The 7 Myths Of AGGREGATION
The rise and rise of procurement had largely ignored aggregators until more recently. Jonathan Dutton FCIPS busts the Seven key myths that held aggregators back until the last few years, in the fourth of his recent articles for the commercial aggregator, SUPPLY CLUSTERS www.supplyclusters.com.au
Over the last fifteen years or so, the rise and rise of procurement in Australia has felt unabated and achieved much for many organisations. Savings mostly, of course.
Yet this has been achieved almost singularly. It has been rare to see procurement teams using external aggregation – either partnering with other organisations directly or through generic commercial aggregators.
This is particularly strange since aggregation is a founding principle of professional procurement. You would have thought it would be a more natural procurement strategy than it has seemed?
Of course, there are exceptional examples of long-standing collaboration or aggregation – indeed, Supply Clusters is 25 years old now. Although membership has increased five-fold to over 250 organisations in just the last five years.
But, traditional, strong examples of aggregation have been rare. And firm examples of its success even rarer. Oddly, the public sector has always seemed slow to embrace aggregation in the past. ‘Whole of Government’ arrangements were very rarely that. Often just two or three random state government departments working together on one category for a time. In the UK, one Prime Minister (Gordon Brown) even had to mandate central procurement of stationery in an attempt to get traction on public purchasing collaboration – which feels like it should be an obvious course. Yet leaders in all sectors are slow to ‘give up’ spend. The FOLG (fear of letting go) is huge in procurement.
Procurement Australia is a Melbourne based aggregator, largely for local government procurement (it is part-owned by the City of Melbourne with others) and dates back to 1985 when it was called MAPS (the Municipal Authorities Purchasing Scheme) – only recently it has grown through the acquisition of another aggregator, Sydney based Church Resources.
In the private sector, CorPROCURE was a Melbourne based collaboration venture between CBA, BHP, Coles-Myer and Australia Post back in 2004. A well intention collaboration that stopped after only two years or so. Another private-sector scheme involved ‘gain-sharing’ – that is experienced procurement consultants trading part of their professional fees for a share of their recorded savings. Yet this approach often floundered in downstream squabbles over true savings or on the simple fact that savings were rarely harvested by clients so, typically, available budgets could never pay surprisingly large invoices post-procurement.
But, historically, other commercial collaborations have been rare. Maybe because six key myths surrounding the few aggregators that were available were sufficient to smother any real interest from mainstream procurement?
More recent history
Yet more recently it feels that aggregation is becoming almost popular compared to the past – even despite the occasional reverse.
In local government aggregation is now mainstream in some jurisdictions (despite Council Solutions in SA closing down recently). Of course, economies of scale are a driving force of council amalgamations that have occurred in several states now, most recently in NSW.
Indeed, consolidation within certain industries is also seemingly becoming more popular now. Although, Health Purchasing Victoria (HPV) has been established since 2001, now offering around 50 central contracts for Vic hospitals, the most high profile example currently is perhaps the universities’ procurement hub (UPH) … a small central buying team across core common categories run by an outsource provider for a growing group of Australian universities http://www.ausfog.com/index/UPH
Similar arrangements have been instituted by Uniting Care Queensland for their members, also for Mutual Marketplace for a number of the mutual banks and building societies. Other examples are increasingly easy to find. What these groups, particularly, seem to have in common is the notion that they better understand their members’ particular needs – as they emanate from a single vertical sector or industry.
But, regardless, what these aggregators have done in their market is to bust the SEVEN principal myths that seem to have so obviously stymied market acceptance of the aggregation model :
The SEVEN Myths of AGGREGATION
1. You have to join the club first – and it’s expensive to join!
Some aggregators (like Supply Clusters) have a membership structure. But membership is really only a token fee each year relative to expenditure. Like $2,000 per annum or so, at Supply Clusters, for any size organisation.
There are no other fees or costs to being a member; not with Supply Clusters anyway. They do, however, take a share of rebates (capped) that is provided by suppliers. There is usually only one supplier per category offered. You can track your own spend at all times through the secure online dashboard facility.
2. You have to buy blind – and commit to buying before joining the club!
Of course not. Quite naturally, potential members get a thorough introduction and professional quotations before making any commitment at all to any of the 35 or so categories currently available. Your account manager will guide through you through any of the categories you might consider buying from, giving you every opportunity to benchmark offers & terms from any of the suppliers selling through Supply Clusters. And well before committing to becoming a member.
3. You have to sign-up to a minimum commitment – of time, money and quantities!
Nope. There is no minimum commitment to anything. Which is why there is a small membership fee – only to dissuade frivolous buying, really. New members can buy from any or all of the categories available and need to make no commitments to spend level, exclusivity, term or quantity.
