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.