Indirect Purchasing Cost Reduction Strategies: The Power of Leveraged Sourcing

Spend Matters welcomes a guest post from Eric Narsolis of Alvarez & Marsal.

Reduced deal volume in recent years has left several private equity funds with significant overhang in their portfolios. In a recent survey, Alvarez & Marsal (A&M) found that an increasing majority of private equity firms are successfully implementing cross-portfolio leveraged sourcing programs to drive savings and EBIDTA improvements across a number of categories.

A&M's Sourcing team asked principals and managing directors from funds ranging in size from less than $500 million to more than $10 billion about their use of leverage sourcing programs. Contrary to common misconceptions about the difficulty of implementing sourcing, the survey results highlighted three critical success factors:

Broad Category Focus. Given the cross-portfolio focus of such initiatives, funds prefer to go after indirect spend categories which tend to be a lot less emotional. General insurance, small parcel, temp labor and office supplies are typically the top four categories for leveraged sourcing strategies. However, respondents cited more than 20 categories in their sourcing efforts, including ancillary insurance, travel services, IT hardware, wireless telecom, wire-line telecom, freight, corrugated, MRO and printed materials.

Senior Buy-In and Roll-Out Support. Senior executive buy-in -- at both the fund and company level -- enables success in any change to the "status quo" of daily operations. Ensuring that the execution of the program is as smooth as possible for all parties is equally important. Most funds opt to use an experienced external resource to launch a sourcing effort; in fact, 93% of respondents partnered with external resources to oversee program launch and management. External resources can bring to the table a very current set of industry best-practices and benchmarks, and strong vendor relationships to add value to negotiations.

Ease of Implementation. With the right level of professional support, implementing a successful sourcing program is not only easier than fund executives expected, but also less complex than many portfolio company executives had previously indicated. Well-planned preparation and execution of the RFP process, incorporating business requirements of all relevant stakeholders, can ensure a smooth transition and a higher rate of compliance with new suppliers.

In addition to quickly realized savings, respondents noted that benefits of such initiatives include improved customer service, greater spend visibility, consolidated reporting across functions and higher compliance with standardized policies.

In recent years, A&M has also seen increased activity and opportunity for such an exercise with diversified business units in a corporate environment. A&M's Sourcing team has successfully partnered with in-house procurement teams at several large corporations to bring new insights, industry best practices and aggressive vendor relationships to sometimes dated practices of in-house teams.

- Eric Narsolis, Alvarez & Marsal.

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