(This is the fifth in my scintillating series of posts on the nine value propositions offered by B2B platforms/multi-sided markets.)
Value Proposition #5: Leveraged Contracts
Leveraged contracts are a very small segment within the world of B2B platforms. Leveraged contracts aggregate the spend of many, small buyers to provide pricing and/or non-price concessions that would not be available to the participants as individual buyers. A supplier on the other end of a leveraged contract, in theory, receives access to many buyers, and ideally big volumes, with just one sales process.
Leveraged contracts are the primary output of a Group Purchasing Organization (GPO) or consortium buying group. Leveraged contracts exist wherever buyers need to pool their purchasing power to gain leverage over large suppliers.
The most common examples of GPOs are in the healthcare industry, where GPOs such as Premier, MedAssets, and others help the fragmented hospital industry buy from the large pharmaceutical and medical device companies. Examples of leveraged contract providers also exist in indirect goods and services, such as Corporate United, Avendra in the hospitality industry, and Foodbuy in foodservice. Again, anywhere buyers are fragmented and suppliers are not, a GPO may be a useful tool.
Strategic Issues Facing Leveraged Contracts
- If GPOs get big they have to steer clear of anti-trust provisions. In healthcare, for instance, there are special rules for the GPOs.
- Leveraged contract providers may decide to instantiate their contracts in the form of industry catalogs or even provide their members full e-procurement solutions. Some leveraged contract suppliers have stayed away from any technology, while others have built, bought, or partnered to offer complete source-to-pay solutions.
- For GPOs to receive concessions from vendors, vendors have to win as well. There is no free lunch. Vendors need to see the volumes and reduced cost of sales and delivery that GPOs often promise, but fail to deliver. If the GPO is just a first step in getting on a member’s “preferred” vendor list, expect the prices and terms to be similar to what you can get with your AAA card!
- GPOs need to develop great processes for strategic sourcing across companies with varying needs. Most companies cannot even convince their internal divisions to agree on the same supplier, much less 15 different companies! GPOs need to be experts in collaborative sourcing and contract management, as well as in understanding supplier cost structures if they are going to negotiate “win-win” solutions.
Up next, one of my personal favorites, the sixth B2B platform value proposition: transaction financing.