Novation, Inc.
Two Cultures with A Common Goal

Nancy Skodack, Director of Contract Management

at a glance Annual Purchasing Volume $26 billion (FY 04, est.) Annual Foodservice Volume $550 million (FY 04, est.) $523 million (FY 03) $498 million (FY 02) No. of Participating Organizations: 2,400 VHA and UHC members

Dallas,TX-based Novation is the "big gorilla" on the GPO block. Formed in 1998 with the alliance of VHA, Inc., and UHC ( University HealthSystem Consortium), it represents a hugely diverse membership. It also caused a significant stir earlier this year when it moved from its traditional dual-source foodservice distribution contracts to a new, single-source agreement with US Foodservice.We interviewed Nancy Skodack, M.S., R.D., L.D., FADA, Novation's director of contract management, for a perspective on how Novation views its position in the foodservice marketplace.

Membership. "One of the biggest misperceptions about Novation is that we have 'members.' In fact, we are a supply organization, formed expressly to serve the alliance of VHA and UHC— they are the ones with the members.We are analagous to the concept of 'Intel Inside'—

Novation is a joint venture, dedicated to meeting the members' combined supply chain service needs. "The two organizations are quite different in their member profiles. UHC is a very homogenous group; it represents large academic medical centers associated with prestigious universities.VHA is more diverse, ranging from not-for-profit community hospitals—over 700 of them with fewer than 100 beds—to very large integrated delivery networks.VHA has a 75 percent ownership equity in Novation and UHC has a 25 percent ownership."

Procurement becomes a boardroom issue. "Throughout healthcare, many of the food operations are now managed by multi-department heads. I think one of the most significant changes over the last two decades was the evolution of the materials management role away from its position in the basement of many organizations to one welcome in the boardroom. Supply purchases make up the second largest item on the average hospital's balance sheet and it has become extremely important as a cost management focus for them."

The value proposition of a GPO. "I think consolidation in the GPO industry has produced several positive outcomes. By increasing aggregated purchasing-volume it has produced cost avoidance for suppliers in terms of sales, marketing and administrative expenses.This reduced manufacturers' need to maintain individual agreements with members and is what ultimately translated into the savings members have realized. GPOs offer a marketing service to manufacturers in that they effectively represent and communicate the value of participating in the national contract agreement to members.

"I think a key misperception is that GPOs generate revenues via fees charged to suppliers. We are actually collecting money on behalf of the members we serve. Critics complain that the GPO model is flawed because they accept fees from suppliers. Yet this business model is common in other industries: credit cards, real estate, even publishing!

"Another misperception is that we make purchasing decisions without member input. We engage our members to the highest extent possible in all contract activities. We only get paid when members utilize the contracts, so we pay very close attention to what they say."

Management company relationships. "Some Novation members do have contracted foodservice arrangements and Novation has professional services agreements with management companies for members who wish to take advantage of them. For example,VHA has a dual award with both Sodexho and Morrisson's.The point is that Novation focuses on procurement only, with a majority of our value driven by off-invoice allowances.There are members who use an outsource provider and also use Novation's procurement. It is a member decision and a contract arrangement, not a matter for Novation's policies."

Distributor relationships. "Formerly, we had a multi-source distribution agreement with Sysco, Shared Service Systems and US Foodservice. Under our new single source agreement, we require that members maintain a prime vendor relationship with US Foodservice for at least 80 percent of their foodservice purchases. That change was the result of an exhaustive and competitive bid process that involved a high degree of member input. The final decision was endorsed by our distribution task force and reflects the belief that the best value to our overall membership was provided by a single award.

"We tried to recognize the reality of the distribution world by designing the terms of the agreement so that a member has recourse if it feels a particular distributor branch is not adequately providing service within those terms. Overall, we think the value proposition of the new contract award will result in fairly aggressive new member signup this year."

The future of e-commerce. "The next major stage in the evolution of GPOs will occur as they help members move to sophisticated e-commerce platforms. Our members now use a single e-commerce exchange—what we call Marketplace@Novation—to access purchasing data in real time and to access analytical tools to evaluate supply chain spending.

"We see our exchange becoming the central point of information exchange between group members and their entire supply community. It will tie together the whole procurement process, beginning with the decision making leading up to initial purchase, tracking orders through the supply chain from warehouse to receiving dock, managing electronic invoicing and payment, and finally, providing reporting and analysis tools to more efficiently manage supply spending."

