It is important for private equity companies to formulate clear-cut goals and expand their strategies for optimizing procurement, if they want significant achievements in the operational value creation process. The difference in savings, from 2% to well over 4%, once again confirms the great potential for value creation in procurement.
Clear-Cut Goals Lead to Better Results
The profit that private equity companies make when they sell a portfolio company is expected to be much lower this year and next than in previous years, the German magazine Finance reports. This means private equity companies will need to use all the levers available to maximize value creation. In procurement, this is best achieved by setting clear optimization goals for portfolio companies.
Private equity companies take a variety of approaches to top-line and bottom-line optimization to add value, as our survey has shown (see box). When it comes to the bottom line, procurement is number one on the list of the most promising areas for improvement. 33% of respondents believe that there is great potential for value creation in procurement. This is followed by production and service, and working capital, as targets for optimization.
Private equity companies that attach great potential for value enhancement to procurement optimization typically achieve better savings than those that do not – on average 4.5% versus 2.5%. This trend is also backed up by a review of governance. Investors who give their portfolio companies clear procurement improvement goals are consistently more successful than those who do not: procurement delivers an improvement in results of 4.3% compared to just 2.8%.
Private equity companies rely too much on traditional procurement approaches
The survey also shows that although all private equity companies carry out procurement optimization, the overwhelming majority (72%) only use traditional approaches such as renegotiation or tenders. Complex procurement levers such as technical specification reviews, demand management, and global sourcing are only used by around half of the respondents. Especially when it comes to secondaries and, most of all, tertiaries, private equity companies should use these more sophisticated tools to unlock further savings potential, as the low-hanging fruit will already have been picked by their predecessors.
There are considerable differences in the role procurement plays in value creation from one portfolio company to another. In almost two-thirds of those surveyed, procurement measures can provide up to 10% of the overall increase in value. A third of those surveyed say these measures contribute between 10% and 25% of value creation, while 6% of respondents say they increase value by as much as 25%. These significant differences are due to the portfolio companies’ very different structures and sector distributions, but also due to the quality of procurement.
// Private equity companies rely too much on traditional procurement approaches
Using consultants for operational optimization
Around three-quarters of private equity respondents use external consultants to enhance the value of their portfolio companies operationally. The main reasons for hiring a consultancy firm are a lack of specialist skills and resources within the portfolio companies, but also within the private equity firms themselves. In fact, using specialist consultants during a project provides specific knowledge as well as the human capacity necessary to tackle more complex tasks, develop new solution scenarios, and focus corporate buyers on strategic issues that might otherwise be forgotten in day-to-day operations.
Procurement experts can evaluate a takeover candidate and determine what potential for value creation procurement can offer, as early on as the due diligence phase. After the takeover, a more comprehensive analysis of requirements, maturity, processes, and hidden potential is essential for defining appropriate goals and working out concrete measures. Especially in the current market situation, where large amounts of available financial assets (dry powder) and fierce competition among investment companies are up against a limited number of takeover candidates, private equity companies should realistically assess and capitalize on the opportunities arising from procurement optimization.
By subscribing to our newsletter, you will receive the current issue of our customer magazine Supply Management Insights three times a year: