A guide for CEO’s, CFO’s and purchasing leaders on Procurement’s Role in Mergers & Acquisitions. We assess how procurement can make a critical difference to the successful outcome of integrating two or more organizations.
Mergers & acquisitions, company integration and the establishment of shared service organizations, have become commonplace in today’s competitive business environment. Companies seek to squeeze out every last penny in the search for efficiencies. Authoritative studies have found that fewer than half of all mergers fail to deliver on their promised value, while many destroyed value.
There are several reasons quoted for this. Many point to a failure to exploit the full potential savings available from a well planned, well-executed integration. In other words, leaving money on the table. But underlying is the absence of due diligence towards the supply chain before completing the deal.
In our experience, a $3billion turnover company who has not had a strategic focus on procurement could easily save at least $30 million. And realistically over $60 million annually from a range of Supply Management initiatives. Such figures would drive substantial earnings per share improvement in a private organization, significantly increasing its valuation. In the public sector adding significant value to fund improved service provision or investment. Typically benchmark savings for procurement are around 25-30% of all merger synergies.
The Absence of Procurement Involvement:
Unfortunately, all too often in M&A the CPO is reactive. Finance makes critical decisions on savings numbers, which procurement inherits and is expected to deliver in a short space of time. This process is flawed for a number of reasons:
- The focus of finance tends to be on high-level financial metrics such as top-line growth and earnings multiples. These metrics do not address the fundamentals of ‘how to’ at the operations level.
- Bringing procurement into the analysis process can help the organization focus on the correct set of metrics and begin “how to” planning that much earlier.
- Few financial and executive leaders recognize the full potential for cost savings from the supply chain. So procurement executives may be able to identify additional synergies.
Procurements Added Value
It is the ability to deliver savings that ultimately determines whether or not integration will be a success. By developing excellence in procurement, procurement becomes uniquely placed to add value through:
1. Spend analysis
2. Spend Management competency
Time is of the Essence
Procurement must get involved in the planning stages. If it does not, and it subsequently takes months to do the detailed supply side analysis,. Then at the worse you will have lost the momentum and the opportunity, and at best almost guaranteed lower supply-side performance and increased the risk of disruption. Action must start on day one, and one way for procurement to prepare for this is by developing a first 100-day plan.
First 100 Day Plan and Evaluation (F100D)
The F100D after signature will make it clear who is in charge at a time when new information is being discovered and conflict over assumptions, resources, style, and roles is frequent. Establish an integration task force and appoint representatives with clear responsibilities and accountability to drive delivery.
A robust F100D program sets the stage and builds the foundations for the sustainable success or failure of the integration effort. It is also the best time to introduce change. For procurement, launching an early wave of targeted and ambitious sourcing improvement projects, aligned to the value drivers of the integration and overall company strategy. Developing a detailed procurement plan for the F100D and beyond helps to create an excellent impression of procurement in the new business. It also facilitates inter-company co-operation to deliver benefits from these initiatives.
Due Diligence and Supply Side Planning
So, procurement has made it to the top table and is involved in due diligence planning. So what should it do now? The most critical success factors when integrating organizations, in which Procurement needs involvement at due diligence stage is:
1. Customer side Impact
Customer delivery models must be merged as quickly as possible, both to realize planned synergies and to minimize potential disruption to customers. While it is vital to capture cost savings, plans must also integrate the supply chains. Considering critical service-oriented metrics such as quality, inventory turns, and order-fill rates. Such a program helps minimize supply disruptions which compromise targeted synergies by adversely impacting service and at-risk accounts.
2. Supply chain alignment
When establishing alignment, we must assess the primary industry performance metrics. For a typical manufacturing company these might include:
Some or all of these metrics will apply whenever synergy’s exist.
3. Supply-side Impact
If supplier relationships are poorly handled, you may not realize some of the expected savings. Those organizations with a well-managed supply base comprising preferred suppliers with strong business relations are best positioned to achieve savings quickly. By developing robust processes before a merger, procurement is best placed to produce a detailed plan covering post-merger:
a) Contract Management:
Those organizations with a well-managed contract management process can ensure contractual commitments are optimized. With this capability, organizations can quickly produce a list of contracts that have to be amended, re-priced, and re-negotiated or to be terminated, feeding directly into a sourcing strategy.
b) Sourcing Plan:
By having a clear sourcing strategy from day one, procurement can ensure the optimum phasing of supply-side synergies, from quick wins through to longer-term synergy potential.
c) Supplier Relationship Management:
By working with preferred suppliers or partners, their business grows with yours. This dynamic changes their underlying cost to manufacture and distribute their goods, due to better utilization of their factories and warehouses. By spreading their fixed costs over more business, their unit cost falls. Even if they invest in additional capacity, there are still economies of scale.
4. Process & System Integration:
The goal is to go from two organizations to one as quickly as possible. For Procurement, the first step is to get your spend cube loaded with the other parties data, so that you can see what they are spending through spend analysis. From an IT perspective, the focus is typically on core ERP implementation which is likely to take longer.
5. Organization Impact
The creation of a new organization presents opportunities to implement more efficient and effective control structures. It is natural for the acquiring company to think its model fits all. But it’s important to keep an open mind and to share procurement best practices. If we are not receptive to best practices on both sides, it will hurt the integration. You will get into a fight as to the best way to do things which add no value at all. Likewise, it is vital to fill roles in the new organization on merit. An impartial skills assessment can play a critical role in maximizing the bench strength of the new organization.
By taking a pre-emptive view of the potential supply side synergies, procurement can make a significant impact on the valuation decision. Procurement knows which its top suppliers and contracts are and where it can create value for shareholders and earn back the price paid for the acquisition.
Grasp the Opportunity
The procurement program to capture synergy can last eighteen months or so, providing an excellent stage on which procurement’s star can shine and stay on the CEO’s strategic agenda. Since both the success of the merger and the CEO judged on how well the business was able to capture the promised synergies, procurement must grasp the opportunity to promote itself while the opportunity last.
Procurements Role in M&A
The logical conclusion is that supply management excellence and the early involvement of senior supply chain executives in the merger-planning process should be on the CEO’s agenda, as this may be the best way to capture and lock in benefits quickly.
Procurement must seize the opportunity to show value and reposition itself for a more strategic role within the organization. Those companies focusing solely on financial metrics and top-line growth will be leaving a tremendous amount of money on the table. By playing a more strategic role, effective supply management can not only improve the financial performance from integration but also help evaluate the viability of deals in the first place.
Nuff said …
Purchasing Practice offers a complete Spend Management capability by:
- Conducting a full spend analysis and opportunity assessment
- Help you develop full Category Management capability
- Plan and support you through a series of strategic sourcing initiatives
- Assess your current systems and processes to ensure these are maximizing your current integration efforts
- Advise if organization structures are maximizing your procurement efforts