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Procurement, private equity and the pandemic

03/04/2021 By

Spend Matters welcomes this guest post on private equity (PE) and procurement from Alejandro Alvarez, Partner: Operations Performance at Ayming UK.

From the outset, 2020 was expected to be a year full of world-relevant events, from a critical election in the US to Brexit and China’s continuous rise as a significant power. However, few of us, if any, expected that a new pneumonia-like virus, Covid-19 would reshape the ways of life, diverse as they are, of societies around the world.

In the West, around February and March, board conversations quickly changed from “how high can the stock market go?” to “is this going to affect us and how?” and finally “how do we manage the impact, risks and potentially, capitalize on opportunities?” For many businesses, the effectiveness with which the last question was addressed will determine their future performance in the years to come.

In our experience, when working with private equity firms and their portfolio businesses, robust value-creation processes (VCPs) that address multiple areas of the business to deliver sustainable improvements are the foundation for success. But what happens when, across the world, several facts and underlying assumptions that were taken into consideration to build VCPs drastically change within a matter of weeks? It is all relative, and indeed the answer depends on many different parameters, such as the business sector, capability to adapt and innovate, and supply chain resilience, among others.

Impact of 2020 on the private equity value-creation process

We could all come up with a long list of impacts and effects that 2020 will have on the PE value-creation process, in different ways and depths for every business, but I’d like to highlight the following four:

  1. Changes in business models — The pandemic has not only turbocharged specific trends (e.g. acceleration of online retail and digitalization), but it also fundamentally transformed many business models (e.g. from in-person medical retail to telemedicine). These shifts, driven by forced customer behavioral changes that may endure beyond the pandemic, will continue to have a critical impact across supply chains, cost structures and human resources.
  2. Increased focus in sector-specific expertise — To address these significant challenges, I believe sector-specific knowledge and expertise will be invaluable to adapt, evolve, innovate, manage risks and capitalize on potential opportunities.
  3. Momentum in ESG investing — A JP Morgan survey published mid-2020 suggests that the pandemic could have a positive impact in ESG investing, with 71% of participants responding that it is “rather likely,” “likely” or “very likely” that awareness will increase. Moreover, there appears to be increased momentum across geographies and asset classes. Whilst the “E” and “G” were probably more visible, it is the “S” that will likely move up in the agenda as the awareness of the impact that the pandemic had, and will continue to have, on communities around the world is evident.
  4. Redrawing VCPs — All of the above suggest that many value-creation plans and investment theses will have to be fully reassessed, to challenge and validate each underwritten assumption and determine if and how the value sources have changed.

These, and many other repercussions, will continue to have a substantial impact on procurement functions across the board. The degree of maturity and the profile of the function within the business will have a considerable effect on its performance. From conversations with our clients, there are certain common themes to point out:

  • Rebalancing of priorities – Whilst cost effectiveness and savings continue to be a key priority for most organizations, the relative importance of other factors such as risk management, supply chain resilience and innovation have considerably increased. Strong CPOs welcome this rebalancing as this aligns much more with the definition of “value creation” and the vision of what a genuinely strategic procurement function should be.
  • Supply chain resilience and ESG – The pandemic has shown how fragile certain value chains are or could be. Businesses are conducting detailed reviews across the value chain that may involve restructuring elements or entire supply chains. Strategies that were once considered low risk (e.g. offshoring, supplier consolidation) may be challenged. In doing so, ESG considerations are likely to gain further momentum and impact the outcome of such reviews.
  • Business strategy, people skills and emotional intelligence (EQ)  As more value is expected from CPOs and their teams, the skills and capabilities required will have to change. Whereas in the recent past technical procurement knowledge was a key requirement, additional skills are now being sought after and prioritized. At a recent Ayming roundtable with PE operating partners, there was broad agreement with the need to prioritize business strategy, critical thinking and EQ over anything else. We believe this trend will accelerate further.

PE houses and their portfolio businesses are likely to leverage the existing alignment of interests across all stakeholders to rapidly adapt, evolve and ultimately capitalize on potential market opportunities. For procurement professionals, this global event presents numerous challenges but an exciting outlook on their role and that of the procurement function as an agile value creator in the business.