Tuesday, August 1, 2017

Bargaining as a Group

Last month, FTC alumni Dan O’Brien and Jon Leibowitz along with Russell Anello, completed a study extolling the virtues of Healthcare Group Purchasing Organizations (GPOs). GPOs bring together multiple firms to buy of common products jointly rather than separately. Among the ways this lowers costs is by lowering their counter-party's disagreement value.
A healthcare provider’s bargaining strength depends in part on the size of the loss it can impose on a vendor by refusing agreement. If a vendor has little to lose from failing to reach an agreement with the provider, then the provider’s bargaining position is weak, while if the vendor has a lot to lose, then the provider’s position is strong.


  1. Group purchasing organizations (GPOs) increased healthcare supply chain savings between 10 percent and 18 percent by reducing transaction costs and supplier prices. When negotiating as an individual organization there is not enough incremental benefit to the suppliers, and the supplier has the bargaining power in the transactions. The use of GPOs reduces the number of transactions by suppliers, and effectively forces the suppliers to provide best price and value, since there would be greater gain in being a supplier to a GPO versus an individual organization and great loss in not being able to provide to a GPO.

    There is benefit to the suppliers also, since it also reduces the transaction costs of the suppliers by negotiating with a handful of GPOs instead of thousands of organizations individually. Additionally, volume discounting can be negotiated, also a benefit to both the supplier and customer, since understanding demand helps suppliers control inventory and costs associated.

    Group purchasing is something that is not just being done in healthcare but also in municipalities and government, where increased bargaining power through volume purchasing, controlling of costs, and reducing transactions costs would also be of benefit communities and taxpayers. Anytime buyers can group together they can strengthen their position, since then there would be greater gain on the side of the supplier due to the increased volume of the buyers and the reduction of transactions from many to one.






  2. This article about bargaining as a group was very interesting as I have a lot of experience with GPO’s. The premise of GPO’s is great for smaller organizations because they group together the purchasing power of their affiliates and negotiate pricing based on purchasing products with the collective spend rather than one companies. If we use office supplies as an example company A may spend $50,000 per year but the combination of all the affiliates may be $50,000,000. So the GPO can go to a Staples or an Office Max and negotiate pricing based off of a $50,000,000 spend and achieve pricing much lower than company A could have because Staples can go back to the vendors and say we are going to increase our ordering by X amount but we need a .30 cent price break per unit. The GPO utilizes strategic bargaining in this negotiation because they are able to commit to a position and since they represent many organizations with a spend of $50,000,000 they can stay firm on their pricing requests knowing that if Staples says no that Office Depot or a W.B Mason would gladly say yes and make the accommodations to take market share from Staples.

    I personally do not utilize a GPO as my spending is large enough where I can negotiate a better deal than the GPO can. I use Cost- Based Pricing to account for the firms cost structure in their pricing methodology. A company like staples will have their bottom line cost price then add a cost-plus pricing component to create their margins of profits. Having worked for Bed Bath & Beyond in their corporate office I have insider information on how these methodologies work. In many cases a company will set a price based only on the cost component while excluding the consumers demand.

    The real secret with GPO’s is that they are simply a middleman. They negotiate with a company like Staples with a collective $50,000,000 then receive their price point per item. Then the GPO will take that pricing list and design tiers for their affiliates based on how much of that initial $50,000,000 they bring to the table. A GPO can create as many tiers as they like. For this exercise we will say that the tiers are broken up by the following spends. If a company is bringing $10,000 to the table for office supplies they will be in the GPO cost plus 20%, $25,000 would be cost plus 15%, $50,000 would be cost plus 10% and $100,000 would be cost plus 5%. The best thing that the GPO’s have going for them is they are double dipping because the vendor is also paying them 3% of whatever is spent in that category. The GPO’s are paid on both ends even though they tell the affiliate company they can achieve such great pricing because the vendor is paying them 3% and the affiliate gets these prices at no charge to them. What most companies fail to ask is how much do I have to spend to get into the next tier? If you are in the cost plus 15% tier you are leaving money on the table because the GPO is getting a much cheaper price and is giving a cheaper price to another organization even though they collectively utilized everyone’s spending to achieve their price point.

    GPO’s are great if you’re a small company or if your company doesn’t have the resources to conduct a full blown RFP. When I run an RFP for Office Supplies as an example I will bring in Staples, Office Depot, Proftech, Weeks Lerman, W.B Mason and Amazon. I will meet with Staples and Office Depot without the GPO representative and tell them that I could care less how they want to go through the process. I give them the choice of dealing with me directly or going through the GPO. One of my selling points to them is that if they deal with me directly they don’t have to pay the GPO the 3% fee so right off the bat they are saving that 3% commission. My advice to any organization that utilizes a GPO would be to see what tier you fall into and get the pricing then work out a deal with the vendors privately so they aren’t paying the 3% GPO fee.

