Procurement - the process of leveraging deep data analytics and a disciplined strategic sourcing approach to optimize the purchase of goods and services - is often an area of under-investment during the first steps of the M&A process. When two companies merge or come together through acquisition, optimizing procurement synergies can be one of the most important strategic levers for driving rapid and long-term Ebitda improvement.
Typically, a merger or acquisition will increase the combined companies' volumes, and therefore leverage, for common expenditure areas. Even two companies in different industries will have similar indirect expenditures, such as spending on selling, and on general and administrative areas common to most companies, such as technology, office products and temporary labor. Even if both companies currently have world-class pricing and contracts, a material increase in volumes will typically drive significant savings opportunities. In some cases, the combined volume will elevate the new entity into a "national account" or other higher status with the supply base, which often opens the door to more aggressive pricing and better service.
When two well-known mattress manufacturers merged through a private equity transaction, an apparent "synergy homerun" was complicated by the fact that the two companies had different manufacturing processes that were not going to be integrated in the near term. One had an automated stapling process and the other used labor with stapling power tools. Both utilized the same global supplier although they bought different fastener products (stock keeping units). Through a rigorous sourcing process, the combined entity saved more than 10 percent on this strategic multi-million-dollar category with no change in supplier, service or quality, and both continued to buy unique products. By prioritizing this as a first-wave effort, the savings generated an early win and helped fund other mid-term strategies, such as sales and marketing integration.
Unfortunately, many companies struggle internally with procurement optimization due to three major challenges:
1. Poor spend visibility - Procurement data is surprisingly poor and many companies have a limited understanding of their annual expenditures, except for the largest areas. As a result, self-reported volume figures are notoriously inaccurate, resulting in a risk of understating volumes and sub-optimizing savings, or of overstating them and creating a negative relationship with the selected suppliers. The issue lies in the fact that most CFOs will look at the relevant GL codes to report spending volume. However, general ledger coding does not align well with procurement needs because it does not capture all spending for specific sourcing categories.
There is no way to effectively manage expenditures you cannot see. The right way to enhance spending visibility is to take a relatively simple accounts payable report from each company and organize the vendors into categories that reflect the supplier markets. This produces clear category-level data that enables development of a full Ebitda improvement strategy and road map.
If this project is performed manually, this can be a very time consuming and a monumental task that produces less than optimal results. The highest levels of spending visibility are best achieved using a software automation tool that is specifically designed to consolidate and normalize spending data from multiple financial systems, and then converting GL code-orientated data to sourcing-ready data.
2. Lack of understanding related to detailed current spend - Many companies lack insight into line item costs and the mix of products or services they use with their suppliers. Achieving optimal results requires a detailed analysis of target expenditure areas including quantitative and qualitative aspects. As a result, a whole host of benefits accrue, including the ability to level the playing field with suppliers who spend a lifetime in their industry.
3. Internal resistance and organizational misalignment - Even if senior executives are well aligned with the equity sponsors in an M&A transaction, the greatest obstacle for results-focused sourcing is often resistance from mid-level stakeholders. These managers may be comfortable with current suppliers, enjoy leading the selection process or have subjective beliefs about why change would be detrimental. Barriers are thrown up to senior leaders who do not have the analytical data to verify or overcome these technical objections, elevating the sense of project risk.
The key to success is to bring objectivity and a thorough analysis to an otherwise emotional or anecdotal argument. Executives need clear decision support data to navigate internal challenges.
Most internal stakeholders want to do the right thing, despite initial fears and concerns. A process that brings these concerns to the surface early, makes them heard and works to address them will often win over reluctant managers. If not, the overwhelming weight of facts and logic is difficult for them to argue against without looking unreasonable.
There are several other notable challenges but all can be overcome using a robust solution that engages the stakeholders from each company and allows them to be part of the decision-making process. A best-in-class process can also overcome the supplier skepticism that sometimes accompanies new programs and can otherwise create sub-optimal results.
Companies should not overlook this opportunity to drive improved earnings through strategic sourcing and procurement transformation, especially post-M&A, when the timing is optimal for a significant improvement. The recommended approach is to partner with a company that has extensive experience and is focused exclusively on strategic sourcing and procurement transformation.
The level of procurement talent and sophistication varies widely by company, and many organizations lack the expertise to deliver rapid value from a procurement perspective. Even if the most strategic procurement leaders are already in place, they often struggle with project overload, or they lack the right team or tools to optimize procurement within an M&A environment. In most cases, choosing the right consulting partner to bring dedication and expertise will rapidly accelerate the use of procurement as a strategic lever within an M&A environment.
Companies can use the following approach to accelerate procurement-related synergy capture.
1. Perform a spend analysis for each separate entity to provide visibility to quickly understand the spend profile for each company. This low-impact effort creates a clear framework for opportunity evaluation because each company can be compared, which ultimately will help identify and develop strategies for savings capture and create a clear framework for opportunity evaluation.
2. Gather supplier contracts for both entities for targeted spend areas to perform an in-depth assessment that identifies:
* Contracts and constraints that might hinder near-term consolidation
* Pricing and payment structures
* Performance and service level requirements
* The ability to assign contracts
* Commitments, penalties and relevant complexities
3. Use a side-by-side analysis to immediately reveal leverage opportunities. When combined with the results of the contract evaluation and client input, an organization will better understand:
* Prioritization of post-merger opportunities and quick hits
* Estimates of savings and target timelines
* Sourcing strategies by opportunity
* Potential contract concerns and challenges
4. In conjunction with the side-by-side assessment, assess each company's procurement organization, people, process and technology to help a strategic partner recommend and execute best practices.
One of the key reasons for selecting a partner is to obtain and leverage the key market intelligence and industry-best service levels from a wider and deeper level. This reason alone will drive a significant difference in the return on investment for the earnings improvement program.
Whether you choose to implement these strategies alone or with the help of a strategic partner, focusing on procurement optimization is guaranteed to be the fastest way to drive Ebitda-related earnings improvement.