5 Reasons why consortia buying is a poor solution for indirects
Sep 8, 2011 5:11:00 AM
I thought I would briefly share some thoughts around limitations and pitfalls of consortia buying for Indirect (i.e. Non-Core / GNFR) Categories.
In almost every instance that we have encountered consortia deals, with the exception of small-to-medium enterprises, a better commercial deal and service levels are achieved by contracting direct with the supplier.
Common reasons for their failure include:
- Consortia create a confused contractual relationship, with poor supplier service often the result as suppliers are unsure who the end customer is.
- There is invariably a great difference in the size of the spend of the members. If one of the largest members decides to change supplier (e.g. due to a merger, or a major service issue) then all other members of the consortium will be effected.
- Rebates often are introduced into the relationship, as a percentage of the turnover through the consortia, which gets paid to the organiser of the consortia. This means that they have a strong incentive to encourage expenditure through the group, regardless of whether it is a competitive solution to the members.
- Service levels vary from organisation to organisation, even in the simplest areas like stationery. One organisation will have one site, with a single delivery point, whilst another will have multiple sites with delivery to the desk. The commercial implications of these varying needs are great.
- As aggregation can force an organisation to restrict their requirements in the market to a limited predefined scope, business units are often non-compliant as they go elsewhere to have their needs serviced.
Where consortia deals can work is in highly commoditised areas of spend (typically therefore in direct categories such as steel, cotton, etc.) where the item being purchased has material economies of scale, is easily and precisely specified and that specification has limited or no variation.
In the arena of indirects on the other hand, every organisation has unique needs. Some categories face diseconomies of scale. Many services get more expensive with scale - the largest accountants and lawyers are the most expensive because there is a cost to operating on a consistent scale across many geographies.
The cost of operating consortia have frequently outweighed the benefits as the need to compromise on requirements and the speed of collective decision-making required for there to be genuine co-operation are punitive.
Finally, the consequent reduction in agility through the compromises necessary to buy together is an impediment to innovation.