is a place for them in commoditized categories and can be the best way for organizations with only a couple of procurement staff to take advantage of better pricing without having to go through a collaborative process for every single procurement. Piggybacking on other’s contracts can create significant administrative efficiencies as well as drive time and cost down for those organizations to get needed goods and services. Most advantageously by working as a collaborative group in a collaborative spend analysis project, piggybacking can be taken one step further by splitting up the research into best pricing amongst the membership. Rather than always carry out a group competitive solicitation there is the opportunity for different members of the group to take responsibility for assessing each other’s pricing for a particular category of goods or services. By comparing this pricing to GPOs and state contracts, the group can make use of the procurement method that provides the best prices, best value, most favorable terms, and takes into account other factors that would impact the group’s decision.
Reallocation of resources and sharing during crisis:
Not surprisingly, disaster and emergency planning has become a savings opportunity as well as a safety priority. In reality, if the group is purchasing goods and services from the same vendors and there is a reasonable amount of consistency in the goods purchased, it makes it much easier for the group members to reallocate resources (one member buying up spare inventory from other group members who have too much) or to share resources in times of crisis (parts for snow plows, text books, emergency generators/supplies)
Impact on local, small, diverse businesses:
One final criticism of collaborative procurement is that it could have a detrimental effect on spend with small, local or minority owned businesses. But through a collaborative spend analysis, this doesn’t have to be the case because the group has the information to anticipate potential effects of collaborative decisions on those businesses before any action is taken. The situation may arise where saving 1% on $100,000 spent through a collaborative contract is not worth the turmoil or loss in the local economy that will be caused as business is pulled away from a local small business. The push and pull between saving money and spending money in the local economy and with small and minority owned businesses will not go away, but at least when the data is aggregated in one place, the impact can be properly assessed before group or individual decisions are made.
The above benefits of collaborative spend analysis don’t just happen, but they all can only begin after the group’s spend data is transformed into a consistent, normalized format and put into a single database for analysis. Spikes Cavell can assist your collaborative procurement group in breaking down the group’s data silos and transforming expenditure and contract data for all member organizations in a cost effective and efficient manner. If you want to find out more about how your cooperative group can realize the benefits of collaborative spend analysis, give us a call.
Or take it from a public procurement professional:
See this American City and County article by Mike Bevis about the significant benefits to be had by public sector organizations working together across a common geography: http://webapps.icma.org/pm/9410/public/cover.cfm?author=Mike%20Bevis&title=Harnessing%20the%20Power%20of%20Money&subtitle
Contact us if you want to find out more about spend analysis using the Observatory.