Private Equity is all about creating value and nothing creates value faster than strategic sourcing.
Private Equity is an increasing presence at all levels of private enterprise. The number of firms has increased dramatically in recent years, as have their holdings, and the famous companies owned by PE firms might surprise you. Setting aside any discussion of the macro-economic merits of widespread private equity ownership, the primary goals of a PE firm are straight-forward: maximize value in as short a period as possible. There’s no better way to do this than through improvements to procurement.
Frequently, procurement teams will view the arrival of a PE influence with gratitude as it can mean an increased incentive to aggressively pursue savings, innovation and speed. That said, it can be tricky from a political and team perspective so it’s crucial to do private equity-sponsored procurement efforts with care.
Using the leverage of procurement to drive value and EBITDA in private equity is not a new approach. Some of the most frequent tactics include:
- Source, source and source some more
- Carrots are better than sticks
- Get a better view
- Know the uplift
- Source, source and source some more – One of the core value propositions for PE ownership is that it brings new vigor and fresh eyes to company operations that might have grown a bit complacent over time. This syncs perfectly with one of the central tenets of strategic sourcing, namely that conducting competitive bidding on categories that have not been negotiated in a while is going to yield strong results.
- Carrots are better than sticks – The relationship between PE firm procurement staff and portfolio teams is always tricky. While the PE staff may have the most leverage, the portfolio teams make or break the projects. PE procurement teams need to present themselves as additional resources to help the portfolio companies in order to be successful. Vying for “credit” on savings will kill any progress.
- Communicate – While potentially the most over-used cliché in business, you can’t overstate the importance of communicating effectively with the members of the portfolio, suppliers, and procurement teams. Suppliers need to collaborate in order to make cross-portfolio frame agreements a success. PE firm management needs to clearly communicate expectations and the metrics by which the teams will be judged.
- Get a better view – The first investment every PE firm should make before embarking on portfolio strategic sourcing efforts is a robust spend analysis platform and the support necessary to build a strong view into the spend across the portfolio. This will help in identifying early opportunities, low-hanging fruit, and areas for spend leverage and aggregation down the line.
- Know the uplift – EBITDA improvements that come from procurement gains have additional impact in a PE scenario due to the leverage associated with how PE firms view companies. Since most PE firms are looking to maximize value during both hold and exist, small differences in profit improvements can yield large valuation impact.
Not surprisingly, some of these tactics work equally well for “stand alone” organizations that are not part of a broader portfolio. One thing that all of us can learn from private equity firms is to embrace their sense of urgency and keep in mind that “Savings delayed are savings lost”.