Friday Rant: What Private Equity Does Right in Procurement (Part 2)

In the first installment of this rant, I offered up a number of suggestions about what private equity does right when it comes to procurement within their own set of portfolio companies. In this second installment, I'll continue my analysis, sharing three additional traits that I think we can all learn from when it comes to seeing how PE firms have recently embraced sourcing, purchasing and supply chain initiatives as a means of deriving additional value from their investments. I'll begin by talking about the benefits of soft hands in the PE world:

  • Soft hands -- Private equity firms are often good at realizing management's role in the business, especially those firms that partner with senior leadership as part of a buyout approach. Rather than stepping on toes and taking a hammer-driven approach to implementing cost reduction ideas internally and with suppliers, many are surprisingly good at listening to management ideas as well as knowing how best to bring in external expertise that does not alienate existing stakeholders. As the saying goes, you get more with carrots than with sticks, but learning how to effectively drive change with soft hands is often easier articulated than accomplished, and PE firms tend to be among the better ones at it.
  • Understanding both up and down sides (e.g., risk) -- PE firms, given the finance background of nearly all of the operating partners in the majority of cases, have a healthy appreciation and understanding of both up and down side risk, including supply chain risk exposures and potential liabilities. Appreciation and acting on the appreciation is not necessarily the same thing, however. Companies can learn from PE firms how they analyze a portfolio and network of spend, suppliers and geographies to identify both opportunities and liabilities from their broader sourcing and supply chain initiatives. It's important to note, however, that this is not risk management as we think of it as supply risk management, but rather risk management in terms of finance, which requires understanding all of the underlying elements of contracts and relationships and who the ideal party is to mitigate a particular risk.
  • Finance-driven -- You rarely, if ever, see procurement guys pulling out the trusty TI calculator at the start of a meeting to look at time value of money, NPV, IRR and related calculations to understand the payback and opportunity costs of particular initiatives and programs. Yet perhaps the TI should become as familiar a site on the conference room tables in procurement leadership meetings as it is in the PE community.

No doubt, PE firms make colossal blunders from time-to-time. But when it comes to procurement, there's far more we can learn and adapt in our own environments from their approach and behaviors than we should dismiss outright as foreign or unproven.

Jason Busch

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