This article is sponsored by Efficio.
Private equity firms may be reticent about procurement as an improvement lever due to concerns around implementation in complex industries, where management may commit to cutting costs but fail to deliver on agreed plans.
It can be challenging to ensure identified savings make it through to the bottom line, often owing to poor engagement with the business or a lack of compliance from line managers who do not support the new initiatives.
It is also true that, while there will be plenty of quick wins, the greatest savings may come from high-impact categories of spend that will take longer to impact profitability.
The key to effective delivery of procurement change is to identify, deliver and then track savings. Many of these historic challenges can now be quickly addressed through the use of advanced and effective systems to record and track savings on the back of procurement initiatives.
If CFOs in private equity-backed businesses have access to technology capable of monitoring the progress of saving programmes, the strategic value that procurement can add becomes immediately apparent.
Identifying savings in the procurement process requires a combination of technology, expertise and insight to analyse every area of spend within a business. Whether it is raw materials, manufactured parts, packaging, IT and telecoms support or temporary labour, each category of spend will come with its own unique supplier arrangements and contracts, all of them influenced by different contractual timelines and existing relationships within the business.
Once savings plans have been identified, the challenge is to implement strategies effectively, which requires not only careful monitoring but also comprehensive buy-in at all levels of the companies involved. In our experience, a top-down imposition of new arrangements is rarely welcomed, and each category may well require a different approach if it is to achieve the support and implementation required to truly boost the bottom line in an accelerated way.
Making sure that savings actually materialise following a process of opportunity assessment, strategic sourcing and new contract signing requires a total commitment to implementation that has not always been evident in the procurement industry. The value of a procurement function is enhanced not by the identification of savings, but by an ongoing process of managing implementation, supplier performance and compliance. Maximising the value of the savings delivered and continuing to identify additional savings opportunities as the market develops are also key.
Savings tracking is notoriously difficult because data has tended to be fragmented and unreliable, with little or no information on project risks or actions. If a multinational manufacturing business signs up to reduce the number of vendors it is purchasing parts from down to 20 from 200, huge savings can be promised. However, if buyers on the ground do not change purchasing habits, target savings will not materialise, or if purchased volumes deviate from that expected, savings can be hard to quantify.
Despite these challenges, effective savings tracking is critical to any procurement function, because it is the only way to ensure that value is being created as expected and that corrections to strategies can be made if required. At Efficio, we have developed enhanced savings tracking tools as part of our broader eFlow technology platform, giving firms access to the latest methodologies and dashboards created for each client to track their own unique categories and scope.
We have supported clients facing complex challenges as they work to implement proper savings tracking as part of procurement initiatives, whether those revolved around orders not being captured properly by systems, manufacturing part numbers not being adequately recorded, or complex vendor structures agreed during contracting. Often the key to successful tracking lies in the automation of data inputs so that monthly reports are not arduous or time consuming to produce and analyse. It typically takes us two months to develop a tool, conducted in parallel with our savings sourcing work, that will track savings in an efficient and cost-effective manner and ultimately deliver sustainable improvements.
Delivering measurable results
Where we see procurement strategies truly delivering is where cost reductions are identified and strategic sourcing initiatives are rolled out hand-in-hand with a well-developed savings tracking and implementation strategy. This approach means working with the whole business to encourage and enhance compliance. It also provides status reporting through regular snapshots on progress that give CFOs and private equity owners clear visibility on how savings targets are being achieved and an early warning if actions need to be taken to address any issues.
Efficio recently completed a programme of work for a global private equity-owned packaging company that has grown by acquisition and now has revenues in excess of $1 billion. Procurement had historically been done on a local level with limited strategic capability and a focus on keeping the plants running, such that purchasing decisions were often dictated by ingrained local manager relationships. In an initial wave of sourcing, we addressed approximately $100 million of spend across 10 categories and over 20 divisions including several complex direct spend areas.
We identified more than $15 million in savings, with all key decisions made by the business units, driving accountability to the end users. Through a systematic and
focused approach, a large portion of the savings was implemented within the first two months followed by a prioritised approach to part and supplier changes.
In another project for a global waste management company with over 200 operational centres, we were able to take savings tracking to an advanced level post the sourcing programme. This allowed the business to track compliance against spend and actual savings against target savings.
Management can easily see if the right items are being bought from the right suppliers at the right price, as well as monitoring any variance against expected volumes. When sourcing categories like maintenance, there is little benefit in agreeing a reduced hourly labour rate if repair times increase as a result, and such nuances need to be captured by the system.
For on-contract transactions, forecast and actual savings can be compared, and the difference between these can be explained by price and volume variations. This helps the CFO and private equity owners immediately see where and why savings differ from expectations. For such a complex business, where there are hundreds of suppliers and parts, a sophisticated tracking tool is required and the business case to develop the tool is more than justified.
What is apparent in every business that we work in is that there are some quick wins to be gained from simple renegotiation or bulk purchasing, but there are also other more high-value gains to be made in more complex categories.
Half of our business derives from private equity and we know that every portfolio company is different and requires a bespoke approach. We believe the key to delivering lasting sustainable cost reductions that drive EBITDA growth lies not only in creating a savings plan and delivering savings in an implementation programme, but in employing the best tools for savings tracking, data analysis and implementation and to keep driving for further improvements over time.
Declan Feeney is a private equity advisor at Efficio, managing the firm’s activity in the sector. He has two decades of experience in private equity, having previously worked at Permira and Fondinvest.
Waldo Saville is a principal at Efficio. He holds a Masters from Oxford University and has been working at the firm since 2011.