Consorta, Inc.
Shareholders as Equity Partners

Christopher Mantel, Senior Director, Contracting

at a glance Annual Purchasing Volume $3.6 billion (FY 04) Annual Foodservice Volume $225 million (FY 04) $192 million (FY 03) $160 million (FY 02) No. of Participating Facilities: 491 acute care 225 extended care 1800 non-acute sites

Based in Schaumburg, IL, Consorta Inc., was formed by the 1998 merger of two groups—CMMA (Catholic Materials Management Association) and DHS (Sisters of the Sorrowful Mother Diversified Health Services). It is structured as a cooperative, with 13 shareholder organizations that together operate more than half of all Catholic hospitals in the U.S. Chris Mantel is senior director, contracting, with responsibility for several of the group's procurement specialties, including foodservice.

Consorta's members. "Our typical member is a U.S. Catholic institution.About 80 percent of our purchases are from the acute care side but we are seeing an enormous shift in the market toward long-term care.A few Catholic schools participate, but we do not have any colleges and universities. To be a shareholder, you must be a healthcare system with at least 1500 beds or $500 million in gross patient revenue; more importantly, you have to be willing to commit and to participate. If you want to shop around, Consorta is not for you.We've had a lot of growth in the social service market— our board sees such activities as aligned with its mission. For example, we just signed the National Human Services Assembly, which includes dozens of major, national nonprofits in the field."

On outsourcing. "Perhaps 18 percent of our members outsource their foodservices to management companies—the decision is site specific. If an operation is contracted, it must decide to use either the Consorta purchasing program or the contractor's program—it can't use both."

On compliance. "Our business charter stipulates that members participate only in the Consorta program.We believe that is an advantage to suppliers and a means of leverage in negotiations. To be successful as a GPO, you have to deliver the commitment of members—that is why some ' virtual' GPO models do not have long-term viability. It is not a mattter of saying 'our members represent this much potential purchasing power.' It is looking at the number of and size of the actual transactions in your compliance reports.

"Our members are required to purchase at least 80 percent of their foodservice volume through our program. We have about 220 vendor agreements that cover the top 80 percent of our foodservice volume.

"The questions for many GPOs may be—is compliance sustainable? Will all your members stay with you given your process? We think there will be additional shifts in membership based on the whole package a GPO offers, including issues like ethical standards, the transparency of its organization, adherance to government policies, its operating philosophy and basic business model."

On sole vs dual-source contracts. "Consorta's distribution contract is based on the regional preferences of shareholders; they decided that the best model is multiple-sourced. Our experience has been that sole source distribution agreements are very difficult to manage and that dual source agreements have competition built in.

"Sysco is our national distributor, for those who want a single national agreement. But in most regions, our members also can source product through select independent distributors, including Gordon Foodservice, Shamrock, Food Services of America, Cash-Wa and others.

"In contrast, on the manufacturer side, we have a significant number of sole source agreements. Our owners believe they have the right to sole source product when that is appropriate and that approach delivers value. We probably have 220 contracts with foodservice manufacturers, and about 45 percent of these are sole source in terms of specific categories. "

The impact of IT."Sophisticated information management is critical to the success of our programs—it is no longer just a matter of tracking manufacturer rebates or providing consolidated reports to members.At one time it was common to employ third-party data aggregators, but for organizations like us, that era is drawing to a close with the much more sophisticated systems we have added at headquarters. Our members have extensive online access to their data and contracts as well as to online catalogs listing every product available to them via those contracts.

"Being able to analyze utilization, procurement and compliance data across our membership lets us manage the organization differently.We can deliver clearer, fact-based decisions to the supply chain and work with directors to show them how to take better advantage of our programs, and what the resulting impact will be on their bottom lines."

Long term trends. "There is more concern about the work environment, about improving workplace safety.We are becoming more involved in helping members address HR and labor issues via negotiated contracts with temp agencies, job posting services and so on. We also see more interest among members in finding ways to make their operations environmentally friendly, using sustainable products and reducing packaging waste. Our food and nutrition committee is working on a policy that will address such issues as antibiotics in poultry, the environmental impact of manufacturing processes and appropriate business practices.These kinds of things are becoming more important in our business evaluations."

General philosophy."We do not have any program bundling and in negotiations,'best price' is the key initiative. Back end allowances are accepted, but they are not our preferred approach. Our rate of return to our shareholders is 75 cents on the dollar in terms of administrative fees, with 100 percent of marketing allowances returned to them. Some GPOs invest in insurance and other businesses, but we do not. Our primary business is group purchasing and our sole focus is on removing costs from our members' supply chain activities."