The Rise of Spend Analytics Within the Private Equity Environment

Spend Matters welcomes this guest post from Jake Wojcik, SVP of SpendHQ and Insight Sourcing Group.

Poor spend visibility continues to be the proverbial elephant in the room for procurement teams across the world. While spend visibility issues are widespread within individual companies, these challenges are exacerbated in the private equity and holding company environment. To address the challenge of spend visibility in a private equity portfolio, many leading operating partners are taking a quantitative and data-driven approach to enable and measure their procurement strategies in order to ensure that savings are translating to valuation enhancement and improvement in the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA).

While many private equity firms have long recognized procurement spend optimization as a strategic lever for valuation enhancement, and operating partners understand that spend visibility is “table stakes” for even average procurement performance, most portfolio companies continue struggling to achieve full procurement visibility. In order to harness the aggregated purchasing power of a portfolio and accelerate the value of these companies, there are some key data challenges that need to be addressed.

First off, it’s not all fun and games when it comes to analyzing organizational spend, especially when the data is typically messy, uncategorized, and spread across multiple systems.

[An insider tip: If it takes a portfolio company more than an hour to produce a breakdown of all spend across the company, organized by category, they do not have adequate spend visibility. The good news is that poor visibility means savings opportunities exist.]

Furthermore, one of the biggest offenders of poor visibility is the “accountant approach” to categorization. While most ERP systems were designed with an accounting orientation in mind (i.e. for people who write the checks), operating partners struggle with interpreting how vendors are being used within their organizations. General ledger codes are simply not an effective substitute for a procurement-specific taxonomy.

Once a private equity firm implements a spend analytics program, the following strategies reflect how they use spend visibility to define and measure value and ROI from strategic procurement programs:

Accelerate portfolio company-specific cost optimization and compliance

 Many leading private equity firms have made company-level spend visibility a strategic priority based on the belief that investments in talented procurement teams are sub-optimized if they lack this most basic capability. An increased understanding of their data will allow company executives and operating partners alike to identify company-specific savings opportunities instantly and enable broad strategic sourcing programs leading to significant EBITDA impact that can be captured in a matter of months. Additionally, it allows portfolio companies to spot maverick spend immediately and use a data-driven approach to drive compliance to preferred suppliers.

Enable cross-portfolio leveraged volume programs and company collaboration

Spend visibility provides the foundation for cross-portfolio sourcing programs and thereby increases company collaboration. Based on the ability to analyze spend and supplier commonality across the portfolio, an operating partner can build strategies to assist companies in gaining leverage via:

  • Consolidated sourcing: Combine indirect spend across the portfolio with a few key suppliers.
  • Co-sourcing: Bundle RFPs in the same category across multiple companies, creating implied leverage but, typically, with company-specific solutions.
  • Price and term harmonization: Compare pricing and terms with common vendors across the portfolio and seek to get the best pricing currently in place within the portfolio for all companies using that supplier.
  • Incumbent re-negotiations: Leverage portfolio-wide spend with similar vendors to achieve quick-hit savings by offering the vendor the opportunity to avoid a competitive sourcing exercise or consortia program.
  • Opportunity identification: Identify new areas to drive leverage for portfolio companies.
  • Cross-portfolio spend analytics will allow a PE firm to effectively host and facilitate CPO/CFO summits, which will provide a data-driven foundation for portfolio companies to collaborate and partner within key expenditure areas — in both direct and indirect spend.

Drive vendor compliance and utilize consortia programs to optimize savings

While consortia programs serve as a low-risk and quick-hit savings opportunity for portfolio companies, most organizations do not have an effective mechanism to measure compliance to the preferred consortia vendors. Research has shown that companies using indirect consortia programs typically can drive 10 – 30% savings, but compliance can unknowingly be less than 50% to the preferred consortium or vendors. Spend visibility will allow a company to immediately spot compliance issues at an entity or location level, allowing you to manage vendor compliance more effectively.

Ensure savings realization through category management

Whether private equity firms are taking advantage of external consortia or developing "private" leveraged buying programs, savings can be amplified by harnessing aggregated buying power. However, many private equity firms undervalue the importance of ongoing category management to ensure savings are actually realized. Spend visibility is a critical element in helping operating partners and portfolio companies develop category management strategies. When category-specific spend data is structured properly, companies can perform savings tracking, enable supplier management, run pricing accuracy audits, and track periodic demand analytics that focus on solving negative demand patterns or surfacing opportunities for optimization within the context of a world class contract.

The solution here is simple: achieving procurement excellence begins with spend visibility - whether for a portfolio company or across the portfolio. The benefits far outweigh the seemingly tedious and time-consuming “pick and shovel work.” If you address these common spend data problems and implement spend visibility as a core strategy, you will have the foundation for rapid savings and be able to accelerate the value of your portfolio companies.

About the Author: Jake is Senior Vice President at SpendHQ as well as its parent company, Insight Sourcing Group. Jake has 15 years of experience in management consulting with a focus on procurement, sourcing, and supply chain management. Prior to SpendHQ & ISG, Jake was a Director with RGP (founded by Deloitte), and also formerly with KPMG Consulting and Arthur Andersen Business Consulting.

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