Procurement in Private Equity: Turning data into actionable insight
The recent PEI European Operating Partners Forum brought together over 150 value creation professionals from a wide range of large and mid-cap Private Equity houses across Europe.
Procurement and its role in value creation in portfolio companies formed a key part of the agenda with a key theme the “greater systemisation of operations improvement” combined with the "entrepreneurial instinct of the operating partner".
Procura hosted a key session with the focus on Procurement in PE: Turning data into actionable insight. The session was led by Procura Managing Partner, Richard McIntosh in discussion with Henrik Rundkvist who leads procurement at Altor Equity Partners and Will Harman, who leads Operational Excellence at Apax Partners.
The session covered a range of areas and different approaches and provided some excellent shared learnings;
How data can transform private equity’s approach to procurement in portfolio companies
Spend data provides the foundation for procurement cost reduction and enables opportunities to be identified and projects to be scoped.
Interestingly, two approaches were highlighted; one bottom-up and the other top-down. In the former, complete data sets from all portfolio companies were used to create a complete spend picture across the portfolio and, from there, opportunities were identified. In the latter, target categories of spend were pre-selected and data requested from portfolio companies based on these.
Leveraging spend data to drive EBITA improvement
Data provides a clear picture of spend and opportunity. Categorisation is the starting point, taking accounts data and putting it into supply market categories. From there we can see suppliers, spend, cost centre, projects, contracts as well as supplier fragmentation, spend change over time, preferred suppliers.
However, to get granular insight, context was highlighted as fundamental. Gained through discussion with portfolio company stakeholders in order to understand business requirements, recent sourcing activity and on-the-ground challenges.
An Opportunity Assessment based on data and context, provides a business case which can be discussed with portfolio company management. A procurement cost reduction initiative may form one of many PE driven operational improvement projects so scope, target and clear deliverable results are essential.
Making it happen – who, what, how
Whether delivery of identified opportunities was delivered by a PE in-house capability or through an external consultancy two learnings were highlighted;
Firstly, engagement of portfolio company stakeholders and management is key. Without this, it is difficult to get traction for projects and results will be sub-optimal.
Secondly, demonstrate success quickly and "earn the right" to do more. Quick wins and successful pilots make the case for further, and more often more challenging, procurement projects, even if the initial spend areas are relatively small.
Identifying opportunities cross-portfolio – procurement, insurance and other synergies
In the drive to improve EBITDA performance, a range of areas for cost reduction were highlighted;
Cross-portfolio indirect spend; leveraging the standard overhead categories across a portfolio, such as courier, travel, fleet, agency and office supplies.
Deep-dive projects in single portfolio companies; adding procurement expertise to focus on deep-dive projects in high-spend areas, often in direct spend categories and with results that really do "move the dial".
Non-traditional spend areas; such as property and insurance were highlighted, often having significant impact, both in terms of cost reduction and risk mitigation, and finally,
Inter-company opportunities; where complete transparency through spend analysis can identify opportunities for trade between portfolio companies.
Overall, the case for procurement cost reduction in PE was very clear with data providing the foundation for maximising return on projects, establishing the business case and opening up more and more spend areas for profit improvement. Procurement transformation can be one of the biggest drivers of EBIT and subsequent equity valuation improvement.
Making it happen - starting now
Procura provide support to Private Equity businesses across all stages of their activity cycles:
- Pre-acquisition due-diligence to identify savings, synergies, risks and opportunities
- ‘Carve-Out’ analysis and planning to assess and guide capability, capacity, operational delivery allocation and planning
- Procurement “in-a-box” total managed service support
- First 100 days’ rapid procurement cost reduction
- Deep-dive strategic sourcing
- Cross-portfolio spend analysis
- Cross-portfolio procurement aggregation opportunity (GPOs)
If you would like to discuss any of the subjects raised in this discussion, please get in touch.