With Private Equity firms increasingly under pressure to improve operational efficiencies within their assets as a means to drive value, Jeremy Smith considers procurement’s role.
All mid-market Private Equity companies recognise the value procurement can bring in terms of sustainable EBITDA improvement, however, the portfolio companies they invest in often lack leverage given their scale in any given market. This means that the balance of power is weighted towards the suppliers leading to clients having little say in the prices set by suppliers and therefore finding themselves having to largely accept what they are quoted.
In addition, across the PE fund many portfolio companies often buy from the same suppliers. This direct competition for some of the scarce supplier services can further drive up prices, but also limit the resources available and forces companies to make undue compromises.
In this context, there are many potential opportunities to be uncovered by centralising commercial relationships at the PE fund level. In particular, providing aggregated buying, supplier relationship management and process control can lead to double digit savings for portfolio companies.
Of course, not all categories are suitable for group buying and a thorough analysis is necessary before any particular approach is implemented. However, once all elements have been taken into consideration, a phased approach is most effective.
The first phase is a simple contracting and unit price reduction exercise, but this sets the foundations for more advanced procurement activities. Phase two often focuses on solutions such as standardisation, process improvement, demand management and other initiatives designed to drive benefits.
A successful implementation requires a degree of flexibility, especially in terms of providing the ability to upscale when needed, for example following growth or an acquisition. This ability to remain agile is also essential in terms of the contracting model. Here a flexible solution will allow divested organisations to have clauses that exist beyond the exit. This enables businesses to remain sustainable for a period of time until new arrangements are put in place. Although there is no shortage of firms which have invested in recruiting central procurement teams, these investments often fall flat. Why? In many cases the team put together simply lacks the resources to tackle multiple categories. This in turn kills momentum and efficiency.
Outsourcing, and not simply in the same standardised way as some of the existing aggregated buying platforms, is often the best solution for firms looking to build fit for purpose cross portfolio options. These can enhance EBITDA and increase portfolio value, whilst providing the flexibility and results required.