July 18, 2023 • 52 mins
Massively Increase Your Net Operating Income™ with The TCO Method™.
Andy discusses the different types of Group Purchasing Organizations (GPO's), how they work, and how they make their money. Learn about when GPO's might be the right fit and find out how much buying power and money you leave on the table by letting them control your purchasing. We also discuss "consultants" that are basically salespeople representing brands and products who get paid twice - once by you for their "consulting" and also via kickbacks from the vendor they are recommending to you and your team.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
[Music]
(00:23):
Welcome to the TCO Method, the only show focused on helping you massively increase your net operating income.
I am Andy McQuade and I want to thank you so much for joining me for today's episode.
What I want to talk about today, I might get on a little bit of a rant because I'm a little passionate about this,
but today we're going to talk about GPO's and why you should be avoiding them like the plague.
(00:47):
GPO stands for Group Purchasing Organization, and they come in many forms, but like I've talked about before,
when you're looking at whatever, you always have to go back and follow the money.
How do they get paid?
What's in it for them?
(01:08):
Why are they suggesting this particular thing to you?
That's true of social media, and it's true of building materials, MRO supplies, office supplies,
it's a procurement cop-out, and what I mean is that a lot of them will talk about using their services
(01:35):
to streamline your operations and save you time in the office by handling all of your,
this, that, and the other thing that take up time for your people.
Sometimes that's true, but rarely if you have any type of buying power whatsoever based on volume,
(01:59):
rarely does it actually work out in your favor because the math they use is made up math.
The numbers don't actually work when you get right into process costing.
In GPOs function in three or four different ways, and there's some out there that don't even say that they're GPOs.
Like they just don't advertise the fact that they're operating in this particular way.
(02:22):
Some are more egregious than others, right?
We're not going to talk about the ones that have existed for decades that have like hospitals, nursing homes, health care,
funds of GPOs out there doing that kind of stuff, lots of stuff selling to the government, etc., etc.
And they do it for a couple of reasons. One is, well, it's the government.
(02:43):
They're really bad at pretty much anything they touch, okay?
So yes, there is a distinct possibility that GPOs can help government agencies buy things at a better price,
a little bit more intelligently, and that there's a benefit to the taxpayer for that.
But we're not going to talk about the government side of this.
(03:03):
We are going to talk about real estate and the recent push for these GPOs to be out there literally soliciting business
for stuff that you should be in charge of controlling.
In procurement, there's two types of spend, strategic spend and non-strategic spend.
(03:29):
Recurement in and of itself is the process and the organization inside your organization responsible for every input that comes into your business to make sure your business can run.
That means electricity providers, other utility providers, phone providers, subcontracted labor, legal, all of the product purchasing,
(03:58):
all of the product selection and specification, all the vendors you deal with, all that stuff should be in procurement.
Now, I say it all the time, people's eyes glaze over.
90% of real estate operators don't actually have a mature procurement function.
(04:21):
So they find ways to simplify it, so it's just a cost center, number one, instead of a value driver, it gets things done but it doesn't necessarily add value.
And number two, they don't want to spend the time or the money.
It takes to really wrap their heads around it because they're in business to operate real estate.
They're not necessarily good at buying stuff, right?
(04:44):
A lot of it comes down to these three bid RFP RFQ, which is request for price, request for quote, or whatever processes.
And those are always the race to the bottom because you say, hey, I'm soliciting bids, blah, blah, blah, see you'll bid process or open bid process doesn't matter.
(05:04):
You're going out and you're soliciting a list of products that you've chosen and you're giving it to your different suppliers and they're going to send you what they think is the lowest cost product and they'll value engineer stuff, meaning that they'll look at what your spec is if there is one and they'll just give you the cheapest thing that gets the job done because
(05:26):
if it fails in a year, it's not their problem because they don't own that warranty.
Maybe it's a manufacturer's warranty and any vendor worth their salt at this point operating in 2023 that survived the pandemic is going to tell you we don't own any of the issues in product quality.
That's the manufacturer take it up directly with them.
We don't care if you bought it from us, we're out of it.
(05:49):
And usually the margins are so tight on those they're not going to do anything above and beyond to help you out.
And POs are even worse and I'm going to explain why in just a second first I want to talk about the different types of GPO's that are out there different types of group purchasing organizations.
So the one that I like the most that I'm okay with people participating in is the program usually offered through like a networking group right there's a ton of different real estate networking groups out there.
(06:24):
They offer education certifications training sometimes vendor pricing sometimes group discounts.
I'm okay with what these guys do in this particular arena because they're not going out and negotiating specific pricing on specific products and then locking you via an agreement in to only buy from those specific vendors.
(06:50):
So you name a real estate networking organization they probably have a contract with somebody national association of home builders has one with lows.
National apartment association national real estate investors association national association of residential property managers.
(07:14):
I am the Institute of real estate management all of these big national organizations offer their members a benefit package that allows them to solicit business and get members to pay their membership dues and in exchange for those dues the hope is.
That these national programs for their players that are that are coming in are going to help offset the cost of their membership so like if you pay $700 a year to join a networking group or your company.
(07:47):
The goal is that then you would get $700 a year in benefits back from the different vendors that they have agreements with now they leave it completely up to you the end user as to what you take advantage of.
You don't have to use Verizon if you join group a you can still buy from 18 to your T mobile or whoever you use for your business cell phone service and you're not locked into a contract where you're not allowed to shop outside that particular.
(08:21):
Relationship to get a better price is not it's not always price based a lot of vendors are very bucketed by how they structure their agreements and so coming from that industry I have 20 something years of experience with dealing with that type of relationship where if you're going to sell Anderson windows you're not allowed to sell pillow windows.
(08:43):
If you're going to sell Geldwen interior doors you're not going to carry Mason interior doors because they're direct competitors.
But that means that you're being locked out of some products by nature that could be a better fit for your business your risk profile for whatever and when you're getting in bed with some of these GPOs they lock you into a specific set of brands or a specific set of products that they've pre-negotiated agreements with.
(09:12):
And make no mistake these GPOs.
They negotiate these agreements for themselves not for their members so the networking groups are a little different they're not dictating to you what you can buy or what you can't they're just saying if you want to take advantage of these programs it can help offset the cost of your membership.
(09:34):
And it could be something like a 2% rebate for the members sometimes there's a kickback from that vendor that goes back to the networking group that helps the offset their costs a lot of these networking groups are nonprofits so it's actually kind of cool.
You join a group you get a rebate from the vendor you get to negotiate your own pricing in your own contracts and service terms with that vendor based on your needs you don't have to buy everything from them.
(10:03):
You can still go outside that relationship and shop for other things and buy what you need not necessarily what they carry based on your business needs.
And then you get to see sometimes some some disclose some don't but sometimes they'll tell you hey because of your X number of dollars we want to thank you we know you got a 2% or a 3% or 5% or 8% or 10%
(10:32):
rebate from them whatever you're set up for.
But we want to thank you because you got us a 5% rebate based on what you spent there and these big corporations these big retailers distributors service providers whatever it is they pool that into their marketing budget because it's considered an expense for the business to incentivize people to shop there.
(10:59):
Good example if you go to home depot.
And you remember of the national apartment association or you remember of national rea or your remember of.
Narpa residential property managers.
You can get a 2% rebate on what you spend and sometimes there's like discounted stuff on the front side sometimes there's not depends on the program but you're going to get 2% back.
(11:22):
Now the parent organization the national organization typically a nonprofit they're going to get like either 2% or 3% or 5% for bringing you to home depot.
Now they're not taking anything from you because you still have the ability to go and negotiate directly with that vendor.
To lock in a price that suits you based on your buying power and your volume.
(11:49):
Okay so we're taking the networking groups out and we're shoving them off to the side because they're the one example of collaborative purchasing.
That can work in your favor where you're not really losing anything because of participating in this program.
Now we're going to talk about the different gpo's that are out there that are true gpo's so there's a few forms that they take.
(12:17):
A lot of them have been pushing in to try and get into real estate whether it's institutional stuff whether it's industrial trying to do.
MRO supplies or even parts and pieces for day to day operations or actually producing product right actual manufacturing or whether they're trying to just get you to purchase everything through their portals.
