Understanding broker models in procurement: What customers and suppliers need to know
In many industries, organisations turn to intermediary firms to help with sourcing and managing suppliers. However, what’s less commonly understood is that some of these intermediaries operate under a broker model. This approach can have significant implications for customers and suppliers, affecting costs, transparency, and overall efficiency.
In this article, we’ll explain how to identify when an intermediary is operating as a broker and explore the potential impacts – whether you’re engaging their services as a customer or supplying goods and services through them.
For customers: How to recognise a broker in your procurement process
If you’re using an intermediary to support your procurement efforts, here are some common signs that you may be working with a broker:
Inefficient processes: Broker-led procurement processes often rely on outdated, manual methods instead of streamlined digital tools. This can result in delays, with end-to-end processes taking weeks rather than days.
Limited supplier options: Brokers may only invite suppliers they already work with to participate in sourcing exercises. This can restrict competition, leading to fewer options and potentially biased outcomes. To ensure fairness, always seek a full-market view rather than relying solely on suppliers who pay commissions.
Higher costs: Brokers typically charge a commission – ranging from 5% to 15% – that is often passed onto customers. This effectively means you’re paying for the service twice. Always request full disclosure of fees and a detailed breakdown of costs.
Opaque commercial arrangements: Brokers may conceal their financial relationships with suppliers, making it difficult to identify hidden costs or inflexible terms. Review contracts carefully to ensure clarity and fairness.
Complexity: Broker-led processes can involve unnecessary complications, such as convoluted contracts or a need for external expertise, leading to delays and increased costs.
Conflicts of interest: In some cases, brokers may have financial stakes in the suppliers they recommend. Investigate the corporate governance of the intermediary firm to avoid biased advice.
For suppliers: Signs you’re working with a broker
Suppliers often encounter unique challenges when dealing with broker-led procurement processes. Look out for the following indicators:
Limited opportunities: Brokers may market you to a narrow pool of prospects, restricting your deal flow and reducing growth opportunities.
Unclear award criteria: Contracts are often awarded based on subjective opinions or the commission you pay, rather than objective factors like performance data or differentiation.
Repetitive, time-consuming processes: Without a centralised digital database, brokers may require you to resubmit the same information for every sourcing event, wasting time and resources.
High commission fees: Brokers typically charge suppliers 5% to 15% of the deal’s value, cutting deeply into margins—especially for smaller suppliers.
Reputation risks: Associating with a broker could raise questions about the quality of your services. To stand out in the market, focus on showcasing your professionalism and unique capabilities through transparent and fair channels.
Limited growth potential: Smaller suppliers often turn to brokers for access to opportunities, but this reliance may stifle their ability to scale independently. Ensure the partnership aligns with your long-term strategy.
Building better procurement practices
Understanding how brokers operate in the procurement space is essential for both customers and suppliers. For customers, working with brokers can increase costs, reduce transparency, and limit access to the best suppliers. For suppliers, these models may limit growth opportunities and reduce profitability.
To avoid these pitfalls, both parties should prioritise transparency, fairness, and efficiency. As a customer, ensure you have a full view of the market, and as a supplier, focus on building strong, direct relationships that showcase the value you bring.
Want to learn more?
At tkg, we pride ourselves on offering transparent and unbiased support for procurement processes. If you’d like to explore how independent advisory firms can benefit your organisation, feel free to reach out or browse our resources for more insights.
