How to increase value through procurement
For a savings plan to work effectively, there are five points to consider.
1. Understand spend in each portfolio company. By knowing how much each company spends and on what, it’s possible to identify areas where this could be reduced through negotiating new contracts with suppliers.
2. Work out which categories or areas could be negotiated on a shared basis. Once savings have been identified at an individual company level, it’s clearer where there is potential to help companies work collaboratively to negotiate bulk purchases. Given that private equity groups may have a variety of companies from different sectors, it may be that it is only a viable strategy for one or two categories, such as, for example, IT hardware or travel.
3. Don’t force the issue. Private equity firms that have achieved the smoothest and best outcomes have offered their portfolio companies opt-in schemes rather than requiring them to sign new contracts. In our experience, success relies on buy-in from the management teams involved rather than top-down imposition of new supplier terms. For example, some companies may require more bespoke services or products than a blanket arrangement may provide for. In addition, this kind of shared arrangement requires internal champions who are enthusiastic about the benefits, while the imposition of terms can be viewed as unnecessary tinkering by private equity owners.
4. Provide a focal point for companies to share best practice on procurement. This could be through the creation of networks and events, so that those responsible for procurement in portfolio companies can build relationships with each other and feel comfortable sharing knowledge and information.
5. Facilitate negotiations for portfolio companies. Produce standard contracts that companies can, for example, access online to help them negotiate and secure better terms from their suppliers.