  3. Bargaining:
    When workers, CWA union, and firms negotiate or workers and firms it’s usually to tackle a wage rate, wage hike, healthcare, sick time or job security subject matter. In my recent experience the company I work for ATT and the CWA union have been working on an expired contract since February 2017. Interestingly multiple contracts have been submitted by AT&T where both entities are bargaining hard even to the point where a strike occurred on May 19th 2017. Although lasting 3 days this showed the union’s conviction on AT&T terms and how accommodating the union’s needs would require a better effort on AT&T’s end. Almost a year later and a rejected “final offer” a resolution and an agreement covering 21,000 employees in 36 state & DC in the orange contract agreed. The type of strategy both the union and AT&T took was similar to the typical Labor Negotiation game of chicken – where both parties were trying to play optimally against its rival. (Froeb) In the end CWA president Chris Shelton stated “This contract affirms the power of working people everywhere to join together and establish a new standard form America’s retail and telecom jobs”
    With a contract entailing a $4,000 wage increase and jobs returning to work from offshore. Pay on average is expected $19.20 per hours which is quoted to be about 74% more than the national average pay for retail workers. All in all the short term strike positioned the Union with an advantage and more leverage for bargaining. The last thing AT&T wants is a long term strike and a bad image –

    CWA-union.org December 14th Groundbreaking Contract at AT&T Mobility
    Froeb, Luke M., et al. “3-14.” Managerial Economics a Problem Solving Approach, Cengage Learning, Boston, MA, 2016.

    A, Pressman (December 14th 2017) AT&T Reaches Tentative Labor Deal with 21,000 Wireless workers Retrieved December 22, 2017 from http://www. Fortune.com

  4. Contract negotiations are the back bone of businesses. It is critical that both parties reach terms that are accountable and equitable. That is why the negotiations process is critical and requires cooperative efforts so each side can mutually benefit from the exchanges. The goal is to avoid moral hazards that negatively affect the business bottom line.
    Last year, my place of employment was sold to a European company. In the sale agreement, the new company assumed responsibility of existing vendor contracts. Vendors were willing to negotiate because the new company potentially offered future growth opportunities in the global and expanded regional footprint. The new company could leverage economies of scales, efficiencies and cost savings. The new multi-national owner flaunted to slash operating costs by utilizing European management and procurement strategies that were successful in building his global portfolio of businesses.
    The new owners made the first move and notified non-critical system vendors they were reducing the number of vendors and contracts were cancelled until re-negotiated. The company assumed the risk that vendors would promptly re-negotiate terms at least 30% lower with an increased scope and 120-day payment terms. This unanticipated hard strike tactic created an adverse selection of information between the company and vendors because the information was not shared with the employees who continued to use vendor services and products. The company held up payments to these vendors, and employees were instructed to continue using their services during the bargaining process. Another tactic engaged to make the vendor appear to have advantage, was proposing to include the past payments into the new contract or to consider the past payments as opportunity costs to secure the contract.
    The European negotiating strategies did not extend good faith to established vendors used to transacting in a fair and equitable manner. This non-cooperative style of bargaining did not give up any concessions for the company and did not provide any opportunity for vendors to reach an agreement that was beneficial, many times resulting in deadlocks. The economic effect of this created a Prisoners’ dilemma where neither party could reach a profitable agreement because the self-interests of the company prevented any wealth consummating transactions for the vendor. The lack of cooperation directed the transaction to be negotiated with alternative vendors, that offered lower rates because they lacked the experience and knowledge to effectively perform the job.
    The company was able to declare costs saving equivalent to 30%. The residual and moral hazard resulting from intimidation negotiation methods has stalled the company’s internal progress, culture and reputation. Post contractual business has shown gaps in service with unusually high volume of service request tickets that also disclose large lag times for resolutions. Vendors who were not paid for services that were provided during the negotiations period and were not awarded the contract, are in litigation for payment. In addition, word of the company’s contract process has spread to through the vendor grapevine and damaged their reputation. The previous owner’s reputation had vendors making deals with marginal gains just to retain business with a reputable and sustainable company. Today the company’s service has declined (competitor’s quality better and repair times too long) and customer accounts dropped 3.5% in 2017. Many vendors do not want to do business with risky and uncertain companies. The effect has also diminished stock price 40% loss in less than 6 months since the IPO. In conclusion, companies need to assess due diligence prior to negotiations to measure the broader picture of bargaining objectives. There is a lot of value in the old saying “penny wise pound foolish.”
    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial Economics A Problem-Solving Approach. Boston, MA: Cengage Learning.