Musings on GPOs and Ariba Express Content
But at its core, is a GPO model -- even a next generation one like this, which differs from the traditional types by being a truly virtual type of model -- the right one for procurement organizations even in select categories? Academically, it never is. And that's because the incentive of the GPO is never to get the best price for buyers. Rather, the GPO makes more money the larger the transaction or unit price size, so its incentive is really with suppliers. In other words, the price discount from a GPO only needs to be good enough for procurement. An analogy here is working with a buyer's agent in the real estate world -- which is probably the most idiotic thing a good negotiator would ever want to do for a large transaction.
The reason for this is that a buyers agent's incentive is actually aligned with the seller's goal -- their motivation is always to get the buyer to pay the highest possible amount that they would for a property because they profit more as a result based on receiving a percentage of the transaction as compensation. A better choice from a sourcing perspective in the real estate world when larger numbers are involved is always to contact the seller's agent directly and work out a set fee or rebate that would have been the buyers agent's commission. Or an alternative is to work with a buyers agent on a fixed fee or hourly basis, paying for advice and getting a percentage-based rebate back after deal close.
However, the real estate world is not the procurement world. In real estate, most of us are only buying a single property at the same time and given the size of the typical transaction relative to our net worth, it makes sense to pull out all stops to achieve a result which is in our best possible interests (just as you would in a strategic or leverage spend category). In contrast, procurement organizations will never have the time to give all spend categories a similar time and investment. They must focus on spend triage based on potential savings, risks and other factors.
Those categories which don't make the cut from a prioritization standpoint internally are in fact ideal for models like GPOs (or for outsourcing). But unfortunately, GPOs have gotten a bad rap over the years because of their central role in health care -- an industry which is so backward from a procurement perspective that GPOs typically serve as a band-aid over a massive gash, rather than healing the minor scrapes which they are best suited to cover in the first place.
Will Ariba help turn around the image of GPOs? Only time will tell, but along with Corporate United and a few other newer models, they've got a chance to breathe life into procurement business model that makes practical sense in the market (even if academically it will never be the optimal answer). Perhaps this even signals the potential move to a business model for Ariba on the procure-to-pay side where they will get out of selling software entirely, instead opting to give it away in exchange for taking part in the transaction value or making money on the finance side. Only time will tell!
- Jason Busch
"But what is remarkable is how much a solution like this is needed in the market."
I believe the correct observation is "but what is remarkable is how much a solution *like* this *needs to be accepted by* the market.
There's already an approach to supplier content, enablement, and commerce that will enable procurement to achieve an 80% coverage on spend. It's Vinimaya. You've blogged about it here:
http://www.spendmatters.com/index.cfm/2007/3/13/Ga...
It connects with the Ariba Supplier Network. And it supports any supplier with an online presence, even if they're not part of the Ariba Network.
Simply put, I don't see how a shoddy attempt at a GPO-like offering from Ariba helps anyone beyond the message that "coverage of even your low priority categories is important too".
(And it is - in large companies, boutiques with epertise in the application of spend analytics like The Buying Triangle and Opera Solutions have found that unmonitored p-card and expense account spend can often contain as much as 50% or more in overcharges from office supply and electronics vendors as well as the occasional case of blatant fraud from a few bad apples lost in the data ocean. If this spend is in the millions, they can often find a million or two in savings where you just wouldn't expect it.)
The difference between this offering and others is pre-populated content AND pricing (which in theory offers some discount to list). Also, do you really think a middle market company is going to go out and buy Vinimaya and an eProcurement system, even though in theory that might be the optimal answer?
The difference real world pragmatism vs. ivory tower innovation, at least as I see it.
- Jason
Then wouldn't the optimal answer be for Ariba to buy Vinimaya?
Up until recently, I'd say that it was very unlikely that a middle market company would buy e-Procurement and Vinimaya - but with Coupa's new low-cost offering and their open pricing model which is only going to drive down cost on the basic e-Procurement capabilities needed by the middle market - I think we're now looking at a very real possibility of a company buying both (or Vinimaya at least getting an acquisition offer from an e-Procurement company looking for an edge).
Vinimaya is also capable of pre-populating any pricing available in any system it connects to (Ariba, SAP, Oracle, Peoplesoft, Supplier Web Site), although, as you point it, it is list price unless the supplier, or system, maintains a special discount feed or you create the discount pricing yourself.
I think what Ariba is attempting to do is a good thing ... certainly more beneficial to their client base than spending 100M just to wipe out a competitor ... I just don't think the solution is where it needs to be, or should I say, should be given that they're the big dog, they've been working on it for some time, they have the largest supplier network, and should be unveiling capabilities that literally crush the life out of the competition.
In comparison, Coupa is just a few dozen punch-out integrations away from delivering close to the same level of capability and I don't see why Ketera couldn't announce the same thing next week.
So, as I see it, it's A for effort but C for being too pragmatic. I think they could have achieved a little more ivory tower innovation while still retaining a usable, pragmatic solution.
Of course, I could be expecting too much.
The test for a GPO is, can it do better than that? I've seen large companies with office supplies pricing that I could beat at my local Staples store. If using a GPO gets you a "gentleman's C" in Procurement, maybe that's OK if you're a Kennedy or a Bush at Harvard, but, as Jason said, a GPO probably needs to do better than that to really have an impact.
