Five procurement questions every private equity firm should ask
Efficio’s detailed spend analysis at a services group in 2015 helped identify savings that have since generated €250m in equity value. Here’s how.
Getting to grips with complex procurement and supply chain systems can seem daunting, so recruiting outside experts who can provide a comprehensive, granular assessment of your company’s spend is usually worth the initial investment.
Efficio was brought in by two prospective private equity buyers to analyse spend at a services group in 2015 - the systems in place were highly complex, making it very challenging to track how much was being spent and on what.
Crucially, the firms brought in expert help at due diligence stage to gain a better understanding of where improvements could be made even before making the acquisition, helping them to develop their investment thesis.
Efficio began by asking a set of key questions with the aim of maximising the savings opportunity for the firms. These included:
1. Do you know how much the company is spending and on what?
This sounds straightforward, but in Efficio’s experience, firms often don’t have a detailed enough view on how much is spent and where.
2. What and where is the savings potential?
Once you understand spending patterns within the company, it’s possible to see where inefficiencies lie and quantify how much can be saved through contract renegotiations, change in suppliers, changing usage patterns, etc.
3. Is procurement a board-level discussion topic?
If not, it should be. Generating maximum savings can only be achieved if there is buy-in from the management team and if the efficiency drive is led from the top.
4. Are you moving quickly enough?
Given that cost savings can have a significant effect on EBITDA and therefore company value, achieving quick wins really drives performance. Make procurement and supply chain analysis part of the due diligence process and identify savings early on.
5. Is there any leakage?
This should not be a one-off exercise – over time, business usage changes and suppliers alter terms and pricing, which can result in procurement savings being lost over time. Make sure there is a process for monitoring spend on an ongoing basis and conduct regular reviews to ensure you are constantly extracting improvements from within the company’s supply base.
Optimise procurement for ongoing savings
Following a detailed assessment, Efficio quantified the group’s addressable spend at around €200m, identifying a 10% savings target. We also found that some of the complexity arose from the fact that spending was fragmented across the group and was managed by operations, rather than the Procurement function, making analysis of spending difficult and resulting in a lack of rigour around managing costs.
Once the deal was completed, Efficio set about helping the company implement a range of measures designed to optimise procurement. These included putting in place a new governance structure with a robust spending approval process; improving monitoring systems to produce more granular analysis; devising alternative cost strategies, such as unbundling and changing specifications; managing the new process with chosen suppliers; designing a new Procurement organisation and coaching the in-house procurement managers.
The result exceeded expectations, with savings reaching 12%. Efficio remained engaged with the company beyond the initial work to ensure that granular category spend reporting and strategic sourcing became embedded practices in the group and to ensure that savings could be sustained over the long term. The result is that savings have generated around €250m in equity value for the private equity investors.