Cooperative Contracts, Amazon-ification & Order Optimization

0

The second in a series of articles exploring public sector cooperative contracting practices, the organizations that make up the cooperative ecosystem, and the strategies and resources that realize maximum value outcomes. 

RECAP:  “What is a Public Purchasing Cooperative?”, the first article in this series, spoke to the general nature of coops and the significant government expenditures that flow through cooperative contracts. We asked, with so many sources of piggyback-able contracts, how do you identify and choose the “best” programs and contract?  What if a best price or best value solution is not available through a single cooperative contract, but could be achieved by optimizing an order across multiple contracts and suppliers?

 

Cooperative Contracting: The Value Proposition

The fundamental underlying value proposition supporting use of cooperative contracting practices goes like this: aggregated buyer demand drives supplier interest and increases competition, resulting in lower prices and better terms for the buying parties to the agreement. Both the buyers and the supplier organizations enjoy the time and administrative overhead savings gained through fewer contracting events and contracts to manage.

In a government business environment dominated by one-to-one contractual relationships and the ongoing pressure to “do more with less,” the promise of cooperative contracting has demonstrated its value-adding capacities. The cooperative practice of “piggybacking” contracts has proven so successful as to form the basis of an enterprise business category generating billions of revenue dollars for public and private consortiums each year. No wonder that new cooperative programs and businesses continue to form in hopes of deriving value from what has become a government-produced commodity, the cooperative contract. 

Ten years ago, state and local government procurement practitioners lamented that there were too many choices to quickly identify “safe” cooperative programs and the contracts that would provide them the best value.  Since then, while there has been some merger and acquisition activity by privately held cooperatives, the overall landscape hasn’t improved to make identification of best programs and contracts any easier. 

What has changed is the technological tools available to help with discovery, evaluation and operationalization of contracts. What has also changed is the common expectation of what a transactional buying experience should be thanks to the success of Amazon and ecommerce as a social norm. Add to this the current turmoil that agencies grounded in legacy, paper-heavy processes are experiencing during this time of social distancing and demand for remote working capacities. The convergence of capability, demand and urgency suggests that we may just look back at 2020-2021 as a period of modernization for many agencies (among other highlights) and a broader realization of the substantial fiscal and managerial benefits still to be gained by fully digitizing acquisition processes. 

 

eMarketplaces

Most agencies already use enterprise financial solutions, some with a marketplace environment to give agencies a one-stop portal for staff to access approved suppliers’ online catalogs, shop and create requisitions. The better ERP-marketplace implementations are fully integrated to allow a seamless procure-approval-pay experience. Providing a marketplace environment offers many benefits to the agency: reduced maverick spending, faster requisition-fulfillment-payment times, greater spend visibility and category management capability, and greater overall customer satisfaction.

The connection between an agency and a supplier catalog is established through a punchout solution to create a one-to-one connection between the requisitioner and supplier catalog unique to the buyer’s agency. A marketplace, then, is a collection of one-to-one connections to multiple suppliers. Think of it as going to a shopping mall. We go into the mall, then into each shop whose merchandise we want to look at and potentially buy.

As entertaining as going to the mall, browsing and shopping can be, whether for one item or many, going from store to store to compare prices on similar items is time consuming. This holds true for the vast majority of agency marketplaces as well. As helpful as it is to have a one-stop portal to agency-approved providers, a limitation of one-to-one connections is that it precludes easy line item comparisons across suppliers. Just like going to a mall, to get the best pricing, you need to navigate to multiple stores, take notes (even if just mentally), and then revisit the store(s) that have what you want at the best price.  

The practicality of this approach to “order optimization” wanes quickly the more items there are to buy. Depending on our commitment to lowest price and our level of energy, we sooner or later rationalize that buying related items from more than two or maybe three stores is not worth the time and effort. We make this choice knowing that we may spend a few dollars more than we might otherwise. This holds true whether we are shopping in the analog or digital world. In fact, “Finding and comparing products and pricing” and “Lack of product information” were the top two cited ‘pain points’ identified by B2B buyers during research conducted in November 2019 by Avionos, LLC1Paul Demery. Dealing with ‘pain points’ of online purchasing. Digital Commerce 360 B2B.
https://www.digitalcommerce360.com/2020/05/19/dealing-with-pain-points-of-online-purchasing/
.

