Government Co-ops – it’s a term many city and county officials have heard, but few outside of the public procurement profession really understand intimately. And while it may not be important for every government worker’s day-to-day job, billions of dollars pass through these organizations annually. Knowing how and why these entities work will only grow in importance as they become more popular. So what are government co-ops, how do they function, and how are they impacting the way governments deliver goods and services?
Cooperative purchasing: A crash course
Generally speaking, cooperative buying practices in the public sector goes back to the 1930s, but became popular with the advent of the General Services Administration’s Multiple Award Schedule. The practice of pre-qualifying suppliers is the common point of reference for modern co-ops, says Brent Maas, the executive director of business strategy and relationships for NIGP: The Institute for Public Procurement (NIGP).
But to really understand co-ops, Maas says you need to understand two key ideas – joint solicitations and piggybacking.
Joint solicitations started when agencies in a given region partnered together to increase their need – and by extension, their buying power – to command better offers from vendors. This practice, Maas says, is very intentional. “You know the parties to the agreement at the front end, and the supplier then knows who it is they will be servicing and what the anticipated need it.”
Piggybacking is similar, but differs fundamentally, Maas says. The idea refers to the language of the contract itself, in which clauses are included where outside, unnamed agencies can utilize the contract after the initial services have been rendered. There is no obligation for other agencies to use the contract, but including a piggybacking clause in the contractual language increases the buying power of the agency drafting it, and can draw out better pricing and services. “It’s a non-guaranteed expectation of substantial use above and beyond the needs of the contracting entity,” Maas says.
In the 90s, co-ops hit their stride using these two practices, Maas says. It was during this period that U.S. Communities, the largest co-op in the country, was able to demonstrate that it’s possible to offer a contract for use that would be relevant to agencies across the nation. Since that time, numerous co-ops have emerged, from regional to national, small to large, some focused on particular goods, others more general. But they all have similar goals, such as consolidating the buying power of local government agencies. “Programs like these… are third party aggregators,” Maas says. “What they’re doing is aggregating market need, market demand and arguably market consumption for use of a particular contract.”
But, what has made co-ops so attractive in recent years? Jean Clark, President of NIGP Code & Consulting Services for Periscope Holdings, says that co-ops primarily grew out of the need of local governments to do more with less. Clark formerly was a state and local procurement officer for three decades, most recently as Arizona’s procurement director.
“When you start seeing budget reductions there isn’t necessarily a reduction in the workload,” Clark says. “You’d think that [in procurement] because you have less to spend, now you have less work.” However often the opposite is true. The recent periods of austerity, Clark explains, drove the demand for cooperative solutions.
Harold Good, president & CEO of the Procurement Pros Group and former director of procurement and contracting for Palm Springs, Calif., agrees. As resources stretch, Good says, “it’s almost a folly” to rely exclusively on singular solicitations, especially as cooperative offerings increase. “Not only do [agencies] not have the manpower to compete everything, but on an economy of scale if they tie in with a larger solicitation they can get a better price.”
Cooperative purchasing's benefits
There are two main benefits of purchasing through a co-op, Maas says—cost savings and time savings. Both are important considerations, but aren’t guaranteed unless due diligence is done from the very beginning of the contracting process.
With a basic understanding of economics, the first benefit is fairly straightforward. The greater the buying power of the contract, the lower prices will be. If a contract will serve only one unique agency, it’s unlikely that agency will get the lowest price or best service terms. However, by making that contract more competitive through piggybacking and/or joint solicitation, suppliers will be more interested in securing it, and more willing to offer lower prices.
The second benefit is slightly more complicated. When purchasing through a co-op the contracts already are written and less time will be spent selecting the best one versus drafting and soliciting a bid from scratch. However, that’s not the extent of the time savings offered.
“Here’s what often gets overlooked,” Maas says. “If you’re not the lead contracting agency, the burden of contract management and supplier management is substantially less.”
That doesn’t mean that going through a co-op will drastically diminish the agency’s relationship with the supplier, but it does mean the responsibility of holding the supplier accountable to the terms of the contract isn’t the sole responsibility of the one lead agency. The reduced administrative overhead associated with the establishment and maintenance of a contractual relationship is where major time savings comes into play, Maas says.
Good suggest that there is a third, peripheral benefit to purchasing through a co-op. “Another added advantage which people don’t often talk about is the fact that you can look at the experience of others who have bought the product or service before,” Good says. “In a cooperative environment you can touch base with who has bought it before and what their experience was. This leads to an intelligent, best value decision.”
