Portfolio procurement the Nordic Capital way
European private equity firms have traditionally found it difficult to leverage portfolio-wide procurement potential to the same extent as their US counterparts. Nordic Capital is one of the few to have bucked the trend.
The award-winning Nordic Capital Procurement Optimization Scheme (NCPO) generates procurement savings of approximately €10m a year across the portfolio – that’s €100m of equity value, based on an EBITDA 10x valuation multiple.
The success is the result of evolution rather than revolution, says Bob Kickham, Industrial Adviser to the Nordic Capital Funds.
“The genesis of the NCPO was a convergence of items,” he explains. “Through board meetings and events, Nordic Capital heard about some of the great work being done around procurement in its portfolio companies.
“At the same time, a number of the procurement specialists in these companies were asking us if there were ways they could get together and share best practice.”
Establishing a procurement academy
So, in 2009, Nordic Capital arranged its first procurement academy. It trained 16 of its portfolio companies’ best procurement talent in state-of-the-art procurement processes, teaching them how to use the tools and understand category management. These 16 individuals ultimately became the core of the program.
“One of the important elements of how the program started was the fact that it was led by the companies themselves – management had a desire to work together and they had buy-in as it was their initiative,” says Kickham.
“Nordic Capital was then able to provide support by seeding the academy, as well as through the boards and engagement with management on procurement. It’s a function that tends to be unloved, so we found that giving it attention and appreciation helped the procurement teams flourish.”
One of the important elements of how the programme started was the fact that it was led by the companies themselves – management had a desire to work together and they had buy-in as it was their initiative.
Value creation in a fragmented European market
Fast forward to today and 150 people have now been through the academy. “This means that you have 150 people who all know what a cost model looks like, what good and poor procurement strategies look like, and they can all recognize best-in-class supply analysis,” says Anne Christiansen, Procurement Manager and NCPO Coordinator at Nordic Capital.
“This is really helpful in a European context as it helps break down some of the barriers created by what can be quite a fragmented market.”
Over the last eight years, in addition to the agreements struck with suppliers by groups of companies with similar supplier needs, the NCPO has developed more than 25 'Plug and Play' procurement programmes that can be made immediately available to companies as they join the portfolio.
As an example of the immediate value creation this can generate, a mid-sized healthcare company saved over €400,000 – including €100,000 in annual IT hardware costs, and €150,000 in software and discounts on hotels – in the first four months through the NCPO.
This is made possible by the structured arrangements that have been developed over the years.
“Every company Nordic Capital backs has a value creation plan, which includes improvements to procurement,” says Kickham. “The ambition is to meet all CEOs and CFOs in the first few weeks of the investment to discuss where the company could benefit from the NCPO.”
In addition, under the ‘Plug and Play’ program, suppliers have dedicated account managers who are trained in dealing with NCPO members. “That way, the process is simplified and new portfolio companies don’t have to go through the basics, but can move straight to discussing individual requirements,” he adds.
Nordic Capital’s five top tips on creating value through procurement
Active and engaged owners really make a difference. Supporting and questioning the development helps to engage executive teams.
Behaviours really matter. People and teams should feel better after any initiative than they did before. This includes celebrating when you find and address poor pricing or poor suppliers because this will create most value when implementing the initiatives. Even if you need to be hard on an issue, you need to be considerate of the people working with it.
Portfolio companies need to have skin in the game. Portfolio companies need to either fund initiatives or provide resources to support the initiative. If the support is provided [by the owners] for free then there may not be commitment in the portfolio company to deliver any result.
Focus on a clear, structured and understood process. The process and rules of engagement need to be fully communicated, understood and restated at the start of any initiative. It takes a rigorous and structured process to engage across multiple portfolio companies from different sectors, geographies and cultures.
Always have reputation at the forefront of your mind Always think of reputation when making a decision. Reputation creates credibility and value over the long term.
One issue that many private equity firms may question is what happens when they sell a portfolio company. This has the potential to remove some of the attraction for suppliers given loss of volume. Yet the NCPO has an answer to this.
Some portfolio companies remain with the NCPO after exit, while others remain with the programme until each of its agreements end, particularly where a business is acquired by one of Nordic Capital’s competitors.
“Clearly there are occasional instances where companies need to exit the scheme more quickly than this,” says Kickham. “Yet we have built longstanding relationships with suppliers and they know that even if a company leaves, others will join as Nordic Capital makes new investments.”
The other issue some might raise is that savings become harder to obtain as efficiencies have already been generated. Yet even in categories that have been part of the NCPO for some years now, portfolio companies are continuing to make savings.
In transport, for example, when a three-year agreement expired recently, a further 21% of savings were made following the negotiation of a new three-year deal. “This is because the NCPO relies on reputation,” says Kickham. “Suppliers know that we will treat them fairly and so are willing to offer better terms.”
The value creation procurement cycle
With eight years of experience, Nordic Capital believes it is now in what it terms “the virtuous cycle of value creation”: the programme has matured, offering more benefits which, in turn, attracts more portfolio companies and leads to more volume discount.
Overall, the NCPO brings the power of 80,000 employees and €17bn of revenue to each company in the scheme’s community.