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The GPO concept has emerged as a hybrid outsourced solution for a reason. It can provide superior flexibility, speed to market and savings compared with internal or other third-party procurement efforts.
Controlling expenses and improving margins are imperatives for every chief financial officer. CFOs at large companies have a hand on the traditional levers – rightsizing the workforce and shifting production and back-office work to lower cost locations. But most companies have already maximized the potential of these options.
Many organizations have achieved further savings by focusing on indirect spend, which can account for 8-15% of total revenue and span more than 100 different categories, ranging from office supplies to complex services such as legal counsel. According to a study by analyst firm Aberdeen Group, 70 percent of procurement executives cite indirect spending as their top focus area for reducing costs. But few spend management departments have the staff, tools and expertise to effectively manage that kind of workload.
An emerging solution to the indirect spend challenge is selective procurement outsourcing through a group purchasing organization. A GPO manages pre-negotiated agreements for member companies across 20-30 or more category offerings. The company selects the package of non-core activities it want to outsource, sometimes starting with a handful and adding others later. The GPO may be paid through either a fixed fee per full-time equivalent employee, a percentage of managed spend, or a percent of savings achieved.
GPOs have grown to be a major factor in the vertical U.S. healthcare sector, purchasing more than $200 billion of goods and services annually for their clients. The horizontal corporate GPO market is newer, smaller and quietly growing.
For example, a 2011 study by the research firm Spend Matters found that 15-20% of the Fortune 1000 currently uses a buying consortium, and 85% of the time they are seeing real savings of more than 10%.
Similarly, a July 2012 New York Times article reported that some of the largest private equity firms, including Blackstone, Kohlberg Kravis and Roberts, and Bain Capital, have adopted the GPO concept. Blackstone said it had saved $600 million since 2006 through its buying consortiums, while KKR pegged its total savings at more than $700 million.