(12:40):
Okay so there's two or three systems.
I'm going to talk about yardies first right and similar systems to yardies so any of your ERP is any of your enterprise resource planning that's an ERP.
Okay and they take a lot of forms in real estate most of them have multiple integrations with different companies and different services.
(13:04):
So like yardie has a bunch of their own built in stuff they have the yardie marketplace they have voyager they have the ability to create like websites and and tenant portals and all this cool stuff so that it automates a lot of stuff in the back end.
Absolutely think you should be doing those and taking advantage of whatever system you use because those systems take manual processes out and automate them.
(13:29):
You have to make sure if you're using them that they're set up properly at the beginning with your business vision and strategy taken into account because the problem you're going to run into with any of those is garbage in garbage out just like anything else.
We're planning leads to poor implementation and you don't take full advantage and you end up leaving money on the table because of it.
(13:53):
The marketplace portals help in a lot of ways to control certain things inside your organization especially as you scale and you get bigger and you get more properties and more locations and more cities and MSAs and zip codes under your belt having a system that creates visibility.
(14:14):
What's being used what's being spent in with who is great some of them even go as far as consolidating all of the invoicing reconciling pricing.
There's there's just a ton of stuff need to contract management through them. It's bonkers the amount of systems that are there but the more complicated they get the less effective they become because complexity is the enemy of execution.
(14:41):
That is a Tony Robbins quote that I shamelessly steal on a regular basis because it is absolutely true.
So some of the important stuff you need to understand about how that marketplace or similar systems works is number one they go to whatever suppliers are in that marketplace to build an integrated portal back and forth between their system that the end user see.
(15:10):
So when you're operating a property you go to the already marketplace you see all the stuff and then they also negotiate how they get paid.
So you're paying your idea fee to use their software.
It's not just licensing it's usually a monthly thing depending on a number of doors that you're covering and the different systems that you've got flipped on inside their their program.
(15:36):
At this point it's it's almost a universe honestly there's so many different modules that you can turn on it's the probably the most complicated and in depth system out there but it is a pain to get set up for that reason.
Marketplace the people who run that will do two things one is if you're not paying directly they will issue you a credit card or a.
(16:05):
Charge account usually a net something account to that vendor.
You will order product on their portal.
Their people or their internal systems will take that order and send it to the vendor now what's happening here is you do not actually have credit with that vendor.
(16:27):
You have credit with yardy yardy has credit with that vendor.
You pay yardy what yardy tells you in the portal needs to be paid for those products.
Meanwhile they've negotiated a deal with the vendor for product discounts based on category or fixed pricing based on product and rebates and other incentives including better terms.
(16:54):
So that they can take the pocket money between what you pay and what they pay and they stick it in their pocket to cover their operating and overhead but you're already paying them to operate the system right you're paying for their software to use it every single month based on a number of doors and all those other systems that you plug in so your your yardy bill is generally very expensive if you've got any type of advanced implementation and you have a lot of doors.
(17:23):
The real measurement comes down to what's your ROI for using the system and in a lot of cases there's an immediate ROI because you're creating transparency and generating all this cool information and it's useful data for the sea level people in the office etc etc.
The problem that I see with it is that they don't tell you how much money they're taking and what kind of benefits they're taking so like if you have a net 30 with yardy for vendor X.
(17:52):
They're probably in a net 60 or net 90 so they're taking your money and they're floating it you're paying your immediately but they're floating that money for 60 or 90 extra days to make more money with it right they're going to use it in other places to make money to cash flow.
They're also getting whatever you're buying at a discount so you're seeing a price that's X and it might be a couple percent less than retail.
(18:16):
But you're getting it for a little bit less but they're getting it for a lot less and generally speaking if it's MRO rehab and and capex materials.
There's ways for you to leverage your buying power on those if you're any type of of operation of any volume where you're going to be upside down and yardy will sell themselves on oh well you're not taking care of reconciling all these invoices and doing all this check.
(18:45):
Because we take care of all that and so we're going to save you.
God ten or twelve years ago they were saying we save the average cost right process costing the average cost to reconcile an invoice internally the way it's done today and this was like 2010 2012 is we take that software and we do this and this and this and we figured out that it's going to cost you 90 dollars for every single invoice that you reconcile because it's got to go through two or three different sets of hands and blah blah blah.
(19:14):
Complete will crap if it takes you 90 dollars to reconcile one invoice from a supplier.
Even today in 2023.
You've got a lot of other issues you need to deal with internally okay like that's not a selling point that should be anything to anyone like that should be a highlighting like.
(19:39):
Okay so you're justifying the cost of this system and all the money that you're taking from me.
And all the opportunity cost for all that other capital that you're using internally to pay your bills and I am spending 90 dollars per invoice and I have a thousand invoices a month.
You would think that a light bulb would go off on some sea level V level executives owners brain would go.
(20:09):
Wait that's 90 thousand dollars a month I could probably hire a couple of people and take care of that 90 dollars for transaction problem.
Now I can probably innovate my way through this through better systems right.
Yeah you probably can.
So that's one type of GPO doesn't really have the same systems as a GPO does as a group purchasing organization does but it acts as one because they're middlemaning the cash they're placing the order.
(20:38):
Down the other downsides are you really don't have any buying power.
Because you're not the one paying the bill like you think you're paying the bill because you're paying you already for it.
But you're he's paying the bill because they're taking your money and they're paying for that product so you already has the buying power.
And they're saying well you're getting savings and you're getting all this stuff because we're leveraging all your spend along with all these other companies use our systems.
(21:04):
And even though we might be getting a little kickback from vendor X Y and Z we have to integrate their software we have to make sure this is operating we're taking your order and giving it to them.
We're making sure deliveries are being fulfilled properly blah blah blah blah blah.
All true.
But when things go wrong you can't call and get a straight answer.
(21:31):
You can't call that vendor and say hey where's my stuff because they're going to go in their system and go I don't have any orders here for you.
What's your address.
And then you're going to go in and say oh that was placed by your already systems in and we can't really talk to you about it because you didn't pay for this order or place this order.
(21:54):
And it gets even more convoluted there's some vendors where the system is set up so you contact the vendor the vendor creates the price that they show you and then they sell it to your different price.
And then you pay your party through the marketplace so you're paying one bill right you're paying your party every month for all of your supplies instead of paying.
(22:16):
10 or 15 different vendors for the supplies that you already is compiling so that's part of their savings program.
Listen.
In 99.95% of cases.
An internal procurement organization is going to do a better job hitting your business goals and objectives and taking care of your procurement needs and your purchasing needs.
(22:41):
Then anything any middleman portal like that is going to do.
Stop using them. You're literally lighting money on fire.
And most of these places are not warehousing it. They're not buying it in bulk for you so you can take a bulk discount or a bulk instead of pricing.
They're just leveraging buying power and relationships and still making the vendors hold that stuff for you.
(23:08):
Lightly tangential sorry.
Now I want to talk about the consultants that are out there and I'm doing my air quotes right now.
You can't see this in podcast world but if you're on YouTube you can see it.
There's a bunch of consultants out there selling their services doing something similar to yard sometimes they're doing procurement outsourcing.
(23:36):
Air quotes again procurement outsourcing purchasing outsourcing where they're doing the negotiation.
The product selection the RFPs and RFQs and then you pay them and they pay the vendor or.
They go out and negotiate the pricing with a pre selected set of vendors and you choose what you want to buy, roof them and they get paid by the vendor.
(24:09):
Okay. These people are not consultants.
Let me be very clear.
If they're selling products from specific vendors.
If they're maintaining a set of recommended preferred vendors that their customers buy from.
(24:34):
They're not consultants anymore.
The consultants job is to leave their client in a better state than they found them.
They can't do that ethically if they have these preferred vendors that they have a paid relationship with.
(24:57):
If that vendor provides that consultant with any type of discount, rebate, pickback, incentive, that's an ethical dilemma for a consultant.
A consultant's job is to be paid by their customer and only their customer.
(25:21):
If that can't happen, you're a piss poor consultant and you need to be done because you're a salesperson now.
