In the past on Spend Matters, I've explored the topic of how and why private equity firms are becoming involved with procurement -- not just in their portfolio companies, but also with investments, looking at cost savings potential even in the due diligence process. Private equity involvement is a trend that has accelerated in recent quarters, even making its way into middle market buy-out shops. In fact, I don't know a single boutique sourcing consultancy that has not been involved in a private-equity related sourcing/cost reduction project (either for a firm itself or for a firm's investment) in the past few years.
Private equity firms, on many levels, represent the ideal "client" for Spend Management programs. Unlike typical senior management whose idea of a long-view when it comes to cost cutting roughly extends out a quarter or two, PE firms have the luxury of looking at cost and risk reduction within their portfolio over a longer time period. Nearly all are not looking for the "quick flip." They're looking to impact meaningful EPS and cash flow improvement to improve their valuation at exit -- a period often 2-5 years after their original buy-out. This typical situation can set up private equity investments to do extremely well by procurement and supply chain focused cost reduction efforts, many of which are best deployed in waves over a number of years.
But what exactly are the best private equity firms doing exactly right when it comes to Spend Management within their portfolios? And what can we learn from them? I'll offer up a few ideas below:
- Gaining visibility as early as possible. Private equity firms, especially larger ones with the luxury of their own large staffs and even internal operations consulting organizations for their portfolios, focus on gaining visibility into portfolio companies -- or potential portfolio companies -- as preliminary, quickly and deeply as possible. They do this to examine opportunities, expose potential liabilities and define potentially game-changing strategies (e.g., moving production to a different location/country, splitting up assets/divestitures, etc.). The appreciation for a rapid quantitative data-driven approach to procurement strategy, including spend, risk and supplier-focused data, is often unrivaled among the better PE firms.
- Taking a portfolio approach. The best PE firms take both a portfolio approach to their investments and "the spend" in their investments as well. The rise of indirect/leveraged spend consortia and buying groups focused on PE -- including a recent AT Kearney relationship that I'll cover in the coming weeks -- further suggests to me that PE firms are interested in segmenting the spend within their companies into what they can most effectively impact directly (i.e., with their own resources) vs. indirectly. This direct and indirect approach typically maps to direct and indirect spend areas as well.
- Embracing a long-view (i.e., focusing on impact and levers over 3-5 year time horizons). Perhaps most important in what we can learn from PE approaches to cost reduction is how many firms are looking to impact procurement and supply chain returns by taking a long-view. They often set their sights on what they can accomplish over a 3-5 year window versus in the next two quarters. Granted, sometimes short-term goals (e.g., cleaning up the balance sheet and massaging the income statement to renegotiate or create a credit facility to pay dividends to the investors) can conflict with this approach. Quite often, however, PE firms focus on the type of procurement and supply chain returns that can take a number of years to fully implement. In essence, in the best of cases, they take their investments through mini or full-scale transformation programs.
Stay tuned for three more ideas we can take away from how the better PE firms approach procurement and operational initiatives within their investments.