Lessons from Involving Procurement More in Realizing M&A Synergies (Part 2)

In the first post in this series, I looked at a number of findings from a recent Efficio whitepaper which examined how to better realize procurement synergies in post-merger environments. I'll continue the analysis today, commenting on two more observations from Efficio as well as sharing our own perspectives. In all of these hints to get more from procurement M&A, it's important to note that lessons from all of the lessons are not necessarily as intuitive as they should be. Consider, for example, how it would be reasonable that "bolting on" contracts to each other to drive cost compression makes sense on the surface. After all, additional volume should lead to tiered discounting. But it's not that simple.

Efficio summarizes this point well when they note that "just bolting B's volumes onto A's contracts" sounds simple, but isn't ... suppliers will argue that differences in spec and service level make price harmonization impossible." In some cases, this supplier response is at least as grounded in reality as sales bravado. In my own experience in direct materials, it's often the case that aggregating spend (bringing it together) can prove difficult, especially if both or either party has extensive SKU proliferation. Given this, it's best to focus on bringing together indirect and services spend first.

With indirect and services spend -- MRO is a great example -- Efficio suggests that the "larger incumbent must be presented with a threat, not just with an opportunity to gain more." Yet I'm not sure if "a threat" is as powerful as actions, such as evaluating new suppliers (which always seems to get back to incumbents). Another strategy besides threatening is to focus on should-cost analysis by telling the supplier where they need to be in supplying the combined entity based on volume and if their own capabilities won't allow them to get to the price points required, then perhaps they need to reevaluate their own operational efficiency.

Another lesson I've learned from M&A and procurement over the years is the importance of enforcing compliance internally. It's very easy to go back to one's old ways and systems rationalization/integration -- especially ERP and transactional purchasing -- and can take years to combine following a merger or acquisition (if they're ever brought together, which is not a given). Given this, procurement organizations should look closely at how to integrate spend analysis, sourcing and contract management systems with the respective transactional buying tools in each company.

Jason Busch

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