On taking a closer look, it was clear that portfolio companies in procurement are implementing measures that promise to deliver a rapid improvement in results: bundling, renegotiations, tenders, and so on. This is where private equity firms can also operate across companies, pooling suppliers for all their portfolio companies, for example, or bundling requirements for several companies in their
While these measures are necessary and effective, and they achieve quick results, they only offer limited leverage. If companies want to exploit the full potential for cost reductions, they should also utilize more sophisticated concepts such as demand management – conducting a precise analysis of all requirements – or technical respecification – such as looking for substitutes for raw materials. Private equity firms are perfectly aware that they could do more in this area. When it comes to sophisticated levers, 43% of survey respondents are aware of potential that is still untapped.
In the area of procurement digitalization, just over half (51%) of respondents report missed opportunities. Admittedly, selecting and implementing digital solutions requires investment, so it is understandable that resources are not available if the pandemic has disrupted sales. Put simply, however, digital projects offer a fast and measurable return on investment, so private equity firms should definitely push for this in procurement projects.
Good Procuement Organizations Make For Significant Value Creation
The value that is delivered by procurement departments in portfolio companies varies greatly; in almost 75% of companies it is up to just 5% per year. Even so, 18% of respondents are achieving a value contribution of over 7.5%. These differences are also clearly visible in exits after five years on average. While the majority reports an overall contribution of up to 10% by procurement, the best buyers achieve value contributions of over 25%.