Embracing change: Private equity’s need for new spend analysis

It’s time for private equity to See Spend Differently.

Despite unprecedented uncertainty, 2021 was big for private equity investment. That’s to say, this year has seen tremendous PE activity beyond just the widely publicized, high-profile moves of CD&R buying Morrisons or Bain Capital and H&F acquiring AthenaHealth, to name a couple. After the surreal disruption that was 2020, private equity firms rebounded with new investments and fundraising steeply rising throughout 2021 (currently $2 trillion in dry powder, globally). Copious capital and record-low interest rates have allowed new firms to enter the market with confidence, while boutiques have consistently added to their portfolios every quarter.

Now, however, things have changed (again). And private equity firms have their work cut out for them.

I sat down with Simfoni’s David Bush, CEO of Spend Automation, to discuss some of the challenges facing private equity, the changing private equity landscape and how private equity firms can stay competitive. We touched on new, more consolidated approaches to value creation through procurement for not only traditional cost savings, but for the increased valuation that issues like environmental social governance (ESG) and supplier diversity bring across their portfolio companies.

What are the biggest changes happening in the private equity sector?

David: The biggest change is that even though capital is high and interest rates are low, investments have become more expensive. That adds pressure to maximize returns by looking at spending habits, especially when portfolio companies aren’t necessarily reeling in impressive earnings. LPs are investing for reasons beyond impressive earnings; ESG, cybersecurity, geopolitics and other “non-financial” indicators of success are major factors for portfolio companies, investors and, necessarily, their investments.

Jason: It will become more important to dial-in investments to create increased economic advantages for cross-portfolio spending. For example, an industry-specific private equity firm can leverage buying power, especially when faced with shortages and supply chain disruptions. By being more focused and having a smaller variance within the portfolio, PE firms can create additional value, and more savings opportunities, from things like shared experiences, supplier discounts and elimination of waste.

David: All of this becomes more challenging as more investments and more companies are added to portfolios, each with different historical ways of tracking spend data. Most investors are seeing the writing on the wall: Procurement and spend data are going to be a big mess if they don’t get a handle on it as soon as possible post-transaction and unify data across the portfolio. So, many firms are accelerating their digital transformations and analysis capabilities in order to capitalize on data.

What types of firms are adopting cross-portfolio spend analytics technology?

Jason: Progressive PE firms realize that it isn’t enough to negotiate a “blanket” deal with a vendor and expect the cost savings to appear throughout the portfolio. Having a wonderfully negotiated price is worthless if you can’t take advantage of it. Anyone who is forward-thinking in private equity knows they need real-time, self-service analytics tools to see their spend and track realized savings, or lack thereof, to assure the value is being realized.

David: I couldn’t agree more, same goes for tail spend. By automating tail spend, you gain control of it, and that’s what everyone in private equity really wants — assurance that the negotiated savings are actually being realized. For example, we recently analyzed the spend for a firm that had 15 total portfolio companies. There were no plans to address tail spend. They just wanted to focus on traditional procurement, or large, “strategic” spend. Our analysis demonstrated that the implementation of catalogs, and moving negotiated deals into catalogs, had significant savings opportunities. They would save over 10% of their addressable indirect spend. That’s 100% profit, and it had a direct impact on EBITDA without adding additional costs.

What are some of the newer use cases you see in spend analytics?

Jason: Most firms I speak with are focusing investment on corporate social responsibility (CSR) values, along with ESG and supplier diversity. Not just because their investors value these types of companies (we’re seeing more and more that they do, but because these strategic initiatives are indicative of value-driven, resilient, well-run operations. In general, companies achieving these modern objectives are all of those things, and are, undoubtedly, digitally mature. Having a holistic view of spend across the portfolio, and the resulting actionable insights, I’d call it “proactive visibility” — things like being able to detect waste or failed diversity efforts, and then take action on them — that’s not possible without spend analytics technology.

I recently did an article in Forbes that analyzed the relationship between company valuation and CSR. Simply put, the data didn’t need much analysis to conclude that doing business with corporations that share your values is good business.

David: From my experience, it’s not the large suppliers who you know the risk is in the smaller vendors because they largely go unmanaged. It’s the companies that allow employees to make buying decisions based on cost. They’re not necessarily looking into the supply chain links, and that creates significant risk. Many of the best-performing ESG suppliers that have the insight and forethought to value environmental, social and human factors are not considered because the buyer either doesn’t know there are options, doesn’t have time to do due diligence or is driven by ease of cost. Though these represent a small value per transaction, the volume adds up to create significant supplier cost risk.

What does spend analysis look like in action?

David: For one, you actually see how each function of your procurement and spend is performing. That visibility lets you develop truly SMART goals to improve them. That is, once your portfolio spend is organized and categorized, you can set benchmarks and develop the right objectives for your org, all addressable at micro or macro scale. Common functions are things like contract renegotiations, supplier reduction or aggregation of buying power — all of which has a direct monetary impact. However, there are some “unusual suspect” areas where a private equity firm can advise their Portco’s into better practices to reduce operational overhead, such as the implementation of technology and even downsizing technology. The key is having accurate data, ideally through an interactive dashboard, and using that to drive smart decisions. For example, is it more valuable to focus on office supplies or something you may have never had thought of, like uniforms? Simply put, better data, better insights.

Jason: So true. Without up-to-date, quality data, these decisions are leaving potentially millions of dollars on the table. Don’t forget, these analysis tools give you the ability to do deeper and faster due diligence, and as I mentioned earlier, ESG and supplier diversity visibility and reporting.

Conclusion

Value creation is not just about cut, cut, cut. Investors have put their own personal values in as a requirement. We’re not hearing, “We’re in this for the buck,” anymore. Now it’s, “We live in this world together.”

In other words, investors want to stand behind compelling stories and missions that will make the world better.

Thinking big, however, requires micro-level insight. Those in private equity who focus on precise procurement and spend details — enriching and understanding their portfolio spend data down to the penny — will reach new heights and outperform the others. In the ever-growing, ever-changing private equity landscape, getting ahead starts with adopting spend analytics technology.

Jason Stern is a proven entrepreneur with over 20 years of experience building great teams at successful technology start-ups. He currently serves as Chief Executive Officer of Simfoni Analytics, the digital solutions provider for procurement analytics and spend automation.