Presumably, if the length of time and level of effort needed to get the optimum pricing for all items in an order was substantially reduced, then we would tend to choose the lowest price items that meet all of our needs. As personal consumers, we are accustomed to sites like Amazon and Travelocity that give us real-time price comparison for similar offerings from many suppliers. Identifying and selecting the best deal in these marketplaces takes only a minute or two, compared to the ten-to-fifteen minutes we would take to go to each provider’s online store and do that same comparison. Even if we take only five minutes on each unique site, that is still four or five times longer than we would otherwise take in a marketplace that gives us in-the-moment visibility into multiple suppliers’ products.

Until recently, limited agency marketplace functionalities dictated a shopping mall-like tactical approach to order optimization. When we consider that a marketplace must be able to draw data from many access-restricted sites, different operating systems, unique database structures and classification systems, and then normalize that data into a consistent user-friendly display, we can begin to internalize the underlying complexity of standing up a new marketplace. The order of magnitude of difficulty goes up with each new catalog and each supplier without punchout or ecommerce experience. 

Today, however, there is emerging technology giving agencies a Travelocity-like marketplace. In these enhanced marketplaces, customers create their order and are then shown all of the like products for each item in their cart. Suggested products are drawn from all of the pre-approved catalogs included in the marketplace. Now, shoppers can quickly compare price and product details, identify the supplier and the contract source to inform their decision-making.

No more “time is money” or “level of effort” rationalizations required.

 

Procurement: Delivering Value After the Award

For a host of reasons, any single agency-single supplier contract for a broad category of materials is not likely to provide the lowest possible price for every item available from that contract at a given point in time. Even cooperative contracts born from large demand pools that successfully achieve lower overall pricing across a category can’t make that claim. Which is why Procurement’s buyers “shop” contracts as best they can, Googling, referencing price indexes, and reviewing published contract price sheets to inform their choice of contracting methodology. 

For all their due diligence and best contracting decisions, there remains a gap in the Procurement team’s ability to achieve up-front uniform lowest prices through each contract. (Yes, best value contracts are often the goal, but even when price occupies a lower percentage of the best value equation, we still want to spend as little as possible for the greatest value we can get.)

Instead of trying to close that gap through an even more intense focus on front-end assessment, evaluation (already an often-exhausting effort) and negotiation to create that “ideal contract,” we can take advantage of advanced marketplace technology to leverage the best pricing provided from each agency and cooperative contract. This doesn’t negate or lessen the level of professional due-diligence that should go into every contract’s formation. Rather, it extends Procurement’s organizational value beyond the risk- and cost-avoidance realized through their contracting efforts. By creating and identifying those contracts that bring best value to their agencies and enabling those contracts in a fully realized marketplace environment, Procurement extends its value into each requisition event. Their customers now have the Amazon-like experience they need to identify “the best from the best” and make the best choices to achieve price-optimized orders.

 

Inevitable Change in Government Business Practice

To be sure, nobody likes being “shopped.” Some suppliers and cooperative programs are reluctant to participate in buy-side marketplaces. Their reasons are many: technological maturity of systems; fears of lower contract spend or average spend-per-order; ongoing competition post-contract award; price protective; staff capacity. 

Agencies may also be hesitant to take on a marketplace implementation (much less a procurement digitization project) at this time. Lack of staff or staff capacity and funding being the most immediate concerns. 

Common to all our realities today is the added stress that comes from adjusting to a global health crisis. The economic effects hit private and public sectors hard, both laying off workers and cutting budgets to mitigate, if at all possible, going out of business, creating huge deficits or taking on greater debt. 

Finding the solutions and technologies available to bridge gaps in business continuity are a high priority. While the adoption of technologies may happen faster over the coming year than might otherwise have happened without the COVID-19 jolt, a trend toward agency IT modernization has been underway since the emersion from the Great Recession. 

Online marketplaces have been an agency reality for some time now. Even if it has been only recently that we’ve seen Amazon-like functionality come into those environments, this capacity for line-item comparison shopping will become the norm in Business-to-Government transactions just as it has in Business-to-Consumer.

Agencies and suppliers should take note that technology is changing the business transaction environment. Its impact can be measured across a number of imperatives for today’s agencies and businesses:

  • Simplified processes
  • Increased efficiency
  • Minimal paper handling
  • Reduced transaction times
  • Realized savings
  • Improved transparency
  • Greater fiscal control
  • Improved customer outcomes
  • Expanded remote/mobile access
  • Data security
  • Easy adoption
  • Reduced staff burden

As the old saying goes, “With change comes opportunity.”  There’s no question that we’re undergoing a lot of changes right now, and the modernization of procurement and financial systems is one of today’s many great opportunities for governments to realize the greatest possible tax dollar value through their transactional spend.

Subscribe To Our Newsletter

Subscribe To Our Newsletter

Join our mailing list to receive the latest news and updates from our team.

You have Successfully Subscribed!