Over the last decade, financial market dynamics have meant that Private Equity firms have needed to increasingly focus on improving operational efficiencies of the underlying assets to generate the required returns.
As a result, we have seen growing importance placed on the roles of PE portfolio executives – the remit and expectations are extensive, but the teams are often small, relying on one or two individuals to cover a wide range of investments. Simply put, there are three main sources of value capture which a General Partner will be trying to maximise at exit, however, Procurement can help with these three areas to deliver more value than is traditionally expected:
1. Revenue growth to enhance EBITDA
In situations where an investment has been made with the intent of growing the top-line revenue, Procurement should not only be focused on pure cost-cutting. Instead, it should work to better publicise the leadership and revenue growth opportunities it can bring to the boardroom. Things will differ depending on the type of industry the investment is in but working with the supply chain partner to increase performance, agility and end-customer service can be value-generating and doesn’t mean you have to pay more for the service.
Supplier Relationship Management, when executed properly, can help drive value to both parties’ mutual benefit using innovation within the supply base that is rarely tapped into when taking a blunt approach to cost-cutting. Releasing value from the supply chain is also an area that can give a company competitive differentiation with its market as this is an investment that many companies do not have the vision, capability, or resources to undertake.
Large multinationals with internal procurement functions may have made this leap but mid-size organisations have an opportunity to identify supply partners with whom there are mutual synergies. Partnerships are something to invest time in due-diligence as it must be certain that the power dynamics are appropriate. This is a long-term commitment and one that will need to ensure motivation remains for both parties throughout the term. Having one dominant party in the relationship will erode the dynamic and could leave the business open to the risk of post-contractual opportunism, by the dominant party.
2. Cost optimisation and improved working capital
This approach to procurement is one that should be taken within the first year of an acquisition, when the growth plans are being developed and implemented. This is procurements’ traditional heartland, when asking non-procurement people. No-one wants to be addressing the emotive areas of cost such as internal salaried employees, as it is often sensitive and extremely risky. Executives of the Portfolio companies are strongly encouraged to look at third party costs with fresh eyes to identify EBITDA improvement opportunities. In many industries third-party costs are well above 60% of total expenditure, so the opportunity can be significant. Releasing this value may not always be a quick win and could require a more transformational approach.
3. Increased enterprise value through financial management
This is an area where procurement has less of a direct impact on the assets, however, it does not mean there aren’t areas where procurement can add value. Debt can be optimised through the balanced use of Operating Leases, Finance Leases, Capex acquisition or Short Term Rental. Procurement can add value by enhancing financing proposals of the acquisition model (e.g. for commercial vehicles fleet) and help negotiate the terms and optimise the implementation.
Risk can be mitigated by Supplier Tail Management. Helping to reduce the sheer number of suppliers will reduce debtor situations in circumstances where integrated Purchase to Pay (P2P) does not exist across the full spend. Supply chain risks, operational as well as ESG (Environmental, Social and Governance), are magnified when an organisation has a large tail spend, as there are often not enough resources to adequately undertake the required due diligence or supplier management. This will make the asset more attractive to potential buyers, or allow you to demand a higher value.
Risk is also mitigated through the effective implementation of procurement policy and processes, which for mid-sized investments may also involve the implementation of systems to control spend, provide transparency and enable the most effective deployment of resources to the high-value areas.
In summary, procurement can do so much more than simply slash cost and increase efficiency. Cross-functional engagement within the business can not only support growth plans but actually enhance them. Risk management is also something where the appropriate policy and process implementation can help to underpin the effective control of spend across the organisation which then allows the right balance of cost-cutting and growth enhancement to deliver increasing value to Private Equity boardrooms.
To contact 4C Associates, book a meeting with us here.
