Collaborative sourcing adds value to GCC ventures

Several corporations in the region are ignoring a key business opportunity. Research shows that collaborative sourcing could be an effective tool to trim costs amid growing competitiveness and a volatile economic environment.

Too many large organisations in the GCC are missing a significant business opportunity. At a time of increasing costs pressure, rising competition and a volatile economic environment, these organisations – such as family conglomerates, multi-business unit corporations, investment portfolio companies or government entities with multiple departments – have yet to exploit the potential of group-wide collaborative sourcing.

Collaborative sourcing can help organisations to capture considerable value. One hospital group in the GCC, for example, believed it could achieve annual cost savings of between 8 per cent and 10 per cent from a blended collaborative sourcing model, involving group-wide volume consolidation, stronger negotiating power with suppliers and product rationalisation. Other examples include savings through economies of scale, simplifying supply chain complexity and greater sourcing capabilities.

To go down this route, organisations need a detailed spend analysis that reveals common spend categories across their various entities and the scale of the potential opportunity. This makes a convincing case for collaborative sourcing. In particular, organisations with several common spend categories would see that they gain the most from this approach.

Once they understand the case for collaborative sourcing has been established, organisations can select a target operating model for their sourcing. The four models available are opportunistic, group-level collaboration, lead buyer or centralised. Organisations can also use a mixed model, blending these options.

The opportunistic model involves group entities collaborating on specific sourcing opportunities, as and when they arise. This collaboration can be achieved through a committee, with representatives from the entities.

The group-level collaboration model uses a lean team that assumes responsibility for collaborative sourcing of common spend categories.

This team oversees a standardised item master, creates and maintains master agreements and manages key supplier relationships. Although the master agreements would be adopted by all group entities as a blueprint for their contracts, procurement can remain under the authority of each entity, with little disruption to operations.

In the lead buyer option, by contrast, separate group entities are chosen to lead the sourcing of particular categories on behalf of the whole group. The selection is based on the entity’s relative strength in that category, perhaps because of its relevant share of spend, specific expertise or the nature of its supplier relationships.

The chosen entity then performs all sourcing activities for the category on behalf of the entire group, including transactional procurement and contract management.

The centralised option offers the highest level of collaboration. It provides economies of scale for sourcing and boosts operational efficiency through centralising the procurement staff.

This option is most effective when a group organisation is already thinking about a shared services model for other functions.

Organisations can tailor the operating model to suit the relevant spend categories. A centralised option could be most appropriate for common, low-value categories.

However, group-level collaboration will work better for common, high-value categories. In the group-level option, entities could take advantage of master agreements that set standard prices and terms negotiated on behalf of the entire group, but still retain control of operational procurement.

The hospital group that talks of such major cost savings selected just such a mix of collaboration options. Each hospital had previously been procuring several common categories at different prices and terms. Therefore, the group as a whole had not been taking advantage of its combined economies of scale.

After conducting a thorough spend analysis, the hospital group decided on a centralised option for non-clinical categories, with one team handling all non-clinical procurement.

They used group-level collaboration for clinical and pharmaceutical categories, with a lean team at group level devising and monitoring master agreements for these categories.

The individual hospitals, meanwhile, stayed in control of operational procurement for clinical and pharmaceutical categories.

The prospective savings result from group-wide volume consolidation, supplier negotiations and product rationalisation.

Implementing each of the possible options requires very different levels of effort. The opportunistic option involves establishing a committee. By contrast, the centralised option entails major changes in organisation, processes and IT systems.

However, all of these models share three foundations. The first is a standard item codification system that records the spend data of group entities. This allows collaborative sourcing opportunities to be quickly identified and then pursued.

The second is to align the collaborative sourcing model and its implementation plan with the organisation’s strategic priorities.

The third is for senior managers to provide dedicated support for the transformation. They can ease the move to collaborative sourcing by securing group-wide commitment and introducing the necessary change management programs.

Without an effective collaborative sourcing strategy, too many group organisations in GCC countries are placing themselves at an unnecessary disadvantage.

Yet if they select the collaboration option most suitable to their own circumstances and priorities, they can gain significant competitive advantage.

Walid Tohme and Haroon Sheikh are partners, Ashish Labroo is a principal and Anna Germanos is a manager, with Strategy&