But this doesn’t mean cooperative purchasing is right for every situation. There are limits to the practice’s efficacy. According to an NIGP position paper, "Cooperative Procurement: Great Value (Great Confusion)," some of these limitations include contract pricing that may not be optimal because of the inability of an agency to accurately predict order quantity and timing, less flexibility in the terms of the base contract, and a possible decline in the opportunities for small, local or disadvantaged suppliers. Because of this, Maas says it’s important for officers to view contracting case-by-case, and select which method is best for the agency at the time.
Trends shaping today's marketplace
The cooperative marketplace is currently in a state of flux. It’s growing quickly and dynamically adapting to myriad factors. First and foremost, according to Clark, is an increasing acceptance of the legitimacy of cooperative procurement and contracting.
“Some agencies potentially don’t have language in their policies that provide them the breadth of opportunity [cooperatives offer,] Clark says. “I think there’s a continued focus to expand so that agencies have a capability to use a broader range of cooperatives, so that they aren’t limited.”
This increased acceptance has, in turn, lead to a dramatic increase in the number of co-ops to choose from. Marcheta Gillespie, director of procurement in Tucson, Ariz., says that in the past 5 years there has “really been a spike in the number of groups coming into the marketplace.”
She adds that while this has increased the options available to procurement professionals, it’s also increased confusion. Education and due diligence are becoming increasingly important as the market expands, she says. “There is no one right solution for any one agency nor is there even a consistent always right partner for any one agency.”
As the market has expanded, so too has it’s offerings. Until recently cooperative contracts have mainly been used to procure goods, rather than services. “If it’s a commodity, there’s probably a cooperative contract in place for it,” Maas says. However, this is shifting.
In the past five years, some co-ops have been experimenting with service contracts, although those types of contracts present their own set of challenges. First, service contracts are generally more specific to the issuing agency – sometimes prohibitively so. For example, it’s far more difficult to write a universally applicable contract for something like financial auditing services than it is for copy paper.
Another challenge is that there are few national service suppliers that can guarantee pricing and delivery nationwide, because of varying labor prices. “Finding or discovering enough suppliers who could compete at that level within itself is a challenge,” Maas says. “If you only have a couple of suppliers… do you really get a competitive process? You need a competitive marketplace to drive the value.”
However, Clark believes that as the marketplace evolves, co-ops who wish to become leaders will discover the types of services that lend themselves well to cooperative contracting versus those that don’t. Generally speaking, contracts for simpler services such as custodial or temp work are easier to make universal, lending themselves well to co-op solutions.
Transparency is another trend guiding the market.. Maas explains that the most recent emphasis on this notion came about during the economic crisis, with a heightened level of scrutiny on how governments were allocating resources. “Because of that, there has been momentum toward this thing called open government or transparency and open reporting of government activity,” Maas says. “I think that spirit contributes to a bit more commitment and conviction around the importance of transparency.”
Maas adds that recently, the notion of transparency has become folded in with the status quo, and while it hasn’t reached it’s ideal yet, agencies are pushing towards it. Because of this, organizations that wish to do business with these governments must themselves be transparent in their practices, creating a strengthened sense of integrity in the marketplace.
Maas says that, “in the last two years, increasingly if you go to a cooperative program’s website, there’s a better likelihood that you’ll be able to more immediately access contract documents – and not just the contract, but the documents that underlie the contract that’s established – so you’ll see the actual RFP document, you’ll see all the solicitation material… I think we’re starting to see more programs be more upfront about what they’re providing to the marketplace.”
The future of co-ops
Clark says that the co-ops have reached a critical mass and foresees a leveling out of the marketplace, with the key players digging in and defining their unique appeals, and other areas that differentiate them from their competition.
One of these differentiators will be increased transparency. Already, some of the larger organizations are looking for the best ways to clarify their practices so they can better compete in a market increasingly concerned with openness.
In a similar vein, groups like the NIGP have recently offered programs to certify co-ops along a standardized list of guidelines. “The onus of the assessment is on the contracting process and the management of the contracting agency,” Maas says. “First and foremost, it’s about the contract, secondarily its the contracting agency’s management practices, and third it’s how the cooperative manages itself.” The hope is to provide a standard that can be referenced and folded into the procurement officer’s process of due diligence.
In a similar vein, last July, three of the largest public agency procurement programs, educational institutions and non-profit organizations established the National Coalition for Public Procurement (NCPP) “to drive best practices in public cooperative procurement, including transparency, competition, integrity, auditability and process,” according to Coalition documents.
While the world of cooperative purchasing is expanding, procurement professionals should approach it with some caution. “This is a really interesting period and a nexus point in the practice of cooperative procurement and cooperative use of contracts,” Maas says. “This is an unregulated area which is good, but also fraught with potential dangers.”