As members benefit from the established volume already spent by other members, suppliers offer pre-set discount rates to new members on standard industry terms (usually always pre-negotiated by the aggregator). However, additional bi-annual rebates are usually also offered by the supplier against agreed spend-thresholds built on your estimated spend. Your individual portal keeps score.
4. You have to buy through the aggregator – not directly from the supplier!
False. The trading relationship and terms are usually agreed between the member and the supplier directly. Effectively, the aggregator only ‘introduces’ the member to the supplier(s) … however, the terms and base discounts are largely pre-negotiated by the aggregator from an initial market exercise conducted by the aggregator against a basket of common goods/services in that category. But you do have to remain a member of Supply Clusters to retain access to their supply arrangements.
5. You lose control of your own spending – and visibility of the data on your spend!
The opposite, actually. The quality and accuracy of the granular spend data offered to members on their own spend through the online real-time dashboard is exceptional – through any of the suppliers at Supply Clusters. Much has been invested in the past establishing these spend-tracking facilities. It is a key benefit offered by Supply Clusters.
In fact, many members say the spend data is better and more comprehensive than their own P2P spend data. This offers members the opportunity of buying through Supply Clusters to improve spend tracking, and subsequently re-addressing the spend of their own volition later on.
6. You don’t get a better deal through an aggregator – you can negotiate better yourself!
This may be true for some buyers. However, this also assumes two things … firstly, that the buyer has a significant volume to leverage a better deal in their own right; and secondly, that they have the time to spend sourcing the right supplier of the right quality and negotiating the right price on the right terms – even though their total spend on the category is likely to be relatively low (if they are considering aggregation).
This work has been pre-done by the aggregator, who has combined the volume of many smaller buyers to bolster the buying power of all their members. They have also pre-negotiated ‘fair’ industry-specific terms on behalf of their members. This includes navigating particular category-specific questions – often managed by
Supply Clusters with the help of specialist category consultants and subject-matter experts during a rigorous sourcing and set-up process. Rates are consistently checked and market tested at Supply Clusters to ensure competitiveness.
7. It will put me out of a job – why does my organisation need me, if they have an aggregator offering 35 categories?
There is no such thing as a well-resourced procurement team. Because historically procurement has not convinced the C suite of their full value, or the need to allocate greater resource to manage the supply side. Spend-per-head managed in procurement can be in the $100m range … a frightening sum really. This means that there is always much to do working in procurement.
Moreover, the “strategic challenge” coming down the road at ordinary procurement managers includes questions like:
What is AGILE procurement, and how can it help my business?
What can DIGITAL procurement offer us?
What is our sustainable procurement strategy, and how can we make it work?
How do we balance the need to better serve our USERs, but balance one-click ordering with the governance needs of our organisation?
Modern procurement is increasingly about allocating the right tool for the right task. Self-service, P cards, catalogues and guided buying are all options today. So is category management or strategic sourcing or using contractors, consultants or outsourced procurement teams. So which approach is best used where? And why?
The resultant time saving from using aggregators, or any of the tools above, only free up busy buyers to tackle the real questions we face. The strategic ones we can’t dance away from.
Buyers cannot hide behind the transactional workload. In future, any work that can be done by others much cheaper, or even by computers for that matter, will be.
The greatest benefit of aggregation – saving buyers time
Increasingly, these SEVEN myths feel largely busted, so aggregation feels on the rise throughout the country today; though partly through necessity too it seems.
Smaller procurement teams focused on DIRECT categories or operational support buying often don’t have the time to properly address indirect categories – certainly their lesser relevant or smaller indirect categories. They often have the intention to address the spend, but (rightly) also get distracted by core business and other operational priorities.
Yet almost all procurement teams are under pressure to keep delivering savings against total spend; even whilst they might be properly focused on supply issues in DIRECT operational categories. Which, usually, are quite mature spend lines offering few savings.
When it takes months to complete a proper sourcing exercise, it is difficult to deliver against expectations of continual savings whilst focused on supporting an operational business or manufacturer with a small team.
Some might say we in procurement have made our bed (ongoing savings) and we now have to lie upon it …. as savings tend to zero over time. Especially with indirect expenditure.
So, perhaps, the greatest benefit aggregators can offer busy buyers is to save time. Buy through off-the-shelf deals from existing standing-offer supply agreements and skip the sourcing process, until you do have the time (and the data) to do the job better in future.
And, if we do embrace more ways to deliver MORE for LESS, procurement will continue to thrive in Australia for at least another 15 years or more.
Jonathan Dutton FCIPS is the former founding CEO of CIPSA until 2013 – the procurement peak body in this region. He now works as an independent management consultant specialising in procurement www.jdconsultancy.com.au and has a non-executive role at Supply Clusters www.supplyclusters.com.au