Privatizing Multi-Transactional Supplier Platforms Within the Public Sector (Part 2)

Posted on February 17, 2010


I can recall negotiating a mutli-million dollar contract renewal and being relieved that my organization held an important advantage in that we had developed and owned the growing supply base that was necessary for the third-party provider to meet the delivery and price requirements for a key government client.

When I talk about owning the supply base, this included the corresponding intelligence, as well as the technology to maintain its veracity and relevance on a real-time, real-world basis.

The flexibility (and mobility) this afforded us also provided a game-changing advantage in that when the government end-client looked to renew their contract with the third-party service provider for another 4 years, other third-party providers recognized the value of the established supply base and approached us with offers to team with them in their efforts to win the government ‘s business.  Suffice to say, we were able to structure a deal that resulted in savings throughout the relationship stream while delivering healthy bottom-line profits to the company.

Based on this experience, I could not help but wonder why clients whether third-party service providers or end-users such as the government would almost dismissively surrender this key point of influential control over the procurement process that had and continues to have such a significant and tangible impact on bottom-line cost savings and profitability?!

Why for example rely on Ariba’s supply network in which there are added costs including a pay-to play structure that presents increased expense for the supplier?

Alternatively, why use an Oracle or SAP ERP-based supplier engagement platform that may not represent the most efficient and effective way through which a client can identify, develop and engage a dynamic supply base?  Besides being based upon progressively outdated technologies, many of these programs are still tied to expensive licensing and/or support models – even when introduced under a supposedly revamped Software-as-a-Service or “SaaS” cost structure.

In short, the supply base is the most important asset for a purchasing department. Do you disagree with this assessment?  Well perhaps this may change your mind.

  • Public sector organizations are being faced with a serious problem relative to supply base erosion.  Specifically, fewer, quality suppliers are responding to bids resulting in a phenomenon known as creeping margins.  Creeping margins occur when the RFP response pool decreases dramatically to the point where 80 percent of the business is being done by 20 percent of the suppliers. Over the years I have made reference to creeping margins by way of tangible examples such as the Canadian Department of Defense consistently paying a premium of a 157% above market price for Indirect MRO parts to support their IT infrastructure.  Of course the results of an eroding supply base is not limited to the public sector, as US retailer Best Buy through a misaligned vendor rationalization strategy paid a premium of 23% above the going market rate for their MRO parts.
  • Despite investing tens of millions of dollars in eProcurement automation, many governments still find themselves in the unenviable position of having to rely on their suppliers to provide intelligence in terms of overall spend.  Putting aside for a moment the fact that an increasingly narrow intelligence gathering funnel through the erosion of an organization’s supply base creates an artificial metrics against which true best-value purchasing verification is impossible, the process of obtaining and analyzing historic data is itself an onerous and resource expensive proposition.  What’s worse is that the ability to apply this “mined” data to real-time, real-world decision-making is virtually non-existent, meaning that it is largely an exercise in futility in that knowing where you have been, without being able to use it as a reference point in decisions that are being made today provides no real value to the organization.
  • The loss of controlling the method of identifying, developing and engaging one’s supply base is also a problem in that end-clients lose the ability to respond and adapt to changing objectives in which there are added considerations like economic impact on the SME sector within a particular State or Municipality.  A May 20th, 2009 article titled “Cook County economy would be harmed by health system plan, Commissioners say” referred to the proposed utilization of a Group Purchasing Organization (GPO).  Based upon the use of a pre-approved set of vendors, the program is under fire by local business owners that currently supply the county. They say an agreement would eliminate their ability to sell to the county.  While Health system officials dismissed said claims by referring to independent surveys which prove the system would save at least $20 million this fiscal year, and as much as $40 million annually in the future, the question of whether a “healthy” or equitable balance can be achieved between these two opposing elements is one that should be confined solely to the end-clients’ interests and not the interests of a third-party GPO.
  • The integrity and transparency of the process is also another important consideration for public sector end-clients.  Especially with growing cynicism on the part of suppliers who on average have to invest between 18 and 24 months before seeing their first government contract.  Against this backdrop, a January 22nd, 2009 article “Sunshine bill is back with sharper teeth” which “requires that manufacturers or group purchasing organizations disclose all payments or transfers of value to physicians worth $100 or more”  goes to the heart of the question surrounding conflicting agendas associated with third-party control of the supply base.

Now I want to emphasize that I am not suggesting that Group Purchasing Organizations are inherently a bad idea across the board.  There are circumstances under which a quality provider will collaborate to develop an effective program that delivers value through a fully transparent procurement process.

What I am saying is that the frequency by which governments surrender control of their supply base either through the third-party engagement of a Group Purchasing Organization, or through the utilization of adjunct platforms that make the procurement process too costly in terms of both dollars and resources for many suppliers, have to be closely examined.

Think about it for a moment, would you like to be the one to explain why the Department of Defense paid a 157% premium for MRO parts totaling millions of dollars in taxpayer money due to an eroded supply base?

This is one of the reasons why I am excited about the emergence of true SaaS technology platforms in which public sector clients can efficiently and effectively maintain control of their supply base under a government branded flag.

Through a relatively simple and direct integration within an existing infrastructure, these new platforms address the issues referenced above with the added advantage of providing what I refer to as muti-transactional functionality that opens up additional supplier revenue streams simultaneously.

Instead of pursuing unilateral opportunities with a single government entity (i.e. state or municipality), the suppliers within the multi-transactional platform can make their products and services available to more than one government, as well as other suppliers!  It is the ultimate “teaming” resource network in which a 360 visibility into opportunities are available through the awareness and interaction of multiple stakeholders.

This means that the real-time intelligence of these advanced SaaS platforms will maximize supplier engagement within the framework of the broader objectives of a public sector organization including economic development.

Besides delivering significant savings that are always aligned with real-world market conditions, the expanded opportunity for suppliers to realize increased revenue lays the foundation for a “revenue positive business model” that will make the government’s management of its own supply base a self-funding vehicle that does not have to tap into the tightening budgets associated with existing deficits.

Ongoing and verifiable, “best value” decision-making intelligence engaging the broadest range of suppliers, and total economic self-sufficiency means that many public sector organizations at all levels of government will likely be taking a more serious look at how their supply bases are presently managed and utilized.

All I can say is . . . what took so long?!

(Note: This article can also be accessed through the Essential Connections Blog)