Buy-out Masters Now Buy in Bulk: Spend Matters Quoted in the New York Times

In my household, our monthly trip to Costco is an ordeal. But lugging seemingly two years worth of toilet paper and paper towels (and soy milk and protein bars and gallons of ketchup and whatever else, you know the drill) up to a third floor walk-up is worth it in cost savings. "Buying in bulk" must be one of the earliest negotiation tactics -- I give you more business, you give me a lower price.

Guess who's tapping into the tactic? According to the NYT, "Private equity firms like Blackstone are emerging as a powerful new force in the marketplace. The big investors, which collectively oversee thousands of companies, are using their size and scope to pressure suppliers, set their own prices and exert their influence in a range of industries, including health care, construction and consumer goods." With the lingering reputation as "job destroyers more concerned with making money for investors than improving the companies they own," private equity firms are finding themselves in a place where the profits aren't turning quite as quickly as they used to. What does this mean? They have to become internal operators. And they have to do it fast.

The article continues, "Historically, private equity firms were about financial engineering," said Jason Busch, managing director at Spend Matters, a research firm that focuses on the procurement processes of big corporations. "That's the fairy tale story from 25 or 30 years ago. Within the last decade, there's been more operational work to do."

Who are they taking cues from? GE started making corporate-level buying decisions decades ago -- a technique that the majority of global firms obviously adhere to today. Private equity firms are quickly following: "Both Blackstone and K.K.R. belong to a group purchasing program called CoreTrust, which has roughly 200 member companies including TPG Capital, Bain Capital, and other private equity firms."

So what's common knowledge for most Spend Matters readers is now a revelation in the private equity sector. But it doesn't come without its quips: "Some large private equity firms choose not to participate in programs like CoreTrust, typically because they believe the group purchasing process strains relationships with suppliers, and requires them to micromanage companies in exchange for relatively small savings." (One chief executive of a portfolio company, in fact, was none-too-pleased that the group purchasing program his company chose changed the brand of his apparently much loved favorite toilet paper).

As private equity treads into these operational waters, Jason Busch urges them to go lightly. "It's one thing to fool with the balance sheet of a company -- it's another to change its operations," said Mr. Busch of Spend Matters. "It's absolutely about rolling up your sleeves, but it's about having soft hands as well."

- Sheena Moore

Discuss this:

Your email address will not be published. Required fields are marked *