‘Procurement can drive cost savings and value in private equity’

28 October 2020 Consultancy.uk 4 min. read

Jeremy Smith, a Managing Partner and Head of Private Equity at consulting firm 4C Associates, shares how procurement can help the private equity sector deliver cost savings and add value. 

A modern procurement department can balance cost optimisation and growth enhancement to deliver increased value to private equity and actively shape a business’s strategic direction and competitive differentiation. Leading organisations have understood how procurement can help define a successful business strategy and modern departments now have a holistic view of organisations, sectors and changing market conditions.

Spotting opportunities, solving challenges and refining processes are the bread and butter of modern procurement, and in many mature sectors there is a strong link between procurement capability and the level of direct expenditure and profit margins.

Profitability improvements through procurement are more accessible than many believe and can be delivered in more ways than many imagine. Selected approaches will depend on the justification for asset acquisition. Whereas a traditional approach will work for technical cost reduction and turnaround plans, procurement can also deliver value during investments for growth, although this requires a different strategy.

Jeremy Smith, Managing Partner, 4C Associates

Value beyond cost savings

When the goal is to grow top-line revenue, as it often is in private equity, procurement is in a strong position to deliver. Cost cutting is just one element of this and something that the most-cutting edge procurement teams will work on, however, there is a much wider remit to explore. Cutting costs will typically deliver 5% - 10% of bottom line savings, however, savings of 20% - 30% are accessible for businesses which integrate procurement into day-to-day operations. 

Depending on the sector being invested in, there may be opportunities to engage with supply chain partners to optimise performance, access innovation, provide agility and end-to-end customer service. These initiatives often lead to greater value impact on pricing, without the need for increased expenditure and can uncover mutual benefits, such as coordinated delivery times, or reduced packaging. 

Cross portfolio initiatives can deliver the buying power of large organisations to smaller companies. The value can be significant when working within the right categories of spend, however, implementation can be complex as each portfolio company needs to sign up their requirements. These come with different specifications, timings and varying priorities.

Within a portfolio company, there are instances when it is not possible to involve procurement in the development of the value realisation plan during due diligence. In this case, the next best scenario is involving Procurement within the first year of acquisition. When the function is involved in the development of initial growth plans, opportunities to rationalise costs are often abundant. 

While sensitive areas such as salaried employees are often put to one side, portfolio companies are encouraged to look at third party costs to identify EBITDA improvement opportunities. The latter frequently represent close to 60% of total expenditure and putting in place a long-term, holistic solution to rationalising this area can lead to huge wins.

Supplier relationship management

One of the main drivers of innovation for procurement is an effective supplier relationship management (SRM) programme. These initiatives can go far beyond the function’s traditional remit and can source multiple, mutually beneficial solutions from within the supply base. Releasing value from the supply chain can in turn provide businesses with competitive advantages, but also help differentiate them from the competition.

Supply chain alignment can lead to significant improvements in terms of performance, customer satisfaction, cost and growth. This is particularly relevant when dealing with businesses that have grown rapidly in a short space of time, but also those where supply chains have received little attention – something relatively common in the world of private equity.

The issue here is selecting the right partner. This can prove complex, as working collaboratively with the wrong partner can result in exploitation. This is where the implementation of a suitable programme, led by procurement, can drive real value in terms of cost reduction, access to innovation and revenue enhancement. Building relationships with key suppliers means sharing information and building trust. This lets businesses point out potential efficiencies and allows for flexibility. 

For example, businesses faced with unexpected levels of demand greatly benefit from a supply base able to flex production levels. A key difficulty in this scenario is guaranteeing consistency of the output, however, investing in a relationship means both buyers and suppliers can work together to mitigate risk and develop a sustainable, yet agile model.

Failure to invest in supplier relationship management is often due to a lack of resources, but sometimes it is simply a serious oversight. In many cases, companies, particularly mid-size enterprises, underestimate the opportunities that can be found by working with suppliers to uncover synergies. Investing in relationships with key partners also results in more secure supply chains, mutual gains, innovative developments and sustainable value.