Enabling transparency, control and EBITDA growth through procurement technology

Enabling transparency, control and EBITDA growth through procurement technology

Jeremy Smith Blog, Private Equity

Mid-market private equity owned organisations usually have a short history of rapid growth or intensive merger & acquisition / bolt-on activity. Their next phase of growth is usually based on product or regional expansion and whilst investing in this approach it is vital that cost control is not forsaken. If, and it will be a nice problem to have, growth occurs as planned then subsequently obtaining the same degree of cost control over this now much larger entity will be exponentially harder than commencing whilst in the lower mid-market. The good news however, is that there are now a multitude of cloud based solutions making this a scalable and much lower capital investment decision than it historically used to be.

Sustainable year-on-year cost reductions during an acquisition phase are difficult enough to realise without the required insight and transparency, but most mid-market firms have embryonic, if any, procurement policies, processes and systems. This is where implementation of cloud based P2P, spend analysis, travel & expense management, contract management or e-invoicing systems can become sound investment decisions, with a strong ROI, through enabling effective cost control and procurement through improved visibility of spend behaviours as well as efficiency and working capital savings through automation.

These systems enable an in-house or outsourced procurement team, working cross-functionally, to understand cross organisational spend consolidation, leverage or process re-engineering opportunities which in our experience allow for anywhere between 4% and 15% sustainable cost reduction, depending on the category. More tactical spend items may have larger, one-off opportunities providing a way of influencing a high proportion of an organisation’s third party spend. It can also enable stronger year-on-year cost reductions which are practically impossible without this understanding of spend and behaviour. Supplier risk is reduced as supplier numbers are rationalised. Contract compliance reduces administration and e-invoicing drastically improves visibility and back-office resource utilisation. Think how this can help with providing real-time data, transparency of performance and the right performance indicators to make the correct investment decisions.

The real benefits to organisations comes from the understanding of cost drivers within your own processes. Using a tactical example, but one we can all relate to, of Travel spend, the real savings are not in re-negotiating your travel management provider or a better rate at the local hotel, but in using the travel spend data to understand behaviours. Advance booking periods, policy compliance, even down to paying for Wi-Fi when it was already included in your deal. All these behaviours can be understood and when in control, can reduce travel category spend by 30%. Imagine having this level of insight across your entire supply base and the cost savings this can deliver. These tools can help with this.

The key to the realisation of these benefits is the correct understanding of the needs of your organisation for each of these tools, its readiness for implementation and capability to deliver subsequent benefits. A quick opportunity diagnostic can identify which tools are recommended and what subsequent procurement benefits will follow. This usually provides a strong ROI for the organisation in addition to enabling future stages of growth. A no-brainer in the right circumstances.