You're not a consultant anymore.
If the consultant has any type of fiduciary or financial relationship with a product, service or person.
(25:43):
They recommend or could recommend in their day-to-day business operations.
They're no longer a consultant. They're now a salesperson for those vendors.
And there are consultants out there who call themselves consultants but are really salespeople.
(26:04):
Who will take money from both parties.
They will be hired by their customer, their client, to provide service XYZ.
And then they only offer them the services and products that are in their portfolio of recommended products and services that they free negotiated because they pay well.
(26:29):
That's a huge issue.
So, ethically, morally, that stuff needs to be disclosed at the beginning of a relationship between the consultant, "still air quotes" on YouTube and the client.
(26:50):
95% of the time they're not.
There's no disclosure there to, "Oh hey, if you buy this product that we've recommended you buy,
we're going to get paid on it." That's a big problem.
You should be good enough at your job, Mr. Consultant, Mrs. Consultant, Ms. Consultant, whatever, potato, whatever you want to call yourself.
(27:16):
You should be good enough at your job and be able to justify what your clients are spending on your services to a point where you don't need to take money
to recommend products and services to them.
If you're working with clients who don't want to pay you what you're worth or what the value is that you bring to their relationship, you're probably not good at what you do.
(27:43):
Okay? I said it. The way I work it inside my business is I get hired by a client to help them with their procurement outsourcing.
That's what a lot of these people say that they're doing. I will negotiate with vendors. I will set up their pricing. I will help them build specifications that are resilient, sustainable, efficient that meet their business needs.
(28:10):
I will work with their vendors to develop some transparency and help them innovate with the client so that the client gets the best of both worlds.
But I'm also not locking myself in to specific vendors. Every single market in real estate is different. Every MSA is different in its own ways.
It has its own sets of issues. A lot of them are similar. A lot of them overlap. But there's no two that are really identical, just like there's no two operations or businesses or whatever that are identical in every way.
(28:41):
The business doesn't change. The challenges in the business don't change. But the specific fixes for them do. There's too many moving parts based on everything.
We've talked about it before and I'm not going to go down the weeds and get lost on this particular topic.
But the needs for customer A are not going to be the same as the needs for customer B. So I work inside their own supply chains that have now. And then if I see a lack or I know that there's a product that's available in that market that can address a problem they don't have a solution for.
(29:18):
Why don't we go to these guys have a conversation and see if there's a fit here to get product or service XYZ into your properties to fix this and this is and this is where I see this stuff being fixed.
I am not a cheap date my average customer blows like $35,000 a year to $50,000 a year with me.
(29:39):
So I'm providing that neutral perspective that doesn't involve getting kickbacks or being paid by a vendor to do something.
I am looking out for my customers best interest. I'm not a fiduciary in their business because I don't have skin in that game all I can do is is guide and help them find solutions and develop strategies and systems to support those.
(30:07):
So these consultants take it upon themselves and stop being consultants and become salespeople for these vendors that they get paid by.
That is a massive conflict of interest. That's like one attorney at the table for opposing parties in a lawsuit.
(30:28):
So paying the same attorney that attorney is going to be incapable of being neutral.
It's not feasible and it's the same thing when you're dealing with consultants who do it.
So there's a consultant out there who's recommending products recommending services whether they're whether you're paying them and they're buying the product as a pass through
(30:55):
whether they're recommending vendors to you and getting a kickback from those vendors.
That's a problem. There should be no money changing hands between the consultant or the consultants company and the vendors that they're using to secure your business in your best interest.
(31:21):
So that's a different type of GPO in my opinion that's pitching themselves as being a consultancy.
It's not consultants have to be objective and neutral.
Moving on.
Purchasing groups are another form of GPO that's not really a GPO. So a purchasing group generally is like when a bunch of different companies or a bunch of different people get together to buy something in bulk.
(31:53):
And they all order what they want so they can hit that tier to get the buying power or the volume of units to justify a lower price.
So a purchasing group will like be six or seven different property managers or inside an organization six or seven different properties inside one that have a project coming up that they know they're going to need like smoke detectors is a great example.
(32:22):
Low hanging fruit lots of margin on the shelf in these stores and through the supply houses you can buy them in bulk and get significant like 20, 25, 30% discounts with the right people, but you need to buy a lot.
So if you need a couple thousand smoke detectors you can pool resources between multiple different entities whether their properties or whether they're different property managers order them from us supplier all at once everybody pulls their money orders them all from a supplier.
(32:56):
Product arrives at the supplier and either everybody goes in and picks their own up individually and takes them to use them or they're stored in a centralized location and people sign them out as they come to pick them up doesn't matter on that side so much logistically.
But that's a purchasing group.
Those are okay in the right circumstances, but they're better served for one off like that or for.
(33:24):
Smaller providers that don't have the purchasing power to do stuff on their own similar to the rebate programs with with the networking organizations.
They're generally ways for newbies and smaller businesses to get purchasing power they wouldn't normally have access to without doing something like that they're okay.
(33:48):
They don't really pose a lot of risk because there's usually nobody getting paid to operate that.
Like maybe the person who's putting it together.
Might charge a small fee to do the organizational side.
But typically it's it's like a group effort and so there's nobody making money off of that though it's not even a formal there's no LLC's there's no formal legal structure.
(34:15):
It's just a one off thing in the last one.
And kind of the most important one that I'm going to spend a little bit more time on is the actual GPO the actual group purchasing organization because they're out there right now actively soliciting property management firms real estate developers construction companies to do all these great things and offer all these benefits without actually disclosing.
(34:42):
What it is they're doing and how they're getting paid so we're going to talk first about how they get paid so there's a couple different ways one is they get paid a membership fee.
Now there's you'll see both models but the first one is the membership fee you pay them a certain amount per year to be a member.
(35:03):
And they promise you fixed pricing or discounts or rebates or all of the above on product from vendors X Y and Z that they work with right sometimes sometimes they will do RFPs and RFQs for you where they'll go to market they'll get the best lowest price.
(35:26):
They'll handle the value engineering they'll handle the specifications vendor negotiations contracting all that stuff others have contracts already in place with specific vendors that you just.
Glow on to because if they've got fixed pricing on all these particular items or flat discount on all these particular items and maybe there's a rebate maybe there's not.
(35:48):
But they have all this stuff already prenegotiated and figured out and maybe they charge membership fee maybe they don't almost all of them charge a like a management fee or whatever but they they get paid based on the amount of money you spend.
It's usually a percentage based with accelerators and and kickers in the contract that incentivize them to push business to specific vendors based on how much money they make.
(36:22):
It's also set up so you the organization the customer the buyer will be paying them a fee so you maybe you paid to be a member maybe you didn't.
They're going to charge somewhere between a half a percent and four to five percent per purchase.
(36:47):
And they take that money as an overhead operating expense. Now you're paying the vendor directly you're maintaining that relationship but you're taking advantage of this contract pricing these contract terms to use their services etc etc so you're going to get something out of it.
(37:11):
But maybe not what you think because there's a few problems with it number one maybe they don't have the right products maybe they just have a product that works but it's not the one that's the most resilient.
It's not the one that solves the most business problems it's not the one that is going to reduce your maintenance cost it's not going to reduce your utilities it's going to create more work for you.
(37:34):
Your tenants might not like it but it's what's available through the program and because most of these GPO's are contract based you have to use that particular contract to purchase.
A lot of them don't allow you to shop around unless you're going to violate the terms of the contract and then there's all this legal crap that goes into it.
Not all of them do that a lot of them do you're also giving up your buying power to these specific vendors inside this contract and you lose your room to negotiate you don't have the ability to go back and say I'm going to buy 600 of these I want a better price because I'm buying in bulk and I'm going to need 600 of them they're going to say sorry you're in this contract you're going to pay this price because this is what was pre negotiated agreed to with this vendor.
(38:17):
So there's a couple of disadvantages there the other thing that is really a huge issue with the GPO is that they will then take rebates and discounts and kickbacks and maybe better terms the same way that like the already marketplace does from your vendors that you're buying from.
