Procurement Mastery: The New Frontier for Private Equity Value Creation

In the current financial environment, private equity (PE) firms are increasingly focusing on driving operational improvements within their portfolios, with assets being held for longer durations.

Moreover, investors are beginning to seek out PE firms that have the capabilities to drive value during lean times. Given the extended asset holding period, investors are looking for PE firms to drive up the future value of portfolio companies through operational improvements such as procurement mastery.

At Accenture, we examined 225 companies for our High Performance Procurement Survey. The survey looked at how these firms performed relative to four procurement processes: strategy, sourcing and category management, requisition to pay and supplier relationship management. It also considered three key enablers: workforce, organisation and technology. The study found that:

• Procurement masters’ operating costs are typically half that of low performers but provide 30 percent higher savings on Cost of Goods Sold (COGS) and Selling, General & Administrative (SG&A) expenses.
• Procurement masters typically save more than ten times the cost of operating their procurement organisations.
• Procurement masters excel across the critical procurement capabilities: procurement strategy, sourcing and category management, requisition-to-pay, supplier relationship management, workforce and organisation, and technology.
• Procurement masters face fewer organisational challenges.

MAKING THE CHANGE

Our survey found that a PE firm’s ability to quickly evaluate and value procurement mastery (strategies that impact COGS and SG&A) pre-deal will become a factor for investors. Similarly, investors will begin to expect PE firms to impart leading procurement capabilities to the acquired firm post-deal.

The PE industry has begun to respond to investor requirements for improved asset savings derived from procurement mastery, yet there still remains an issue over how best to drive the change.

Typically, portfolio companies claim to have the capability to improve and drive cross-portfolio initiatives. However, due to the expected transient nature of portfolio companies and the limited resources within them, cross-portfolio initiatives have historically been few and far between.

PE firms have generally avoided interfering in the running of their portfolio companies outside of the standard value-creating activities, relying on the restructured management team to drive change. Attempts by PE firms to increase the managerial control of their portfolios have begun, but limited short-term resources are likely to hinder change.

From the portfolio company’s perspective, this market-driven change is most likely to be met with scepticism. Without performing a fact-based assessment of the portfolio company, most firms would describe themselves as procurement masters.

Understanding the portfolio company’s level of procurement mastery following a capability assessment is an effective way to enable the company’s ‘CEO buy-in’ to the subsequent process of change. This change would normally include ‘in-company’ and cross-portfolio strategies, delivering typical savings.

UNDERSTANDING PROCUREMENT

We envisage that in-company procurement organisational structures, which typically deploy procurement managers across business divisions, will move towards a ‘hybrid’ structure where a selection of categories will be either managed centrally by the PE firms or under their guidance.

The relationships between the portfolio companies and the vendors will also need to change. Vendors will need to be willing to change how they structure and negotiate supply agreements to allow post-deal savings to flow. They will be required to:

• Recognise the PE firm’s total expenditure.
• Price without volume or value commitments.
• Structure contracts that accommodate the future sale of the firm.
• Be agile enough to implement supply agreements into new PE firm acquisitions.

Accenture found that over 95 percent of responding vendors from a cross-section of industries expressed positive interest in moving toward commercial agreements that include the above factors. Firms willing to change how they work with PE portfolio companies will benefit from a constant flow of new business and the opportunity to rapidly increase their market share at a fraction of the normal ratio of marketing and development costs.

Procurement mastery is an increasingly important tool that PE firms are adopting in order to demonstrate to investors they can continue to drive value during these lean times. Portfolio companies and vendors alike will find that they are required to change the way they approach and manage these contracts through the life of an acquisition.