The Deals Are Coming! Key Considerations For the Transaction Boom

Spend Matters welcomes this guest article by Chris McCarney, director of Operations Advisory at KPMG.

Traditional indicators point to a significant increase in M&A activity for 2015. Continuing last year’s trend, companies and private equity firms are looking to put their historically high levels of cash to work. Armed with this “dry powder,” healthy credit markets and improving employment numbers, dealmakers are poised for an active year ahead.

In a recent survey conducted by KPMG and Mergers & Acquisitions magazine, 82% of respondents said they were planning at least one acquisition in 2015. Further, deal values are expected to increase from last year.

FREE Research: The 4 Faces of Procurement

With the anticipation of 2015 M&A activity must come a focus on the operational challenges of integrations and separations. The emerging trend of asset re-calibration, inorganic growth, splits and spin-offs will once again highlight the importance of supply chain and procurement and their role in driving value and mitigating risk.

This 2-part series will address some key considerations for procurement in the deal environment, through the following:

  • Part 1Profitable Departures: Driving Procurement Value in Separation and Divestments
  • Part 2Gainful Integration: Maximizing Deal Value Through Procurement

Whether in an integration or separation scenario, procurement’s role (and opportunity) will always be grounded in its core responsibility – the management of third-party spend.

Part 1: Profitable Departures: Driving Procurement Value in Separation and Divestments

Within the separation environment there are a variety of procurement and supply chain factors that can impact future operations, most of which are related to the integration of existing businesses, divisions or plants under the current operating structure and corporate construct. Organizations with common information, data, integrated systems and common processes face greater challenges than those that run each business independently. In addition, some supply chain assets, systems and personnel may be included in the separation, creating a void or capability shortfall for the remaining business.

Contract and Supplier Transition

Third-party contracts and commitments may present significant operational risk in a separation environment, especially in instances where corporate scale has been leveraged to achieve favorable commercial terms or vendors were engaged under broader “strategic account” initiatives. Such instances may present a “dis-synergy” risk as vendors look to re-examine historical terms. In contrast, some procurement teams may uncover opportunities to refresh old agreements that might have been historically unmanaged. In either case, early action should be taken to assess the contracts environment, identify dis-synergies, understand open obligations at deal-close, define the processes for transition and apply the appropriate contracting treatment. Further, the assignment and novation process may become much more extensive with complex contracts, requiring multiple party agreement. Finally, post-close payment management is a vital component of supplier transition. Both suppliers and acquirers need to understand how invoices will get paid.

Systems and Data

System separation is typically a complex, uniquely managed initiative during the separation process. Understanding the IT separation strategy is key to identifying post-close capability gaps, master data impacts, or operational transition issues. Lack of clarity on a specific buying channel and its enabling technologies may directly impact the ability to transition operations supported by a given set of goods or services. In addition, procurement and supply chain technologies may require modification. From buying channel consolidation to spend taxonomy and master data revisions, procurement-specific systems and data may need to be adjusted to support the end-state business size and scale. Further, IT systems and data transition plans must synchronize with procurement to meet closing conditions related to supplier data transition, including historical spend data, vendor master or commodity master data.

Organizational Efficiency and Stranded Costs

While most separations have the strategic intent of realigning a business or asset portfolio to focus on growth opportunities or increased profitability, operational issues arise as dis-synergies are missed. Most commonly, supply chain and procurement functions find themselves managing the “hangover” associated with supporting a modified asset footprint – especially in instances of historical integration and leverage. Procurement and supply chain are most commonly burdened with stranded costs and face erosion of functional returns-on-investment when not addressed. These imposed inefficiencies are typically due to smaller asset-to-cost ratios, leaving less business to support procurement costs. Early action should be taken to identify and assess these stranded costs. Stranded cost removal may require a restructuring of the procurement and supply chain organization itself, alongside process and operating changes.

Managing the Change

A separation may serve as a driver for broader procurement transformation. Using the transaction and a shifting asset base as a catalyst and case for change could provide the needed momentum to re-tool the organization to support the go-forward business strategy. Whether truly transformational, or an effort in rescaling the procurement function, a focused effort on change management should be considered. As businesses and assets exit, so does talent and the capability required to drive procurement operations. A proactive approach to addressing uncertainty, supported by a communications and change plan, may be the difference in successfully navigating a separation and supporting a profitable departure.

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