(38:38):
So you're going to pay the fee to join or maybe not you're going to pay them a fee per the amount of money you spend and then they're going to take money in the middle because of their buying power with these manufacturers and vendors that you should be using for yourself again GPO's serve a purpose for small guys who don't have buying power or for specific categories non strategic spend specific categories.
(39:04):
But you don't have enough buying power to negotiate a better price on your own strategic spend the stuff that actually operates the day to day of your business where you're spending the bulk of your money on goods and services.
The GPO is never the right answer.
(39:25):
If you're spending over $50,000 a year in a category you need to be going to a vendor whether it's a manufacturer whether it's distributor whether it's a building materials dealer whether it's a retailer like freakin home depot it doesn't matter you need to be leveraging your buying power for yourself don't farm that out.
(39:47):
It also means don't like nothing we've talked about prior is overridden by this anti GPO thing it doesn't mean go out and deal with 47 different vendors no the perfect number is somewhere between like eight and 14 the one stop shop is an illusion.
It's a great story and it's great for little guys but you're going to make too many compromises along the way that are going to impact your an ally later.
(40:14):
So don't go down that road either but you do need and this is where we talk about like centralized purchasing GPO will sell their services and the benefits that they offer most of the time to where we're going to save you time because we're going to do all the shopping for you we're going to hook you up with all these vendors we've already negotiated these pricing here's what this contract does for you XYZ service wise here's you know what you're going to get in rebates and blah blah blah.
(40:42):
All true but they're not being transparent about how they get paid because you're paying them per per volume of spend and sometimes to join their group they're getting paid by the vendors that they work with in most cases and they may or may not disclose that to you like you know what you're paying you're paying them a half percent to 4% or 5% of whatever you spend.
(41:08):
And yes you're going to get some better pricing but and maybe you're going to get some better service and maybe you'll have the relationship and maybe you won't you'll be buying a product directly so there's that you're just going to be working on through a contract but then you're stuck with.
Doing a bunch of extra overhead work to make sure that the price that's in the contract is the price that you're build if you're very heavily distributed and decentralized in your purchasing how do you reconcile that across 50 or 100 properties with 50 or 100 different hands in the cookie jar there's a lot of pitfalls they don't advertise but there's also a lot of I'll call them opportunities because it's politically correct for your systems internally to be better you.
(41:50):
To be better you can probably if you are a business of any size any volume you can hire someone either an outsourced procurement consultant like me or you can hire an internal w2 employee to handle a semi centralized procurement operation they can be a director they can be a manager they can be a VP it doesn't matter what title you give them.
(42:19):
The function is the same they should be looking at building transparent systems inside your organization.
That will pay for their job it will pay for them to exist as an employee or as a subcontractor.
Better pricing can be negotiated based on volume you just need to figure out how to pull purchases to impact that your specifications your product selections should be made in a way that minimizes your long term operating costs and increases your N.O.I.
(43:03):
extra N.O.I. in commercial will add to the value of your properties when your hemorrhaging value because of insurance and property tax increases you need to be finding ways to increase your N.O.I.
ethically you're not going to be able to raise rents 5 to 8% per year for the entire estimated period on that pro forma it is not reality it does not take in market market dynamics and market demands and a macro economy.
(43:41):
That is a pipe dream that worked for two years during the pandemic the pandemic is over stop being idealistic the numbers aren't going to work.
So you got to find other ways hiring a person to come in and negotiate those contracts do the due diligence solve business problems address opportunities that are unchecked in your organization are the best ways.
(44:10):
The best ways for you to make more money by spending money your ROI on hiring somebody to set up a semi centralized procurement program is going to pay for itself in spades down the road is you're going to have transparency systems and standards and you're going to leverage your buying power for yourself.
(44:36):
And GPO's leverage their buying power so that they can make more money especially the ones that are out there that are publicly traded right now or that are looking to do a a VC funding you know seed round those people those businesses.
They're getting paid a percentage of what you spend and that's how they're making their money they're free let's say there's no association fee all they're doing is billing you that point five to five percent of your spend.
(45:12):
Where is the incentive for them to really accurately honestly and transparently negotiate the best price for the products that are in that contract that are on their authorized vendor authorized product lists.
Because if it's cheaper truly cheaper they're going to make less money all they really need to do is make sure that you're not going to be able to go online and find it for a lower price.
(45:45):
Do you think maybe that there's a problem with that.
I sure do because you know they're not going to lose money they're going to make sure that they're insulated.
You're going to lose money and you're not even going to know it you're going to hemorrhage dollars that you could be leveraging for your business and you are not going to realize it's happening because they're never going to disclose it.
(46:12):
And because of these contracts and the way things are structured in the fact that your using their system.
Those that you're not really operating a true procurement function because you're handing that off to these gpo's.
And that means that you're going to trade off.
(46:35):
True transparency and true buying power for convenience.
Usually at a five, six or seven figure dollar amount in extra spend that you could have brought inside for a fraction of the cost.
If you're looking to scale if you're serious if you're a good size operation.
(47:00):
It will always work out in your favor to set up an internal set of standards and an internal relationship.
Vendors that will help you innovate and solve business problems.
Then it will be to allow these gpo's to do the three-bed system race to the bottom or to bucket you into a contract with a bunch of vendors that they selected through the three bid race to the bottom.
(47:29):
You will 100% of the time always end up farther in the black with better ROI and more NOI.
Through an internal procurement system internal procurement process internal procurement organization that is looking to solve business problems and leverage your buying power and your relationships to innovate and solve problems and address your risk management and compliance.
(47:59):
Resilience sustainability.
If you're into ESG all that cool stuff you can do that internally these gpo's are not ever going to do that for you. They're out for one thing that's to make money for themselves.
The worst of them are essentially retailers.
They're going to these manufacturers. They're going to these building material dealers. They're going to these two-step wholesale distributors.
(48:22):
They're saying, "I want to sell these. I want a relationship with you. Let's do it. We're going to get all these customers locked into a contract."
They're basically operating like a home depot or a loas or a building materials dealer where they have a ton of different vendors and different line cards and all of this stuff under their hat.
But they're selling it to you and then they're charging you all this extra money to pay their operating fees. In addition, to getting kickbacks from the vendors and all this other stuff, take all of that for yourself.
(48:56):
These guys are getting somewhere in the neighborhood of 10 to 25% in incentives on your money depending on which structure it is.
Why would you not want that for yourself? For your business, for your benefit.
(49:18):
You can 95.5% of the time, hire an internal person, hold time and pay them market rate to run this type of program for you if it's set up correctly, transparent, and strategic.
(49:41):
And they will pay for their salary 10 times over. You can hire somebody like me to come in and look at it and give you an opportunity assessment and that will pay for itself 20 or 30 times over.
Or you can just outsource it to me for a fee.
And I'll handle all that stuff and set up those systems for you and then when you're ready to hire a full-time person, I'll hand it off.
(50:08):
But the fact that these companies exist, to mean that there's people out there who are absorbing what they're saying and believing it, who don't know any better because they're being spoon-fed information.
Without actually taking any time to do the analysis and do the research and find out if it's true or not.
(50:31):
You don't know how your vendors make money. If you don't know how your GPO suppliers of any kind make money, if they're not directly selling the product.
And you don't know how they get paid, that should be your first clue that something is weird.
It's like going into a deal with a GP on this indication and not knowing that they get paid at acquisition and that they don't care what that property actually makes for money over time or how successfully investment is because they already got their money and they're onto the next thing.
(51:09):
This is all really important stuff for your business and you really need to get a handle on it and you don't have to do it yourself.
Bring people into your team who can help you.
I've gone way over on this episode. I apologize. I'm almost at an hour. This is a very important topic, especially with the amount of push that's going on right now.
(51:32):
So I am going to wrap this up. We're not going to do a second episode on it. I'm done talking about GPOs for now.
I want to thank you for listening and putting up with me. I hope you have a great rest of your day. Please, if you're on YouTube, hit that bell and subscribe.
If you're listening on Apple, on Spotify, on Stitcher, whatever, please subscribe.
(52:01):
If you're on Spotify or Apple iTunes, please leave me a review. Four or five stars would be great, but be honest.
Leave me a comment. If you're on Spotify, you can comment on the episode. Click that button.
