Private equity (PE) firms are tilting towards comprehensive procurement strategies to combine spend across their portfolio companies. As PE companies are under pressure to offer good returns to their investors, they try to achieve quick savings in regards to procurement.
Using procurement in private equity can help to save money, but consolidating spend can be challenging as portfolio companies may have a decentralised spend due to the variety of businesses they deal with. It is also important to note that a PE firm’s portfolio will keep changing, with some companies being sold while others are acquired. This is why PE organisations need to have an adaptable approach when it comes to combining spend so that different strategies can be used for different holdings but to the same objective.
To aggregate spend, private equity firms need to engage internal and external stakeholders. Internal stakeholders refer to portfolio company stakeholders while external ones are the suppliers.
Engaging vendors of PE firms
Vendors dealing with private equity firms may not be in favour of bundling spend. This is primarily because vendors are concerned about the ownership of portfolio companies and are under the misconception that participating successfully in sourcing initiatives can be possible only if the PE organisation has complete ownership.
However, in most cases, private equity firms do not have complete ownership of portfolio companies, and this causes doubts in the vendors’ mind about the influence the equity firm has on the procurement process of every other portfolio company.
Under such circumstances, it is necessary for the equity firm to engage vendors and convince them that lowering prices across portfolio companies will help them to capture incremental business. This can be facilitated by holding discussions between the vendors and the key stakeholders of the portfolio companies to convince both parties of the mutual benefits of a PE firm.
Engaging portfolio companies
Holding companies of a private equity firm may not be willing to relinquish operational control, which also includes autonomy over procurement. Hence, private equity firms need to create a comprehensive roadmap to aggregate spend across portfolio companies. However, there are many different models and the equity firm needs to evaluate which model will work best to be most effective for each portfolio company. This will help PE firms to find a common ground between dissimilar holding companies. One of the best practices in this case, for example, is to provide an opt-in model to ensure strategic sourcing.
However, even if portfolio companies are similar, there could be instances where aggregating the spend may not make financial sense, particularly if consolidation requires major retooling or increases manufacturing costs. For this reason, PE companies should opt for comprehensive spend analytics to assess which categories can be bundled and to engage an internal stakeholder to get them on-board.
Ed founded Odesma in 2014 with the explicit intent of creating a new kind of procurement consultancy founded entirely on cloud principles. Deploying best-of-breed subject matter experts alongside the best on demand technology to deliver rapid and effective change for customers.