In the second of our three-part series on procurement’s role in a merger or acquisition, we explore how firms can achieve immediate and longer-term synergy savings after a merger.

Imagine you’ve just closed on an acquisition of, or merger with, another company. As a procurement leader, you’ve likely just been handed a synergy target that was scoped out before the final deal was signed.

Hopefully it is a detailed, bottom-up picture of realizable savings (as we explored in the first part of this series on M&A procurement).

More often than not, however, a chunk of expected savings will either never be achieved or won’t be secured as quickly as hoped.

The primary procurement task is to start picking low-hanging fruit because the saving of that first million or two will build confidence and the momentum needed to tackle more complex projects.

Whether you’re handed an attainable target or an unrecognizable wish list of overestimations, everyone from financial backers to the board to those with boots on the ground will be looking to the supply chain to start bringing in the money.

Procurement is viewed as the litmus test for how successful the amalgam of the companies will be – so you must grab quick wins while simultaneously making longer-term plans.

Procurement is viewed as the litmus test for how successful the amalgam of the companies will be – so you must grab quick wins while simultaneously making longer-term plans.

Measuring synergies

The devil is in the detail, so once you have a believable target, the next key activity is to establish a good way of measuring achievements.

Finance buy-in is essential, and if there’s a project management office overseeing post-merger work, they’ll need to back it too. Securing this will avoid any disputes over how savings are accounted for.

Creating implementation plans

After measurement has been agreed, you will need to translate synergy targets from their high-level overview into detailed implementation plans.

Holes from the pre-close assessment phase must be plugged now that you have access to more accurate information. You can refine earlier estimates and assumptions using data, supplier contracts and by meeting with stakeholders to get a sense of what exists beyond the raw facts and figures:

  • Look beyond what’s in the database to try to understand how cost and prices are analyzed and assessed across the companies. How do they apply unit costs, for example, or evaluate contracts?
  • Build a consolidated spend cube using all the available information covering what the combined businesses buy, for whom they buy it and from whom they purchase it.

Merging two databases or ERP systems could be a 6-18 month project, but spend cube work can be done in the short term to provide customised mapping and information across the two previously separate businesses.

After pulling together as much information and intelligence as you can, it’s time to compile a map of opportunities. This is a chart that displays savings prospects according to addressable categories, the priorities/phases of the project and the size and complexity of the potential prize.

Preparation is key. You need to be ready to move from deal close and kick off from day one of integration.

Category planning

Preparation is key. You need to be ready to move from deal close and kick off from day one of integration.

Start with a broad program of goals and refine them. After that you can undergo more detailed planning: which categories are you going to go after immediately, in the near future, in 12-18 months’ time, or not at all in the foreseeable future?

Categories should be planned by waves or phases. Arrange them according to effort, impact and difficulty.

Once you’ve organized all the various categories into their level of complexity and prioritization, you need to consider the time and resources required to support these programs. Think about who will be managing the project, what personnel should be involved and which other departments or outside assistance will be required to make them work.

1. First wave category planning

The first wave should incorporate simpler categories or those that have a high degree of overlap. These include indirect materials or services that have little or no impact on clients, such as office supplies, travel, professional services and non-client facing IT such as mobile and fixed telephony.

The sourcing strategies to tackle them include price comparison and harmonization for those materials or services that are the same or similar, and open, competitive bidding for simple or comparable products or services.

Also, your first phase should include some tactical initiatives in the more complex categories – think, for example, of asking for additional end-of-year rebates from the same raw material supplier in exchange for the combined volumes.

Although not strategic, this type of action will deliver some quick savings and in turn provide confidence to the board that synergies are materializing.

2. Mid-wave category planning

Mid-wave categories are those with more divergence between the two companies. These typically include raw materials or simpler commodities, finished and assembled products, as well as the more complex indirect categories not previously addressed.

Levers used will be a combination of ‘supply side levers’, such as low cost country sourcing, and ‘demand side levers’, such as the harmonization of specifications for items of low to medium complexity. In these mid-waves, you could also tackle additional aspects of categories already addressed in your first wave.

Let’s take the example of travel – while running a global tender on air or hotels (wave 1 activity) will help harmonize tariffs obtained across the group, the majority of savings will be lying in the alignment of the travel policies and in the enforcement of the newly defined travel policy for the group.

3. Final wave category planning

The final waves cover the more complex, often direct, categories that have different product specifications or require engineering approval or testing, such as highly engineered products.

Key sourcing levers to be applied for these categories would be the harmonization of specifications or ‘make-v-buy’ analysis.

In some cases, categories involved in these final waves may have a physical impact on your footprint – for example, the consolidation of IT data centres between the two companies. These activities can be lengthy but can also deliver some substantial savings.


Executing synergy savings

Information gathering, support seeking and careful phased planning are essential to achieving successful synergized savings, but you also need to get the core program underway.

Key steps and opportunities include price and contract harmonization covering cost, delivery terms, availability and so on. Look at which parts overlap from different suppliers and run a contest between them to see who should win the future business.

As soon as the savings are coming in, you need a means of tracking and recording them. This need not require an expensive or specific system; it can generally be performed in-house using a custom-built spreadsheet or template.

It is, however, important that someone is assigned responsibility to manage it on an ongoing basis and that the results coming through are checked periodically with the project management office.

And don’t forget to regularly share and celebrate success. Reports of positive progress will help to keep momentum up and motivate everyone from the top executives to the teams who are working so hard to achieve them. These achievements can also assist in influencing and winning over the stakeholders whom you’ll be approaching next.

Procurement’s role in the rationale for merging companies cannot be underestimated. The pressure to achieve and the spotlight under which you do it may be an uncomfortable place to be, but with it comes huge opportunity for both individuals and the profession more broadly.

To find out more about M&A savings, please contact us.

The final part of this series, to be published in issue 6 of The Source, will examine the design of the future organization, and the harmonization of systems.