In this article, explore the transformative power of hybrid outsourcing. Learn how buying consortia tackle indirect spend challenges effectively.
Consortium buying provides members access to already negotiated contracts that leverage the aggregated spend of its members. “Consortium buying is the wave of the future,” says Joe Vales, Senior Partner, Vales Consulting Group. “Today it makes a lot of sense for companies to come together on non-core processes that don’t provide a competitive advantage in the marketplace,” he says.
Indirect spend items (ancillary goods not used to provide the company’s product or service) are important because “they are major expenses that are not well controlled,” according to Vales.
This type of procurement is “a hybrid outsourcing solution,” according to David Clevenger, Vice President, Corporate United, one of the nation’s largest group purchasing organizations. Instead of outsourcing indirect procurement to one supplier, consortium buying allows companies to select specific categories to outsource. Most start with office supplies.
“No one goes from zero outsourcing to a completely outsourced solution,” says Clevenger. Members gain the benefits of outsourcing such as leverage, speed to market, tools, and subject matter expertise. They join the consortium’s master agreement; the consortium then actively manages the relationship.
But buyers are also able to maintain their relationships with the vendors, something they rarely do with a typical procurement outsourcing engagement. Members can have their own service level agreements (SLAs) directly with a supplier. “Our members can work with vendors like Office Max and tailor the agreement to meet their unique needs,” says Clevenger. “They don’t have to surrender their autonomy.”
Savings are the magnet. Clevenger says members typically realize a ten-to-one return on their initial investment within the first 12 months of membership. In addition, many members have been able to redirect resources.
Johnson Controls’ Story of Hybrid Outsourcing
The manufacturer of York air conditioners joined Corporate United initially to help it with office products procurement. It has since added three more categories: uniforms, relocation, and roofing. “We didn’t have a strong knowledge in these categories and the leverage wasn’t there,” says Charles Davlin, Director, Strategic Sourcing for the Building Efficiency Business at Johnson Controls.
He says the consortium afforded speed to market. He was able to sign up and order supplies “because they had already done all the work,” he explains.
He’s happy with the savings. He says his division of Johnson Controls has an office supplies spend of about $1 million a year; Corporate United’s is over $100 million. “The leverage we get is incredible. I don’t think we could get a lower price,” he says. In addition to the hard dollars saved, he adds the time his staff saved “not having to source these categories and negotiate price.”
Another advantage was that he did not need to get technical approval for products in the four categories he outsources to Corporate United. “I don’t have to work with our engineering groups,” he explains.
He appreciates that the hybrid outsourcing choices are menu driven so he can pick and choose.
How the Consortium Helped an Insurance Company
The Trustmark Companies looked at three buying consortiums to replace several incumbent office supply vendors, according to Ron Watt, Second Vice President, Contract Management Office, for the health insurance carrier and benefit administrator. “The first one was too expensive. The second’s roster included only Fortune 50 firms, making the company too small for that group. “But Corporate United was just right in structure and approach,” he says.
Watt appreciated that there’s just a one-time fee to join. “We achieved our return on investment in two months,” he reports.
Like Johnson Controls, Trustmark liked the fact it could join already negotiated master agreements. “Since we didn’t have to source office supplies, we had the time to source more strategic areas like our pharmacy distributors and technology providers. We appreciated the extra time we had to focus on our direct commodity areas,” says Watt.
He says office supplies “offer a savings opportunity, but they really are not strategic. So we don’t want to spend a lot of time managing them.” Instead, he likes the fact a professional is handling those transactions.
The Advantages of a Horizontal Consortium
The procurement landscape is littered with consortia that “didn’t work as well as expected,” according to Clevenger. For example, Pantellos in the energy industry, Covisint in the automotive space, and Transora in the grocery business have failed to live up to their original expectations. One reason he suspects they didn’t work was because they were vertical consortia. “They are counter-intuitive. You have members who have been life-long competitors trying to work together. Can Ford and GM really share a sandbox?” he asks.
This was an important consideration for Johnson Controls. “We really don’t want to work with other companies in our industry. It would be tricky. I suspect we would be suspicious about product specifications,” says Davlin.
Clevenger says Corporate United is successful because it is a horizontal rather than a vertical consortium; it has members from a variety of industry sectors. “We have some rare instances of competitors in our group, but we have found ways to create a forum for mutual success. We created an environment where sharing best practices works,” insists Clevenger.
Members actually benefit from the industry cross-pollination, according to the executive. For example, companies that have a white collar workforce have buying experience in office supply procurement while the manufacturing members are more knowledgeable about industrial supplies. “We now have a knowledge-sharing network,” Clevenger says.
In addition, it’s solely focused on the indirect spend, eschewing the strategic spend that differentiates competitors in an unforgiving global marketplace. “Someone in the office has to pay attention to paper clips and pens,” says Clevenger. Once companies move that spend out of their offices, their employees can dedicate their time to procuring items that are more strategic to the company’s bottom line.
“No one cares about this stuff because it’s not strategic,” notes Davlin.
Six Cleveland-area companies founded Corporate United back in 1997. Today 80 companies in 17 states are members selecting from 15 discrete contracts. Hailing from Ohio has been an advantage. “We liked them because they came across as Midwest conservative,” says Davlin. “That put us at ease.”
Why are buying consortiums thriving now? Clevenger says procurement has become the BPO process in the limelight as human resources and finance and accounting outsourcing mature. Accenture, Ariba, A.T. Kearney, IBM, and McKinsey “are really pushing procurement ideas into the marketplace,” says Clevenger.
Lessons from the Outsourcing Journal:
- Procurement is the next BPO process that’s gaining buyer excitement. Buyers are turning to a hybrid outsourcing solution by joining buyers’ consortia. These offer the advantages of outsourcing while allowing the buyers to retain their relationships with the vendors.
- Consortia based on indirect procurement are thriving because they do not source materials strategic to a business.
- Consortia that have a wide variety of industries work well because no company directly competes with another member. Instead, they can share knowledge.
- Buyers like consortia because the master services agreements are already negotiated. They enjoy the savings provided by an aggregated spend. And their employees now have more time to spend on direct procurement which differentiates them in the market.