The Merger – A Procurement Short Story

This is a bit of a departure for us – our first multi-part “procurement short story”. It is appropriate to launch the first chapter today, as it is co-written by Peter Smith of Spend Matters and Steve Cobley of Ivalua, the procurement software providers, who are holding their “On Air” customer event in Paris today!

Chapter 1 - The Meeting

"This is a merger of equals,” said Andrew Hartson, CEO of RHS Foods. "Joining forces with Larousse Corporation will create one of the largest food manufacturing businesses in the world, with considerable synergies and great opportunities for new product development.”

Jim Roberts sighed as he read the latest press statement from Hartson. Yes, it was exciting, in a way, to be part of a deal that was headline news on the business pages and websites, but it brought a few concerns as well. He had been told what was going on a few weeks ago, but only a small team had actually got really involved with the deal, which was done with great secrecy to make sure no-one else could intervene before the deal was stitched up - perhaps with a counter-bid for Larousse.

As the Group Procurement Director, Jim knew he was on the hook to play a major role post merger. That was exciting, but also a little scary. The meeting with the CFO, his boss, that morning had made both of those elements clear.

"Jim, of course there will be lots of talk about new products and exciting innovations, but the most important element of this deal will be the synergies on the cost side. The whole business case is built on that. Now you've told me that over 50% of our costs come from bought-in goods and services - so it is obvious that we're going to need a major contribution from your team. I'm sure you won't let us down I mean, you tell me our procurement function comes in the top decile in all your benchmarking studies, don’t you?”

Raj, the CFO, was younger than Jim, a brilliant brain but not the most tolerant individual, and Jim wondered at times whether he really understood procurement. But matters had moved on even from that conversation.

In another interview on the lunchtime news, the CEO of Larousse had actually mentioned a number. Perhaps to re-assure the workforce that there would be no major redundancies, she said that "at least 80%" of the forecast merger synergies would come from savings on third-party spend. That logic meant that out of a combined spend of $8 billion, the new business would look to make savings from suppliers of at least $250 million. That in itself would increase the bottom line for the new firm by some 20% compared with the current total of both firms’ profits.

That was only 3% savings, Jim thought, but he knew that was not as easy as it might first sound. How much spend was committed in long-term contracts, or was in commodity markets where there was little potential for major improvement? The real addressable spend from which the savings would have to come was a lot less than $8 billion, he knew that. Unfortunately, he could not be precise on either the total spend or indeed the addressable spend – he was only too aware that spend analysis was not one of the factors that scored well on those benchmarking studies, and he had struggled for years to get really good data out of the multiple ERP systems in use around RHS.

He also felt somewhat annoyed that all his efforts since he joined five years earlier to re-focus procurement away from being seen as simply a driver of cost savings seemed to have been forgotten. Savings were back as number 1, 2 and 3 on the agenda, it seemed. As he brooded on this, Louise, his Head of Procurement Strategy, appeared by his desk.

"Shall we go down to the meeting room? You remember we've got the video call with Gabrielle from Larousse? She's in Geneva this week but she’s dialling in."

Of course. This was his first chance to meet - virtually at least - the Chief Procurement Officer of Larousse, Gabrielle Lefevre. He'd stalked her on Linkedin - and seen a stellar career described. MBA from a top school, she was still only in her late thirties, joined Larousse three years ago, and was promoted from Head of Category Management to CPO about a year ago. So he was more experienced, he thought, as well as older, having been a Procurement Director at a smaller firm for some years before joining RHS in that role.

That was relevant because of course there was some uncertainly about the future. Raj had just said "there's going to be more than enough work for both of you for at least two years, I think, given the savings we need to make,” when he had tackled him about his own position. But of course, in time there could only be one CPO.

Louise had got the IT working, and soon they could see and talk to Gabrielle, and her "right-hand man" as she described him, Denis.

“Hello Jim,” said Gabrielle. “It is great to meet you finally. I heard you speak at that ProcureCon conference back in 2012, you were great - I loved the way you set up that SRM programme, I confess we based our efforts on the ideas you gave me that day.”

Well, Jim thought, that was nice of her to say that. But Gabrielle continued by explaining that she only had 15 minutes before she had to leave for her plane.

“Many apologies. So can I suggest we agree what information we are going to exchange, then we do that by email and speak again perhaps early next week?”

“Sounds good - I think we still have to be a little careful though. For instance, I don't think we can give you full access to our systems until the final deal is approved by the shareholders. But we can exchange information and even start talking to our suppliers I believe,” said Jim.

Gabrielle nodded. “OK, I think maybe spend analysis is a good start. So we get a sense of what we spend, with which suppliers, in which countries and so on? That will help us identify priorities.”

“Then perhaps we can exchange a list of our top 20 or so contracts - with just some key points on each, when they terminate, perhaps not pricing at this point, but we can start thinking about where we might be able to harmonise or rationalise.”

“Then some information on people and organisation, and perhaps the work plan for our teams, current projects and so on. Then of course it would be good to look at each other's current position and future strategy in terms of procurement technology.”

“That all sounds sensible,” replied Jim, trying to sound confident. “I'm sure we can do that? Louise”?

He turned to see Louise looking somewhat uncomfortable.

“Right, Louise? That's all fine, isn't it”?

(To be continued...)

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