Put the number of stars on the episode. Leave me a comment. If you have any questions, concerns, issues, shoot me an email, podcast@tcomethod.com.
(52:25):
I'm a great rest of your day.
[Music]
[MUSIC PLAYING]
[Music]
(00:23):
Welcome to the TCO Method, the only show focused on helping you massively increase your net operating income.
I am Andy McQuade and I want to thank you so much for joining me for today's episode.
What I want to talk about today, I might get on a little bit of a rant because I'm a little passionate about this,
but today we're going to talk about GPO's and why you should be avoiding them like the plague.
(00:47):
GPO stands for Group Purchasing Organization, and they come in many forms, but like I've talked about before,
when you're looking at whatever, you always have to go back and follow the money.
How do they get paid?
What's in it for them?
(01:08):
Why are they suggesting this particular thing to you?
That's true of social media, and it's true of building materials, MRO supplies, office supplies,
it's a procurement cop-out, and what I mean is that a lot of them will talk about using their services
(01:35):
to streamline your operations and save you time in the office by handling all of your,
this, that, and the other thing that take up time for your people.
Sometimes that's true, but rarely if you have any type of buying power whatsoever based on volume,
(01:59):
rarely does it actually work out in your favor because the math they use is made up math.
The numbers don't actually work when you get right into process costing.
In GPOs function in three or four different ways, and there's some out there that don't even say that they're GPOs.
Like they just don't advertise the fact that they're operating in this particular way.
(02:22):
Some are more egregious than others, right?
We're not going to talk about the ones that have existed for decades that have like hospitals, nursing homes, health care,
funds of GPOs out there doing that kind of stuff, lots of stuff selling to the government, etc., etc.
And they do it for a couple of reasons. One is, well, it's the government.
(02:43):
They're really bad at pretty much anything they touch, okay?
So yes, there is a distinct possibility that GPOs can help government agencies buy things at a better price,
a little bit more intelligently, and that there's a benefit to the taxpayer for that.
But we're not going to talk about the government side of this.
(03:03):
We are going to talk about real estate and the recent push for these GPOs to be out there literally soliciting business
for stuff that you should be in charge of controlling.
In procurement, there's two types of spend, strategic spend and non-strategic spend.
(03:29):
Recurement in and of itself is the process and the organization inside your organization responsible for every input that comes into your business to make sure your business can run.
That means electricity providers, other utility providers, phone providers, subcontracted labor, legal, all of the product purchasing,
(03:58):
all of the product selection and specification, all the vendors you deal with, all that stuff should be in procurement.
Now, I say it all the time, people's eyes glaze over.
90% of real estate operators don't actually have a mature procurement function.
(04:21):
So they find ways to simplify it, so it's just a cost center, number one, instead of a value driver, it gets things done but it doesn't necessarily add value.
And number two, they don't want to spend the time or the money.
It takes to really wrap their heads around it because they're in business to operate real estate.
They're not necessarily good at buying stuff, right?
(04:44):
A lot of it comes down to these three bid RFP RFQ, which is request for price, request for quote, or whatever processes.
And those are always the race to the bottom because you say, hey, I'm soliciting bids, blah, blah, blah, see you'll bid process or open bid process doesn't matter.
(05:04):
You're going out and you're soliciting a list of products that you've chosen and you're giving it to your different suppliers and they're going to send you what they think is the lowest cost product and they'll value engineer stuff, meaning that they'll look at what your spec is if there is one and they'll just give you the cheapest thing that gets the job done because
(05:26):
if it fails in a year, it's not their problem because they don't own that warranty.
Maybe it's a manufacturer's warranty and any vendor worth their salt at this point operating in 2023 that survived the pandemic is going to tell you we don't own any of the issues in product quality.
That's the manufacturer take it up directly with them.
We don't care if you bought it from us, we're out of it.
(05:49):
And usually the margins are so tight on those they're not going to do anything above and beyond to help you out.
And POs are even worse and I'm going to explain why in just a second first I want to talk about the different types of GPO's that are out there different types of group purchasing organizations.
So the one that I like the most that I'm okay with people participating in is the program usually offered through like a networking group right there's a ton of different real estate networking groups out there.
(06:24):
They offer education certifications training sometimes vendor pricing sometimes group discounts.
I'm okay with what these guys do in this particular arena because they're not going out and negotiating specific pricing on specific products and then locking you via an agreement in to only buy from those specific vendors.
(06:50):
So you name a real estate networking organization they probably have a contract with somebody national association of home builders has one with lows.
National apartment association national real estate investors association national association of residential property managers.
(07:14):
I am the Institute of real estate management all of these big national organizations offer their members a benefit package that allows them to solicit business and get members to pay their membership dues and in exchange for those dues the hope is.
That these national programs for their players that are that are coming in are going to help offset the cost of their membership so like if you pay $700 a year to join a networking group or your company.
(07:47):
The goal is that then you would get $700 a year in benefits back from the different vendors that they have agreements with now they leave it completely up to you the end user as to what you take advantage of.
You don't have to use Verizon if you join group a you can still buy from 18 to your T mobile or whoever you use for your business cell phone service and you're not locked into a contract where you're not allowed to shop outside that particular.
(08:21):
Relationship to get a better price is not it's not always price based a lot of vendors are very bucketed by how they structure their agreements and so coming from that industry I have 20 something years of experience with dealing with that type of relationship where if you're going to sell Anderson windows you're not allowed to sell pillow windows.
(08:43):
If you're going to sell Geldwen interior doors you're not going to carry Mason interior doors because they're direct competitors.
But that means that you're being locked out of some products by nature that could be a better fit for your business your risk profile for whatever and when you're getting in bed with some of these GPOs they lock you into a specific set of brands or a specific set of products that they've pre-negotiated agreements with.
(09:12):
And make no mistake these GPOs.
They negotiate these agreements for themselves not for their members so the networking groups are a little different they're not dictating to you what you can buy or what you can't they're just saying if you want to take advantage of these programs it can help offset the cost of your membership.
(09:34):
And it could be something like a 2% rebate for the members sometimes there's a kickback from that vendor that goes back to the networking group that helps the offset their costs a lot of these networking groups are nonprofits so it's actually kind of cool.
You join a group you get a rebate from the vendor you get to negotiate your own pricing in your own contracts and service terms with that vendor based on your needs you don't have to buy everything from them.
(10:03):
You can still go outside that relationship and shop for other things and buy what you need not necessarily what they carry based on your business needs.
And then you get to see sometimes some some disclose some don't but sometimes they'll tell you hey because of your X number of dollars we want to thank you we know you got a 2% or a 3% or 5% or 8% or 10%
(10:32):
rebate from them whatever you're set up for.
But we want to thank you because you got us a 5% rebate based on what you spent there and these big corporations these big retailers distributors service providers whatever it is they pool that into their marketing budget because it's considered an expense for the business to incentivize people to shop there.
(10:59):
Good example if you go to home depot.
And you remember of the national apartment association or you remember of national rea or your remember of.
Narpa residential property managers.
You can get a 2% rebate on what you spend and sometimes there's like discounted stuff on the front side sometimes there's not depends on the program but you're going to get 2% back.
(11:22):
Now the parent organization the national organization typically a nonprofit they're going to get like either 2% or 3% or 5% for bringing you to home depot.
Now they're not taking anything from you because you still have the ability to go and negotiate directly with that vendor.
To lock in a price that suits you based on your buying power and your volume.
(11:49):
Okay so we're taking the networking groups out and we're shoving them off to the side because they're the one example of collaborative purchasing.
That can work in your favor where you're not really losing anything because of participating in this program.
Now we're going to talk about the different gpo's that are out there that are true gpo's so there's a few forms that they take.
(12:17):
A lot of them have been pushing in to try and get into real estate whether it's institutional stuff whether it's industrial trying to do.
MRO supplies or even parts and pieces for day to day operations or actually producing product right actual manufacturing or whether they're trying to just get you to purchase everything through their portals.
(12:40):
Okay so there's two or three systems.
I'm going to talk about yardies first right and similar systems to yardies so any of your ERP is any of your enterprise resource planning that's an ERP.
