M&A Procurement Capabilities: Value Creation

Dave HenshallMergers & Aquisitions, Strategy

M&A Procurement Capabilities: Value Creation

Part 1: M&A value creation

A three-part guide for CEO’s, CFO’s and CPO’s to assess how procurement can make a critical difference to capturing the value in M&A

M&A Procurement Capabilities: Value Creation. Here in Part 1 we discuss M&A value creation and the procurement capabilities required to capture it.

A recent surge in M&A activity has placed Mergers & Acquisitions firmly back on the agenda in corporate board rooms everywhere. Similarly, as companies seek to satisfy investors expectations, the challenge is 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. There is a  failure to exploit the full potential savings available through a well-planned, well-executed integration. In other words, leaving money on the table. But underlying this is the absence of due diligence towards the supply chain before completion of the deal.

Procurement Savings Potential in M&A:

Authoritative estimates suggest that 80% of the value in M&A comes from tangible cost reduction — not from the less tangible ‘value creation’ headlines fed to the press.

Of the tangible component, 50% comes from cutting fixed costs, such as eliminating redundant infrastructure and headcount, with the remaining 50% coming from reducing procurement costs.

Absence of Procurement Involvement:

Despite the significance of procurement in M&A, key decisions on savings numbers are frequently made in the finance arena, which procurement simply inherits and is expected to deliver in a short space of time. This process is flawed for a number of reasons:

  1. The focus of finance tends to be on high-level financial metrics such as top line growth and earnings multiples, which do not address the fundamentals of ‘how to’ at the operations level.
  2. 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.
  3. 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.
M&A Procuremet Process

M&A Procuremet Process

Procurement’s Added Value:

It is, therefore, the organizations ability to deliver savings that ultimately determines whether or not integration will be a success, and procurement is uniquely placed to add value. A clearly defined process is essential combined with key capabilities required to deliver the required savings:

1.    Spend analysis

Spend analysis provides the link between supply and the integration strategy by:

  • Rapidly identifying and analyzing spend data in the pre-planning and due diligence process.
  • Early use enables procurement to project savings opportunities through the integration.
  • Conducting a detailed review of the aggregate spending of each company.
  • Facilitating the optimizing of relationships with suppliers and supporting the ability to align integration initiatives with its core suppliers.

2.    Spend Management competency

Spend management capabilities improve the ability to forecast cost reduction opportunities accurately and capture synergies quickly:

  • By developing a joint category structure, suppliers can be grouped to allow a thorough strategic sourcing effort, as part of an overall category management program to accelerate savings. In many cases, Procurement can negotiate new contracts prior to finalization of the merger, so that cost savings begin on day one.
  • By developing a methodology to evaluate, deploy and manage the supply base purchasing can integrate strategic suppliers more effectively.
  • Look beyond cost savings to the impact of cash flow benefits from standardizing payment terms, reducing inventory, and increasing innovation, etc.
  • Build models to understand the potential for Spend Management BPO

If procurement does not demonstrate these competencies, it is unlikely to play a lead role in the M&A agenda.

Nuff said …

In part 2 we discuss some of the issues in planning and due diligence.