Purchasing Power and When It’s Most Powerful
Just as “Location, Location, Location” is the mantra for real estate value, “Spend, Spend, Spend” is often cited as the equivalent sine-qua-non for buying, especially for replicated items with commodity characteristics. Put simply, one of the most successful keys to creating reduced pricing is “Spend”. In general, the bigger the gross purchasing power, the lower the unit price for the items being purchased. Oftentimes, this is why centralized IT departments are tempted to create blanket agreements for the benefit of their affiliates.
In some cases this approach can work really well. However, it can also create downstream burdens and encumbrances that ultimately result in partial or failed consumption of items included in the agreement.
Let’s look at a theoretical nonprofit IT organization:
GoodHealth has a National Office and is an affiliation of 100 local nonprofits. GoodHealth (acting as the National IT Buying Office) has just secured an excellent price on a nationally respected piece of fundraising software. The negotiated price includes licensing and technology that will apparently scale with diminishing incremental costs. After implementation of the 50th Goodhealth “local” there are minimal incremental platform (server\cloud) costs and minor additional licensing costs for the 51st through 100th affiliate.
Sounds like a good deal, right? Maybe, but let’s take a look…
Replicated Units—The “Commodity Illusion”
Start by defining a commodity as “an item used in commerce that is interchangeable with other commodities of like type, and comprising units of predictable form, fit and quality.” Sounds promising, right? And you might expect buying a replicated, standard software solution with attractive features validated for your successful affiliates to be a GREAT strategy for improving all other affiliates.
So, why might this fail?
Two common pitfalls of centralized IT buying agreements:
- The needs of the largest affiliate may be very different from the needs of the smallest. Consider the range of constituent engagement activities offered by a large “local” with enough scale to retain operational knowledge versus the need for extreme simplicity and ease of access for small, volunteer-intensive tiny “local”.
- Consider also that software and platform are only two, of several, Total Cost of Ownership (TCO) categories that represent the actual cost of the solution.
The smallest affiliates, who are least able to consume these costs, can be blind-sided by an apparently attractive solution that appears to be “already paid for.”
The irony is that these unquantified costs, which are not internalized in the master agreement, can be much larger than the more obvious licensing and platform costs. Furthermore, these costs can easily be replicated (by “reinventing the wheel”) for each new implementation. So, for the smaller affiliates, an apparently inexpensive decision to deploy can quickly evolve into an “ouch” and ultimately end with a stalled initiative.
So, what is the answer?
In summary, any national office that is considering a global buying role on behalf of its affiliates should have eyes wide open during selection.
This means you must:
- Negotiate licensing and platform costs
- Think TCO in all areas of design, implementation, support, maintenance and upgrade
- Think very carefully about whether a single solution footprint fits the profile of ALL affiliates, or whether a selection of scalable feature offerings might better suit the needs of different types and sizes of affiliates
In a later blog well define the several critical dimensions of centralized purchasing agreements and discuss how to tackle them for a head office acting on behalf of a set of affiliates.