Okay and they take a lot of forms in real estate most of them have multiple integrations with different companies and different services.
(13:04):
So like yardie has a bunch of their own built in stuff they have the yardie marketplace they have voyager they have the ability to create like websites and and tenant portals and all this cool stuff so that it automates a lot of stuff in the back end.
Absolutely think you should be doing those and taking advantage of whatever system you use because those systems take manual processes out and automate them.
(13:29):
You have to make sure if you're using them that they're set up properly at the beginning with your business vision and strategy taken into account because the problem you're going to run into with any of those is garbage in garbage out just like anything else.
We're planning leads to poor implementation and you don't take full advantage and you end up leaving money on the table because of it.
(13:53):
The marketplace portals help in a lot of ways to control certain things inside your organization especially as you scale and you get bigger and you get more properties and more locations and more cities and MSAs and zip codes under your belt having a system that creates visibility.
(14:14):
What's being used what's being spent in with who is great some of them even go as far as consolidating all of the invoicing reconciling pricing.
There's there's just a ton of stuff need to contract management through them. It's bonkers the amount of systems that are there but the more complicated they get the less effective they become because complexity is the enemy of execution.
(14:41):
That is a Tony Robbins quote that I shamelessly steal on a regular basis because it is absolutely true.
So some of the important stuff you need to understand about how that marketplace or similar systems works is number one they go to whatever suppliers are in that marketplace to build an integrated portal back and forth between their system that the end user see.
(15:10):
So when you're operating a property you go to the already marketplace you see all the stuff and then they also negotiate how they get paid.
So you're paying your idea fee to use their software.
It's not just licensing it's usually a monthly thing depending on a number of doors that you're covering and the different systems that you've got flipped on inside their their program.
(15:36):
At this point it's it's almost a universe honestly there's so many different modules that you can turn on it's the probably the most complicated and in depth system out there but it is a pain to get set up for that reason.
Marketplace the people who run that will do two things one is if you're not paying directly they will issue you a credit card or a.
(16:05):
Charge account usually a net something account to that vendor.
You will order product on their portal.
Their people or their internal systems will take that order and send it to the vendor now what's happening here is you do not actually have credit with that vendor.
(16:27):
You have credit with yardy yardy has credit with that vendor.
You pay yardy what yardy tells you in the portal needs to be paid for those products.
Meanwhile they've negotiated a deal with the vendor for product discounts based on category or fixed pricing based on product and rebates and other incentives including better terms.
(16:54):
So that they can take the pocket money between what you pay and what they pay and they stick it in their pocket to cover their operating and overhead but you're already paying them to operate the system right you're paying for their software to use it every single month based on a number of doors and all those other systems that you plug in so your your yardy bill is generally very expensive if you've got any type of advanced implementation and you have a lot of doors.
(17:23):
The real measurement comes down to what's your ROI for using the system and in a lot of cases there's an immediate ROI because you're creating transparency and generating all this cool information and it's useful data for the sea level people in the office etc etc.
The problem that I see with it is that they don't tell you how much money they're taking and what kind of benefits they're taking so like if you have a net 30 with yardy for vendor X.
(17:52):
They're probably in a net 60 or net 90 so they're taking your money and they're floating it you're paying your immediately but they're floating that money for 60 or 90 extra days to make more money with it right they're going to use it in other places to make money to cash flow.
They're also getting whatever you're buying at a discount so you're seeing a price that's X and it might be a couple percent less than retail.
(18:16):
But you're getting it for a little bit less but they're getting it for a lot less and generally speaking if it's MRO rehab and and capex materials.
There's ways for you to leverage your buying power on those if you're any type of of operation of any volume where you're going to be upside down and yardy will sell themselves on oh well you're not taking care of reconciling all these invoices and doing all this check.
(18:45):
Because we take care of all that and so we're going to save you.
God ten or twelve years ago they were saying we save the average cost right process costing the average cost to reconcile an invoice internally the way it's done today and this was like 2010 2012 is we take that software and we do this and this and this and we figured out that it's going to cost you 90 dollars for every single invoice that you reconcile because it's got to go through two or three different sets of hands and blah blah blah.
(19:14):
Complete will crap if it takes you 90 dollars to reconcile one invoice from a supplier.
Even today in 2023.
You've got a lot of other issues you need to deal with internally okay like that's not a selling point that should be anything to anyone like that should be a highlighting like.
(19:39):
Okay so you're justifying the cost of this system and all the money that you're taking from me.
And all the opportunity cost for all that other capital that you're using internally to pay your bills and I am spending 90 dollars per invoice and I have a thousand invoices a month.
You would think that a light bulb would go off on some sea level V level executives owners brain would go.
(20:09):
Wait that's 90 thousand dollars a month I could probably hire a couple of people and take care of that 90 dollars for transaction problem.
Now I can probably innovate my way through this through better systems right.
Yeah you probably can.
So that's one type of GPO doesn't really have the same systems as a GPO does as a group purchasing organization does but it acts as one because they're middlemaning the cash they're placing the order.
(20:38):
Down the other downsides are you really don't have any buying power.
Because you're not the one paying the bill like you think you're paying the bill because you're paying you already for it.
But you're he's paying the bill because they're taking your money and they're paying for that product so you already has the buying power.
And they're saying well you're getting savings and you're getting all this stuff because we're leveraging all your spend along with all these other companies use our systems.
(21:04):
And even though we might be getting a little kickback from vendor X Y and Z we have to integrate their software we have to make sure this is operating we're taking your order and giving it to them.
We're making sure deliveries are being fulfilled properly blah blah blah blah blah.
All true.
But when things go wrong you can't call and get a straight answer.
(21:31):
You can't call that vendor and say hey where's my stuff because they're going to go in their system and go I don't have any orders here for you.
What's your address.
And then you're going to go in and say oh that was placed by your already systems in and we can't really talk to you about it because you didn't pay for this order or place this order.
(21:54):
And it gets even more convoluted there's some vendors where the system is set up so you contact the vendor the vendor creates the price that they show you and then they sell it to your different price.
And then you pay your party through the marketplace so you're paying one bill right you're paying your party every month for all of your supplies instead of paying.
(22:16):
10 or 15 different vendors for the supplies that you already is compiling so that's part of their savings program.
Listen.
In 99.95% of cases.
An internal procurement organization is going to do a better job hitting your business goals and objectives and taking care of your procurement needs and your purchasing needs.
(22:41):
Then anything any middleman portal like that is going to do.
Stop using them. You're literally lighting money on fire.
And most of these places are not warehousing it. They're not buying it in bulk for you so you can take a bulk discount or a bulk instead of pricing.
They're just leveraging buying power and relationships and still making the vendors hold that stuff for you.
(23:08):
Lightly tangential sorry.
Now I want to talk about the consultants that are out there and I'm doing my air quotes right now.
You can't see this in podcast world but if you're on YouTube you can see it.
There's a bunch of consultants out there selling their services doing something similar to yard sometimes they're doing procurement outsourcing.
(23:36):
Air quotes again procurement outsourcing purchasing outsourcing where they're doing the negotiation.
The product selection the RFPs and RFQs and then you pay them and they pay the vendor or.
They go out and negotiate the pricing with a pre selected set of vendors and you choose what you want to buy, roof them and they get paid by the vendor.
(24:09):
Okay. These people are not consultants.
Let me be very clear.
If they're selling products from specific vendors.
If they're maintaining a set of recommended preferred vendors that their customers buy from.
(24:34):
They're not consultants anymore.
The consultants job is to leave their client in a better state than they found them.
They can't do that ethically if they have these preferred vendors that they have a paid relationship with.
(24:57):
If that vendor provides that consultant with any type of discount, rebate, pickback, incentive, that's an ethical dilemma for a consultant.
A consultant's job is to be paid by their customer and only their customer.
(25:21):
If that can't happen, you're a piss poor consultant and you need to be done because you're a salesperson now.
You're not a consultant anymore.
If the consultant has any type of fiduciary or financial relationship with a product, service or person.
(25:43):
They recommend or could recommend in their day-to-day business operations.
They're no longer a consultant. They're now a salesperson for those vendors.
