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The First Step. In the last decade or so, corporate and governmental purchasing departments have implemented entity-wide purchasing of goods and services. The savings realized through increased volume purchases are no surprise, given that the aggregated spend is a win for both the purchaser and the supplier. Furthermore, including in those arrangements additional discounts or rebates beyond the initial volume-driven lower per-unit pricing is just icing on the cake. Significantly, that entity-wide purchasing strategy has also been implemented by private equity-backed companies as a way of reducing portfolio company costs and increasing profits.
The Next Step. Given the savings that aggregated spend makes possible for a company or government entity, purchasers can be forgiven for thinking that's the end of the story and no further volume economies are available. However, collaborative purchasing by groups of non-affiliated purchasers can drive further substantial savings through an additional substantial discount. The evidence shows that pooled spend by non-affiliated purchasers readily yields lower prices for indirects/fungible goods such as office supplies and bottled water. Given the attraction of those additional potential savings, governments in the UK and the United States have taken notice of such collaborations.
The Issues. So what are the issues that an interested group of companies or governments needs to address? The following list covers the major ones, with brief comments, and each issue needs a good bit of thought to help the venture succeed:
"¢ How many participants? Two to eight participants, depending on the size of each participant. The volume increase through collaborative purchasing has to be sufficient to provide the leverage with suppliers for an additional discount.
"¢ Government vs. non-governmental participants: all one or the other, or a mix? All governmental or all non-governmental participants, but not a mix of the two. The principal reason for not mixing the governmental and private sector purchasing participants is the governmental mandate for minority set-asides that complicates the supplier selection process and price discount results. For governmental collaboration, it makes more sense to bring together participants that understand and live within that reality.
"¢ Geographical locations of participants? Geography generally doesn't matter, even with cross-border participation by one or more players. But talk to your tax counsel regarding the tax effects of cross-border transactions.
"¢ Size of each participant? Each roughly similar in size to the others. Not an absolute necessity, but similarities in scale and organization create similar mind-sets and make commitment easier.
"¢ Will larger participants get a further discount, given that their spend disproportionately drives the volume pricing discounts? One possible way to go, but not recommended. This is an issue with real centrifugal potential to drive participants apart and break up the collaboration, so care is warranted here.
"¢ Competitors vs. non-competitors? There may be antitrust/foreign competition law issues here, depending on the purchasers' market share or treatment of suppliers, so particularly if the participants include competitors in the same market (but even if they don't), check with your legal counsel.
"¢ Will there be a separate company organized to represent the participants? Recommended. There are questions of even-handedness and confidentiality that are best handled through use of a neutral third party as an administrator and data aggregator, but that separate entity raises the question of funding by participants.
"¢ Governance. Whether you set up a separate legal entity to accomplish the venture's goals or you simply sign an agreement setting out the terms of the venture, you need to know how the venture's and participants' activities will be governed. Again, engage legal counsel. It's too easy to be accused of destructive favoritism at the inception of the venture when you - thinking to help things along - seconded your own employees to get the new venture up and running.
"¢ How will that company, or the group's activities if no company is formed, be funded? Yes, this is the big one. Fund it however stingily, and run it as a utility, not as an operation needing lavish office space, frequent and expensive travel habits, etc. Lack of fiscal discipline was the closest thing to being the common factor that accelerated the bursting of the dotcom bubble of the early 2000s.
"¢ Will the separate company, if one is formed, take title to goods purchased by participants? No. Too much legal risk, likely too little funding for the infrastructure necessary to take and hold goods pending delivery to the ultimate purchaser.
"¢ What are the tax issues raised by a purchasing collaboration? Engage tax counsel or an accountant, or get the participants to engage their internal company/governmental tax and accounting experts.
"¢ Fungible and/or non-fungible goods and services? Fungible (that is, indirects), although some customizing for participants' special needs is expected and feasible (for example, customizing computer and handheld devices with English, French or Spanish language software, as needed for each purchaser).
"¢ Insurance? E&O, for sure. Maybe D&O, and probably cyber liability if the negotiations, group discussions or transactions will be executed using an e-commerce or other internet-connected platform, particularly if sensitive data is exchanged or made available. Talk to a sophisticated IT lawyer or other expert who understands what the issues are, then to a corporate insurance broker or risk specialist.
"¢ Benchmarking and Standardization. Both good ideas, and generally not objectionable, even among competitors, so long as the purpose of the exercise is to increase efficiencies and enhance collaboration participation, as opposed to trying to squeeze suppliers or keeping certain would-be purchasers out of the venture.
"¢ Are the incumbent purchasing/supply chain personnel on-board with the venture? If you don't already know the answer to this question from your internal due diligence for the venture, go back to square one; you missed perhaps the most important issue.
"¢ Compromise. No matter how simple your collaboration arrangement is, you will - if you want it to succeed - need to inculcate as an article of faith that compromise among the participants will be essential at the early stages and later on during implementation. With all the other venture challenges to address, egos and showstopper issues have no place in a collaborative purchasing venture.
Collaborative purchasing offers a very real opportunity to use the familiar mechanics of volume purchasing to save costs. In a time of slow recovery from a deep economic recession, collaborative purchasing can help both governments and companies make the most of their purchasing dollars.
Source: Greensfelder, Hemker & Gale, P.C.
Keywords: sourcing solutions, supply chain management, value chain, procurement strategies, collaborative procurement initiatives
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