I appreciate your thoughts. But I think we're talking about two entirely different areas here -- punch out and catalog integration vs. pre-populated categories with discounted pricing and terms.
Pulling off a model like this given the different contract prices, tranches, volume discounts, size of company, negotiations with individual providers, etc. is no simple feat. Trust me -- I've done work in the GPO space before and what goes on behind the scenes ain't easy or pretty. It might look simple in a press release, but good luck to Ketera or anyone else who tries to get into this without giving it some very serious thought and investment.
And don't think for a minute that Vinimaya is a direct substitute for this type of offering (unless you want set standard terms and pricing).
I guess we just have two different interpretations of what the problem is and what the press-release appears to be promising.
So I'll stop bickering now.
We're working with several mid-market companies right now (revenues ranging from $50M to $4B) to implement pre-negotiated contracts for indirect and some of the things we're seeing include:
- many have still not heard of the non-healthcare GPO concept (one VP Proc. of a $4B high tech company we talked to had not heard of Corporate United). The GPO approach - particularly as a procurement outsourcing strategy - is still under the radar for most mid-sized companies.
- the "one contract/one price for all" concept is indeed generally fiction: it's possible for some simple indirect categories like office supplies and janitorial to have a core list of pre-priced items with a reasonable discount off list available to all our members, but then you need additional incentive tiers to sign up the bigger mid-market companies (and generally the suppliers want to see demonstrated volumes before handing out deep discounts sight unseen). In addition you need flexibility to allow different companies to customize the items in their core list for them to play. Also there are other categories like print and technology where there can really be no core list at all - the play here is not so much offering a leveraged price but being a preferred outsourcing provider for requirements gathering, sourcing and contract/supplier management for that non-core category.
- I agree conceptually with the conflict of interest argument about GPO supplier fees but (a) realistically, we are not going to deliberately sabotage our chance of winning an account by negotiating a 50% tiered discount for our clients instead of 70%, and (b) the value proposition is bigger than price, it's allowing the typically small mid-market procurement groups to focus on generating value in their strategic categories and outsource the non-core spend management activities.
- A capability that is lacking in the current GPO provider market is active compliance management to help the customer drive volumes through the contracts. This means more than just generating quarterly reports (this is a minimum) and holding phone calls with the client to ask them to "do better". It means true change/stakeholder management integrated with the GPO services to identify reasons behind non-compliance and to drive different behavior in the user community. This capability should be present in the large consulting firms that also offer GPO services/procurement outsourcing but the problem here is the revenue model of these firms will not fit the mid-market. These firms won't pay the hefty outsourcing/category management fees of a DeutschBank - they'll pay a modest annual membership fee at most, and then will be quite happy to have the GPO provider capture their fees from the suppliers so long as they achieve their savings targets.
Ariba Express Content? Ultimately the question will be whether it helps organizations drive more value from their spend base. In my view it's a start because it sets up the process for users to easily access "ready to go" content and pricing. What it does not address is the outsourcing of the complete sourcing, contract/supplier management of non-core categories so that procurement professionals can focus on strategic spend (because the final price is "between the supplier and the buyer"). Plus, compliance management does not appear to be addressed. The "full service GPO" should have this end-to-end spend management capability as its goal.
Jason called it GPO-like, and that makes sense. I also agree with those who said the GPO business model, especially in health care, is going to be challenged very soon
Again, nothing reolutionary, simply a step in the right direction toward bringing e-procurement for the mid-market
Sounds like some more information on this is needed. If Ariba presents $9 'preferred pricing' for a widget that retails for $10, but Ariba has negotiated a 10% 'rebate' with the supplier, even though the contract is between the buyer and seller, Ariba gets a $1 cut, and doesn't even need to do anything besides autofax the PO and collect the rebate fees every quarter. brilliant!
ahhh, the old ghost of ICG Commerce returns!
another deferred revenue sliver added into the cauldron for Bob and Kevin I guess.
First, they can provide real-time access to a massive amount of SKU’s just using supplier web sites because they are not dependent on punchout or any other proprietary technology on the supplier side. Second, and I’m not technical enough to describe exactly how they do this, I guess it’s part of their patent, but the search agents (as Vinimaya calls them) actually log on to the supplier sites, so if the supplier can deliver specific pricing and terms based on login credentials (most can), they can use it (they can also audit for compliance purposes), and If the supplier site cannot support login-based pricing, the system can be programmed to discount whatever price it retrieves real-time. Or the pricing can be managed inside the Vinimaya system (the online price is dropped at the time of the search and overlaid with a stored price). We can point them to a GPO, or because of our size, use them to become our own GPO someday.
Also important to us, it presents everything in a single, unified user interface, no jumping from catalogs to punchouts, makes searching simple and accurate. This is critical for user adoption and should not be overlooked.
Vinimaya calls it a “virtual supplier network” and it’s really worked for us where traditional supplier networks did not. They’ve simplified the process for everybody. I’m pretty sure they have some plans to create a web-type environment similar to what Ariba is describing.
Excellent thoughts and thanks for chiming in. I'm on the road until Monday, but will build on the conversation then.
- Jason