And there are consultants out there who call themselves consultants but are really salespeople.
(26:04):
Who will take money from both parties.
They will be hired by their customer, their client, to provide service XYZ.
And then they only offer them the services and products that are in their portfolio of recommended products and services that they free negotiated because they pay well.
(26:29):
That's a huge issue.
So, ethically, morally, that stuff needs to be disclosed at the beginning of a relationship between the consultant, "still air quotes" on YouTube and the client.
(26:50):
95% of the time they're not.
There's no disclosure there to, "Oh hey, if you buy this product that we've recommended you buy,
we're going to get paid on it." That's a big problem.
You should be good enough at your job, Mr. Consultant, Mrs. Consultant, Ms. Consultant, whatever, potato, whatever you want to call yourself.
(27:16):
You should be good enough at your job and be able to justify what your clients are spending on your services to a point where you don't need to take money
to recommend products and services to them.
If you're working with clients who don't want to pay you what you're worth or what the value is that you bring to their relationship, you're probably not good at what you do.
(27:43):
Okay? I said it. The way I work it inside my business is I get hired by a client to help them with their procurement outsourcing.
That's what a lot of these people say that they're doing. I will negotiate with vendors. I will set up their pricing. I will help them build specifications that are resilient, sustainable, efficient that meet their business needs.
(28:10):
I will work with their vendors to develop some transparency and help them innovate with the client so that the client gets the best of both worlds.
But I'm also not locking myself in to specific vendors. Every single market in real estate is different. Every MSA is different in its own ways.
It has its own sets of issues. A lot of them are similar. A lot of them overlap. But there's no two that are really identical, just like there's no two operations or businesses or whatever that are identical in every way.
(28:41):
The business doesn't change. The challenges in the business don't change. But the specific fixes for them do. There's too many moving parts based on everything.
We've talked about it before and I'm not going to go down the weeds and get lost on this particular topic.
But the needs for customer A are not going to be the same as the needs for customer B. So I work inside their own supply chains that have now. And then if I see a lack or I know that there's a product that's available in that market that can address a problem they don't have a solution for.
(29:18):
Why don't we go to these guys have a conversation and see if there's a fit here to get product or service XYZ into your properties to fix this and this is and this is where I see this stuff being fixed.
I am not a cheap date my average customer blows like $35,000 a year to $50,000 a year with me.
(29:39):
So I'm providing that neutral perspective that doesn't involve getting kickbacks or being paid by a vendor to do something.
I am looking out for my customers best interest. I'm not a fiduciary in their business because I don't have skin in that game all I can do is is guide and help them find solutions and develop strategies and systems to support those.
(30:07):
So these consultants take it upon themselves and stop being consultants and become salespeople for these vendors that they get paid by.
That is a massive conflict of interest. That's like one attorney at the table for opposing parties in a lawsuit.
(30:28):
So paying the same attorney that attorney is going to be incapable of being neutral.
It's not feasible and it's the same thing when you're dealing with consultants who do it.
So there's a consultant out there who's recommending products recommending services whether they're whether you're paying them and they're buying the product as a pass through
(30:55):
whether they're recommending vendors to you and getting a kickback from those vendors.
That's a problem. There should be no money changing hands between the consultant or the consultants company and the vendors that they're using to secure your business in your best interest.
(31:21):
So that's a different type of GPO in my opinion that's pitching themselves as being a consultancy.
It's not consultants have to be objective and neutral.
Moving on.
Purchasing groups are another form of GPO that's not really a GPO. So a purchasing group generally is like when a bunch of different companies or a bunch of different people get together to buy something in bulk.
(31:53):
And they all order what they want so they can hit that tier to get the buying power or the volume of units to justify a lower price.
So a purchasing group will like be six or seven different property managers or inside an organization six or seven different properties inside one that have a project coming up that they know they're going to need like smoke detectors is a great example.
(32:22):
Low hanging fruit lots of margin on the shelf in these stores and through the supply houses you can buy them in bulk and get significant like 20, 25, 30% discounts with the right people, but you need to buy a lot.
So if you need a couple thousand smoke detectors you can pool resources between multiple different entities whether their properties or whether they're different property managers order them from us supplier all at once everybody pulls their money orders them all from a supplier.
(32:56):
Product arrives at the supplier and either everybody goes in and picks their own up individually and takes them to use them or they're stored in a centralized location and people sign them out as they come to pick them up doesn't matter on that side so much logistically.
But that's a purchasing group.
Those are okay in the right circumstances, but they're better served for one off like that or for.
(33:24):
Smaller providers that don't have the purchasing power to do stuff on their own similar to the rebate programs with with the networking organizations.
They're generally ways for newbies and smaller businesses to get purchasing power they wouldn't normally have access to without doing something like that they're okay.
(33:48):
They don't really pose a lot of risk because there's usually nobody getting paid to operate that.
Like maybe the person who's putting it together.
Might charge a small fee to do the organizational side.
But typically it's it's like a group effort and so there's nobody making money off of that though it's not even a formal there's no LLC's there's no formal legal structure.
(34:15):
It's just a one off thing in the last one.
And kind of the most important one that I'm going to spend a little bit more time on is the actual GPO the actual group purchasing organization because they're out there right now actively soliciting property management firms real estate developers construction companies to do all these great things and offer all these benefits without actually disclosing.
(34:42):
What it is they're doing and how they're getting paid so we're going to talk first about how they get paid so there's a couple different ways one is they get paid a membership fee.
Now there's you'll see both models but the first one is the membership fee you pay them a certain amount per year to be a member.
(35:03):
And they promise you fixed pricing or discounts or rebates or all of the above on product from vendors X Y and Z that they work with right sometimes sometimes they will do RFPs and RFQs for you where they'll go to market they'll get the best lowest price.
(35:26):
They'll handle the value engineering they'll handle the specifications vendor negotiations contracting all that stuff others have contracts already in place with specific vendors that you just.
Glow on to because if they've got fixed pricing on all these particular items or flat discount on all these particular items and maybe there's a rebate maybe there's not.
(35:48):
But they have all this stuff already prenegotiated and figured out and maybe they charge membership fee maybe they don't almost all of them charge a like a management fee or whatever but they they get paid based on the amount of money you spend.
It's usually a percentage based with accelerators and and kickers in the contract that incentivize them to push business to specific vendors based on how much money they make.
(36:22):
It's also set up so you the organization the customer the buyer will be paying them a fee so you maybe you paid to be a member maybe you didn't.
They're going to charge somewhere between a half a percent and four to five percent per purchase.
(36:47):
And they take that money as an overhead operating expense. Now you're paying the vendor directly you're maintaining that relationship but you're taking advantage of this contract pricing these contract terms to use their services etc etc so you're going to get something out of it.
(37:11):
But maybe not what you think because there's a few problems with it number one maybe they don't have the right products maybe they just have a product that works but it's not the one that's the most resilient.
It's not the one that solves the most business problems it's not the one that is going to reduce your maintenance cost it's not going to reduce your utilities it's going to create more work for you.
(37:34):
Your tenants might not like it but it's what's available through the program and because most of these GPO's are contract based you have to use that particular contract to purchase.
A lot of them don't allow you to shop around unless you're going to violate the terms of the contract and then there's all this legal crap that goes into it.
Not all of them do that a lot of them do you're also giving up your buying power to these specific vendors inside this contract and you lose your room to negotiate you don't have the ability to go back and say I'm going to buy 600 of these I want a better price because I'm buying in bulk and I'm going to need 600 of them they're going to say sorry you're in this contract you're going to pay this price because this is what was pre negotiated agreed to with this vendor.
(38:17):
So there's a couple of disadvantages there the other thing that is really a huge issue with the GPO is that they will then take rebates and discounts and kickbacks and maybe better terms the same way that like the already marketplace does from your vendors that you're buying from.
(38:38):
So you're going to pay the fee to join or maybe not you're going to pay them a fee per the amount of money you spend and then they're going to take money in the middle because of their buying power with these manufacturers and vendors that you should be using for yourself again GPO's serve a purpose for small guys who don't have buying power or for specific categories non strategic spend specific categories.
(39:04):
But you don't have enough buying power to negotiate a better price on your own strategic spend the stuff that actually operates the day to day of your business where you're spending the bulk of your money on goods and services.
The GPO is never the right answer.
(39:25):
If you're spending over $50,000 a year in a category you need to be going to a vendor whether it's a manufacturer whether it's distributor whether it's a building materials dealer whether it's a retailer like freakin home depot it doesn't matter you need to be leveraging your buying power for yourself don't farm that out.
(39:47):
It also means don't like nothing we've talked about prior is overridden by this anti GPO thing it doesn't mean go out and deal with 47 different vendors no the perfect number is somewhere between like eight and 14 the one stop shop is an illusion.
It's a great story and it's great for little guys but you're going to make too many compromises along the way that are going to impact your an ally later.
(40:14):
So don't go down that road either but you do need and this is where we talk about like centralized purchasing GPO will sell their services and the benefits that they offer most of the time to where we're going to save you time because we're going to do all the shopping for you we're going to hook you up with all these vendors we've already negotiated these pricing here's what this contract does for you XYZ service wise here's you know what you're going to get in rebates and blah blah blah.
(40:42):
All true but they're not being transparent about how they get paid because you're paying them per per volume of spend and sometimes to join their group they're getting paid by the vendors that they work with in most cases and they may or may not disclose that to you like you know what you're paying you're paying them a half percent to 4% or 5% of whatever you spend.
(41:08):
And yes you're going to get some better pricing but and maybe you're going to get some better service and maybe you'll have the relationship and maybe you won't you'll be buying a product directly so there's that you're just going to be working on through a contract but then you're stuck with.
Doing a bunch of extra overhead work to make sure that the price that's in the contract is the price that you're build if you're very heavily distributed and decentralized in your purchasing how do you reconcile that across 50 or 100 properties with 50 or 100 different hands in the cookie jar there's a lot of pitfalls they don't advertise but there's also a lot of I'll call them opportunities because it's politically correct for your systems internally to be better you.
(41:50):
To be better you can probably if you are a business of any size any volume you can hire someone either an outsourced procurement consultant like me or you can hire an internal w2 employee to handle a semi centralized procurement operation they can be a director they can be a manager they can be a VP it doesn't matter what title you give them.
(42:19):
The function is the same they should be looking at building transparent systems inside your organization.
That will pay for their job it will pay for them to exist as an employee or as a subcontractor.
Better pricing can be negotiated based on volume you just need to figure out how to pull purchases to impact that your specifications your product selections should be made in a way that minimizes your long term operating costs and increases your N.O.I.
(43:03):
extra N.O.I. in commercial will add to the value of your properties when your hemorrhaging value because of insurance and property tax increases you need to be finding ways to increase your N.O.I.
ethically you're not going to be able to raise rents 5 to 8% per year for the entire estimated period on that pro forma it is not reality it does not take in market market dynamics and market demands and a macro economy.
(43:41):
That is a pipe dream that worked for two years during the pandemic the pandemic is over stop being idealistic the numbers aren't going to work.
So you got to find other ways hiring a person to come in and negotiate those contracts do the due diligence solve business problems address opportunities that are unchecked in your organization are the best ways.
(44:10):
The best ways for you to make more money by spending money your ROI on hiring somebody to set up a semi centralized procurement program is going to pay for itself in spades down the road is you're going to have transparency systems and standards and you're going to leverage your buying power for yourself.
(44:36):
And GPO's leverage their buying power so that they can make more money especially the ones that are out there that are publicly traded right now or that are looking to do a a VC funding you know seed round those people those businesses.
They're getting paid a percentage of what you spend and that's how they're making their money they're free let's say there's no association fee all they're doing is billing you that point five to five percent of your spend.
(45:12):
Where is the incentive for them to really accurately honestly and transparently negotiate the best price for the products that are in that contract that are on their authorized vendor authorized product lists.
Because if it's cheaper truly cheaper they're going to make less money all they really need to do is make sure that you're not going to be able to go online and find it for a lower price.
(45:45):
Do you think maybe that there's a problem with that.
I sure do because you know they're not going to lose money they're going to make sure that they're insulated.
You're going to lose money and you're not even going to know it you're going to hemorrhage dollars that you could be leveraging for your business and you are not going to realize it's happening because they're never going to disclose it.
(46:12):
And because of these contracts and the way things are structured in the fact that your using their system.
Those that you're not really operating a true procurement function because you're handing that off to these gpo's.
And that means that you're going to trade off.
(46:35):
True transparency and true buying power for convenience.
Usually at a five, six or seven figure dollar amount in extra spend that you could have brought inside for a fraction of the cost.
If you're looking to scale if you're serious if you're a good size operation.
(47:00):
It will always work out in your favor to set up an internal set of standards and an internal relationship.
Vendors that will help you innovate and solve business problems.
Then it will be to allow these gpo's to do the three-bed system race to the bottom or to bucket you into a contract with a bunch of vendors that they selected through the three bid race to the bottom.
(47:29):
You will 100% of the time always end up farther in the black with better ROI and more NOI.
Through an internal procurement system internal procurement process internal procurement organization that is looking to solve business problems and leverage your buying power and your relationships to innovate and solve problems and address your risk management and compliance.
(47:59):
Resilience sustainability.
If you're into ESG all that cool stuff you can do that internally these gpo's are not ever going to do that for you. They're out for one thing that's to make money for themselves.
The worst of them are essentially retailers.
They're going to these manufacturers. They're going to these building material dealers. They're going to these two-step wholesale distributors.
(48:22):
They're saying, "I want to sell these. I want a relationship with you. Let's do it. We're going to get all these customers locked into a contract."
They're basically operating like a home depot or a loas or a building materials dealer where they have a ton of different vendors and different line cards and all of this stuff under their hat.
But they're selling it to you and then they're charging you all this extra money to pay their operating fees. In addition, to getting kickbacks from the vendors and all this other stuff, take all of that for yourself.
(48:56):
These guys are getting somewhere in the neighborhood of 10 to 25% in incentives on your money depending on which structure it is.
Why would you not want that for yourself? For your business, for your benefit.
(49:18):
You can 95.5% of the time, hire an internal person, hold time and pay them market rate to run this type of program for you if it's set up correctly, transparent, and strategic.
(49:41):
And they will pay for their salary 10 times over. You can hire somebody like me to come in and look at it and give you an opportunity assessment and that will pay for itself 20 or 30 times over.
Or you can just outsource it to me for a fee.
And I'll handle all that stuff and set up those systems for you and then when you're ready to hire a full-time person, I'll hand it off.
(50:08):
But the fact that these companies exist, to mean that there's people out there who are absorbing what they're saying and believing it, who don't know any better because they're being spoon-fed information.
Without actually taking any time to do the analysis and do the research and find out if it's true or not.
(50:31):
You don't know how your vendors make money. If you don't know how your GPO suppliers of any kind make money, if they're not directly selling the product.
And you don't know how they get paid, that should be your first clue that something is weird.
It's like going into a deal with a GP on this indication and not knowing that they get paid at acquisition and that they don't care what that property actually makes for money over time or how successfully investment is because they already got their money and they're onto the next thing.
(51:09):
This is all really important stuff for your business and you really need to get a handle on it and you don't have to do it yourself.
Bring people into your team who can help you.
I've gone way over on this episode. I apologize. I'm almost at an hour. This is a very important topic, especially with the amount of push that's going on right now.
(51:32):
So I am going to wrap this up. We're not going to do a second episode on it. I'm done talking about GPOs for now.
I want to thank you for listening and putting up with me. I hope you have a great rest of your day. Please, if you're on YouTube, hit that bell and subscribe.
If you're listening on Apple, on Spotify, on Stitcher, whatever, please subscribe.
(52:01):
If you're on Spotify or Apple iTunes, please leave me a review. Four or five stars would be great, but be honest.
Leave me a comment. If you're on Spotify, you can comment on the episode. Click that button.
Put the number of stars on the episode. Leave me a comment. If you have any questions, concerns, issues, shoot me an email, podcast@tcomethod.com.
(52:25):
I'm a great rest of your day.
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