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By Steve Kelman

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Leveraging buying power: A lesson from the private sector

The front page of the business section of today’s New York Times  (yes, Washington Post readers, the Times has a standalone business section that is several pages long) featured an article called “16 Million Reams of Paper, Please,” about how private equity firms such as the Blackstone Group have banded together to negotiate better pricing on common items such as office supplies, overnight packaging, and commodity IT for the companies they own in their portfolios.

“We have incredible leverage,” a senior Blackstone executive was quoted in the article as saying, “The more volume we have, the lower our prices go.” The purchasing entity, called CoreTrust, uses both pre-negotiated contracts and reverse auctions to bring prices down. They basically demand that their vendors give the purchasing entity the lowest price that has been negotiated by any of the companies owned by the private equity group. (The example given in the article was that the largest firm in the group was paying $6.95 for an overnight package shipment, while the smallest was paying $9.95 – CoreTrust negotiated a $6.95 price for all the companies in the group.)

One thing that is interesting about this article is that this purchasing alliance consists of a large number of different companies owned by several different private equity firms – it is not just inside one company. This makes it more analogous to governmentwide leveraging of buying power across federal agencies, if anything even more difficult. It is also interesting that the private equity companies have developed this new model in response to changes in the economic environment – they are having to hold the companies they buy for a longer period of time because of the slowing economy, and they are reacting to that economic change by changing the way they do business. A lesson for government in the tight budget environment.

There was another interesting quote in the article, where the same Blackstone executive, referring to trying to get lower prices from suppliers, stated, “We negotiate them to the wall.” As I have noted in other blogs and columns, there is sometimes an attitude around Washington that if the government negotiates vigorously on behalf of its interests, it is “anti-contractor” or against partnership. This is no more true than to state that if contractors negotiate vigorously with the government – which they do – they are “anti- agency.”

I believe that the interests of the government and of well-performing contractors are mostly the same, but they are clearly not always identical, and price is often an example of this. To be sure, there are sometimes tradeoffs that need to be managed – indeed, the Times article notes there are some worries in some of the companies the private equity firms own that this approach will hurt supplier relationships. There is no one size fits all management approach here, and it should be noted that a company that receives a lot of business from these deals is likely actually to treat the customer better, because the business relationship has become more important to it.

Posted on Jul 12, 2012 at 12:09 PM


Reader comments

Mon, Jul 30, 2012 Don Mansfield

Alan, Your comment about hunting licenses suggests that you don't know what GSA Global Supply is. You seem to be confusing it with the GSA Federal Supply Schedule program. GSA Global Supply, which is a mandatory source per FAR 8.002(a)(1)(v), is a stock program. They have over 120,000 products ranging from office supplies to tools and hardware. The program has been around a long time.

Mon, Jul 23, 2012 Alan

I don't know that the Federal Government has been doing this for a long time. GSA has been issueing hunting licenses for years, but do EPA and DoD use the same computers? The same ERP system? The same pencils? Are these things procured under the same solicitation? Not that I remember. Is there a person short of the President who can compel this level of standardization?

Tue, Jul 17, 2012 Don Mansfield

This is nothing new for the Federal Government. Ever heard of GSA Global Supply? How about DoD's Coordinated Acquisition and Integrated Material Management Programs? The DoD Enterprise Software Initiative? The Federal Government has been doing this a long time. I'm not exactly sure what "lesson" the private sector can teach the Feds that they don't already know.

Fri, Jul 13, 2012 Alan

In the ivory tower’s defense, even the cutthroat private sector folks have considerations that are not purely economic (emphasis added):
“Some large private equity firms choose not to participate in programs like CoreTrust, typically because they believe the group purchasing process STRAINS RELATIONSHIPS WITH SUPPLIERS, and requires them to micromanage companies in exchange for relatively small savings.

Private equity-owned companies, too, have raised objections to group purchasing programs, which OFTEN REQUIRE THEM TO CHANGE SUPPLIERS FROM THE ONES THEY HAVE USED FOR DECADES”.

Still, if there is still low-hanging fruit of this nature still to be plucked in the federal government, you have to go to GSA and ask what’s going on. Bulk purchasing is not a cutting edge idea.

I tried to see what the feds were paying for shipping, not what fees have been waived, or a percentage discount- I couldn’t quite figure it out:
http://www.gsa.gov/portal/content/105105

Until someone has the authority to mandate that EPA, NOAA, DoD, NIH, and the rest of the leviathan use the same type of computer, or paper, GSA’s job is much harder than it should be.

Thu, Jul 12, 2012 David Yarkin Washington

Great blog post Steve. By now, most state governments have launched some kind of strategic sourcing initiative. In many, it's the standard M.O. for procuring enterprise wide contracts. I liked how the Times article described an earlier era for private equity where times were so good, there was no pressure to find ways to save in procurement, but as times got tougher, it became unavoidable. The parallels for government should be obvious.

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