WHAT IS A CONSORTIUM CO - O P? U.S. CARIBBEAN BUSINESS COUNCIL BU ILDING CAPACITY THROUGH COLLABORATION Consortium Cooperatives A consortia cooperative is a non - legally binding business network operating in a shared and equal way, by and for the benefit of its members. As full members, suppliers of the cooperative may execute any objective to benefit their collective interests including marketin g, tendering, collaborative cost management, or exporting. At the core of the consortia cooperative model is something called Strategic Industry Aggregation, where similar and related, but independently owned and managed businesses, are categorized by the procurement industry that they supply. [F ig. 1 ] For an aggreg ation of businesses, industry is defined as the demographic market which its members serve, which in this case is procurement spend. Fundamentally, it is designed to optimize federal procurement spend by streamlining supply chain processes and back - office services without additional capital investment from stakeholders. In a selling consortia like USCBC, aggregation helps all members supplying both direct and indirect goods/services maintain r easonable prices, better control production schedules, and shar e overhead costs resulting in increased revenue scale and greater profit margins ! For the procurement entity, segmentation strategies are typically used to deliver economies of scope so that the buyer (federal agency) deals wit h the smallest number of ven dors required for addressing the product or service demand. Equally for the supplier, procurement category segmentation plus aggregation offers economies of scale by delivering greater (more attractive) volume pricing, and as a result achieve lower costs for the buyer. Through aggregating demand by procurement category, large volume contracts for different products can be established with key supplie rs belonging to the same consortium thereby reducing the number of total suppliers required to fulfill the c ontract and effectively manage agency needs long - term! Types of Collaboration Models : The Strategic Industry Aggregation model reviewed thus far can be successfully applied to virtually any supplier collaboration model, though reliability is most consistent when applied to non - production (indirect) spend on commodities and services. In addition to the examples above , suppliers that are strategically aggregated within industry consortiums can command discounts in the private sector on operating expenses where cost synergies might exist, for example, in e mployee health plans, legal, accounting and tax services, research and development (R&D), financial services, distribution, bookkeeping and payroll services, and HR - marketing for recruitment of highly specialized talent. Other opportunities to leverage co llective buying power include group ticket purchasing for industry trade shows and events, as well as jointly prepared market research reports to share expert knowledge. Figure 1. Since none of the companies in a strategic aggregation want to change how they traditionally interact with their clientele, t he process of producing all of the above benefits must be virtually invisible to current management and seamless in its operation. This forms the basis of the consortia hub definition as “network orchestrator.” With no day - to - day managerial role in any of its affiliated member compani es, the consortia instead provides administrative oversight, macro - logistics management, member/network support, and risk management parameters using proprietary supplier collaboration software to support and automate these functions Every organization within a consortium remains independent to execute their normal busin ess operations with which the consortia does not interfere in any way. (Members may even elect to collaborate with a firm outside the consortia network if determined to be in its competiti ve best interest.) Supplier collaboration software built upon a proprietary algorithm will enable the consortia to create and implement the cross - marketing methods and other processes with little if any changes to the way participating companies currently conduct business. USCBC simulate s the environment of a conglomerate , like Berkshire Hathaway, by creating a “one - stop shop” for SMB procurement spend across all categories: from product distribution to IT solutions, healthcare, security, warehousing, hospitality, etc., by providing structure, systems, technolo gy, and cross - marketing methods. Vertical Aggregation is collaboration between companies that are engaged in diff erent stages of the value chain. An example is cooperation between the following companies: a mid - sized supplier of leather, a small business manufacturer of leather bags, small to mid - size wholesale distributor and small business retailer s of leather bags Horizontal Aggregation might represent the collaboration between four separate m edium - sized whole sale manufacturer s of leather bags who cooperate and produce together a sufficient number of bags to satisfy an order too large for them to f ulfill individually The horizontal cooperation characterizes collaboration among firms of the same industry and in the same stage of the production process Both models communicate directly with a common body ( USCBC) that coordinates their cooperat ion and monitors whether they efficiently contribute to the achievement of the jointly set objective A key difference between business networks as company aggregations and joint - ventures is that the former use s the network contract as a collaborative tool to secure concrete opportunities and expand all participating business es while simultaneously preserving the ir individual autonomy without creating a n entirely new permanent legal entity. [Figure 2 .] The Network Effect: The application of the “Network Effect” to the insufficiently capitalized mid - sized supplier with razor - thin margins can create a huge advantage in scalability since as more customers are acquired, greater value is created. A nd since all memb ers have ownership interest in the consortia , increased r evenue occur s as a result of buyer s procuring suppliers among members within the same spend category across the entire consortia - c reating for each consor tia member two new streams of revenue : − passive “back - end” income from existing customers buying from consor tia members providing goods and services within the same spend category , AND − earned “front - end” income from new customers acquired from consortia members providing goods and services with in the same spend category Product/service costs decrease as production volume increases since new customer acquisition cost or “pull” is lowered, making products/services more affordable. This affordability factor attracts more buyers, and the entire cycle repeats itself, graduall y causing many, if not most of the businesses in each consortium to all share the same customers! C ase Stud y : The CEO of Studio Proper, a company that designs accessories and mounts for phones, tablets, laptops, and point - of - sale devices, refer s to it as finding partners throughout its customer’s “stack.” The company sells the physical equipment for business solutions, but not the implementation, software, and inf rastructure services around it. So t he company’s B2B arm take s advantage of its unique position to leverage s trategic partnerships with its industry affiliates that do. 1 Figure 3