By Jason Cromack.
The public sector is frequently considered slow to innovate and to be near the bottom of the league in best business practice. This perception, which is far from reality, is challenged by the author. He highlights the success of collaborative procurement in the public sector and points the way for the private sector to follow the example.
Collaborative purchasing has long been a feature of the public sector and the immensely successful results are something the private sector can no longer afford to ignore. One such success story is the 2008 collaboration of six NHS procurement hubs, representing 220 trusts across the country, which saved £6.5 million in the first year of an 18-month deal for the purchase of new IT consumables. As a collaboration they could approach the suppliers with a bigger budget and greater bargaining power and ended up being able to buy to a higher specification while saving at least 20% on previous prices.
An opportunity for the private sector
In the current economic climate companies are doing everything they can to cut their spending. So why isn’t collaborative purchasing the norm? The truth is that while the public sector can so obviously gain from the benefits of collaboration it is not impacted highly by what many consider to be the downfall of this approach. The recession may be driving the need to cut expenditure but it is simultaneously increasing the competitive nature of the market. Companies may be reluctant to adopt collaborative purchasing because they don’t want to share details of their suppliers with competing brands, particularly if their product is their unique selling point.
It could be argued that concerns about competition are unfounded because of the involvement of an independent third-party co-ordinator. This third-party co-ordinator is responsible for controlling the budget and negotiating contracts with the suppliers. Therefore it is not necessary to share information with competitors about the contract terms your company use, or to reveal to them your unique supplier. Through the use of a third-party, companies are able to remain competitive and keep confidentiality, all the while reaping all of the benefits that a larger purchasing budget brings with it. In this way private sector companies level the field with the public sector as the competitive factor is removed.
In spite of these fears the private sector finally seems to be treating collaboration purchasing as a viable way to reduce their procurement expenditure. The airline industry has been hit particularly hard by the recession and several companies have been exploring collaboration purchasing as a means of cutting back.
In January 2010 two of Asia Pacific’s biggest budget airlines, Jetstar (part of Qantas) and AirAsia, announced that they had entered a joint-procurement agreement on engineering and maintenance goods and services. The company aim was to save around £114 million through their collaboration. However it is not only Asian airlines that are taking the idea seriously. British Airways and Monarch Airlines CPOs have met to discuss the possibility of collaboration, and Oneworld Alliance, which is made up of 11 of the biggest airlines in the world, meet biannually to discuss the potential for collaborative purchasing.
With such a scope for potential savings, collaborative purchasing will become an attractive proposition for any company. However it is important to understand that it’s not a measure to be drawn on only in times of economic difficulty; a company doesn’t need to be struggling in the market before collaborative purchasing becomes an attractive option.
Getting collaboration right
The key to a successful collaboration is twofold. Firstly trust and transparency have to be established between the collaborating parties. It is vital that all parties behave correctly and professionally, are always clear about costs and contractual arrangements and that each individual company has been consulted about the final agreements. Secondly the right third-party co-ordinator must be found. It is important to look for a team of professionals who have experience in saving money across a wide range of products, rather than relying on industry-specific experts. It is also important to work with a team who already have the required specialist software in place. Specialised software streamlines the whole process, facilitating best practice and eliminating low-value administrative chores involved with ordering and reporting on a supplier framework, managing stock levels and reordering. Furthermore it is independent, reduces conflict and provides total transparency for all parties.
Collaborative purchasing makes economic sense in today’s market. It has already proved hugely successful in the public sector and private sector companies are quickly catching on. There will always be difficulties with agreeing the terms between the collaborating companies, but put simply caution is needed. What’s more, with the right third-party co-ordinator there is no reason to fear that a company will lose its competitive edge. Expert advice and software is out there, and because of it, collaborative purchasing should become an increasing trend in the current economic climate.
Jason Cromack is CEO, Lateral Group