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Procurement’s Spend Analytics Expertise is Untapped Strategic Lever for M&A success

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At the risk of sounding like Gus Portokalos from “My Big Fat Greek Wedding,” I'll share what the Greek philosopher Heraclitus was noted as saying, “There is nothing permanent except change.” Mergers and acquisitions provide a constant reminder of how business is always in flux and how executives need to meet the challenge of managing it.

While the topic of procurement’s role in M&A has been covered before on Spend Matters, my recent entry to the SpendHQ team has made me reconsider the importance of it as it relates to spend visibility. During several discussions at the Marcus Evans conference in early October, I found that more than 50% of the procurement executives inherited or were dealing with some form of post-merger corporate activity. This comes as no surprise given that the M&A demonstrated compound annual growth rate (CAGR) for the number of deals from 1985 to 2018 is 5.86%, and M&A value grew at 5.32% for the U.S. economy during that same time.

Despite the high volume of M&A activity, success is another issue. I think we can all recall a history of the biggest M&A failures, such as Sears-Kmart, DaimlerChrysler and AOL-Time Warner, just to name a few. According to the Harvard Business Review, the failure rate for M&A sits at more than 60%, where the core of the problem is not the high number of deals in itself but rather that too many executives bring insufficient discipline to the evaluation process. The failure often involves overestimating how much additional revenue the companies can generate when combined but not on testing how foundational assets will work to together over time.

Based on experience from our own M&A practice at Insight Sourcing Group, the first 100 days after a merger or acquisition often set the tone for the new entity and can influence long-term success. The environment is typically perfect for early procurement synergy capture, where when executed correctly, procurement optimization can improve EBITDA by an average of 10% to 30%, which is one reason why procurement is an untapped strategic lever for M&A. In this regard, spend analysis is essential in taking the first steps toward making assets work together through synergy capture. With effective spend analytics, organizations can better size up the savings based on the combined entities spend in key procurement categories and identify the commonality of suppliers across the merged entities and categories where spend is highly fragmented.

The highest levels of spend visibility are best achieved using a spend analysis software automation tool that is specifically designed to consolidate and normalize spending data from multiple financial systems and then converting GL code-orientated data to sourcing-ready data. Moreover, doing spend analysis across each entity in concert with assessing supplier contracts invariably can lead to strategic sourcing efforts for establishing initial quick wins. Experience tells us that a strategy for each category will vary but can include consolidating spend, leveraging the best contract between the two entities, merging the spend of the new entity into that contract and performing targeted renegotiations with large incumbent suppliers by leveraging the threat of strategic sourcing.

Yet outside of spend analytics, a big part of the M&A challenge for procurement leadership is finding the best way to integrate disparate ERP and procurement systems. Therefore, even after first wave savings efforts are completed, bringing every sourcing or purchase-to-pay process under one roof may prove to be difficult and costly. The cost of doing these integrations also requires balancing the well-recognized triad of people, process and technology. Aligning core processes like suppliers and contracts for master data management may make sense, but assuming the need to move all processes on to one system across source-to-pay may be a fool’s errand, especially if the industry is prone to M&A activity in the future. Moreover, publicly traded organizations under the scrutiny of the stock market are being watched and may not have the benefit of time to consolidate within the time parameters given to recognize M&A value. By the time these integrations are complete, often another corporate event — like another merger or divestiture — has taken shape.

Since spend analysis is an activity that can easily capture data (via API and flat file) for data normalization, there are no process contingencies as part of wider source-to-contract or purchase-to-pay process that requires these spend analysis activities to be under one roof. Therefore, if there is any technology worth using across different segments of the newly merged business both pre- and post-acquisition, it's likely spend analytics. Hence, as part of any M&A that is taking shape as part of any digital procurement strategy, it behooves procurement leaders to inquire into proven spend analytic and visibility tools for ensuring quick returns on the short and long-term operational synergies that were initially planned by their C-suite executives.

In the end, I hope this is not all Greek to you, but if it is, please, feel free to leave questions or comments.

And remember, as Gus says, in the end we are all just fruit.

Constantine Limberakis is SpendHQ’s product marketing director.

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