With valuations climbing ever higher, fund managers are having to find innovative new ways of maximising value in their portfolios. Jersey-headquartered Nordic Capital is stealing a march with its community-led approach to cutting procurement costs.
Launched in 2009, Nordic Capital Procurement Optimisation leverages the economies of scale by enabling its portfolio companies to pool their sourcing requirements and secure contracts on an aggregated spend basis. The scheme – which includes a dedicated procurement academy and annual conferences for participants to compare their needs – delivered approximately €10 million of savings, or €100 million of value created, in 2016 alone.
Such is the success of NCPO that nine former portfolio companies have retained their membership after exit.
“The key point for investors is that in a low growth environment you have to work your assets harder,” Declan Feeney, private equity advisor at Efficio Consulting, which advises firms on how to improve their procurement functions, tells Private Equity International. “You’re buying assets at high prices, so anything you can do to generate EBITDA and improve the performance of the business [is attractive].”
Last year, NCPO replaced its prime hotel provider in the Nordic region. Securing one contract for multiple companies guaranteed its portfolio a significant discounted rate and access to selected hotels with improved fixed rates, while the hotel provider benefitted from thousands of booked rooms for the year.
Such an approach is growing in popularity. Sovereign Capital has saved £1.9 million, or 26 percent of its procurement expenditure, by leveraging the economies of scale over the past three years.
But with Nordic’s portfolio comprising 29 companies around the world, implementing a procurement system is no mean feat. Geography, language and tax differences are important factors to consider when attempting to find a standardised procurement contract that can service the needs of multiple companies.
“For private equity funds in the US, this has been a much bigger play than has been the case in Europe,” Feeney says. “The value that can be created is not as high necessarily in Europe even though from a GDP perspective it’s as big.”
Even if these barriers are overcome, managers face the difficult task of synchronising complex supply contracts across multiple companies.
“At the beginning we didn’t have a cycle or we weren’t linked with the DNA of the portfolio companies,” Bob Kickham, head of NCPO, says.
“Someone would say ‘I’ve just done it’. What’s happened over a nine-year period is that we have many companies who are now on the same cycle.”
Encouraging businesses that may work in entirely different sectors and geographies to think as one cohesive unit requires more than convenient scheduling. “I’ve worked for many corporations in the past where we’ve had mergers go on and people were embarrassed that their numbers were worse than the other person’s and tried to hide them,” Kickham adds.
“NCPO has tried to create a culture where we celebrate when we find poor deals and encourage the teams to think this way. It becomes a virtuous circle; as peers begin to see the benefits, they begin to work more together and therefore there’s more combined effort to extract value.”
Although NCPO is already delivering tangible results, procurement demands constant vigilance in order to maintain the value added. And while the system can deliver handsome savings for one year, there is no guarantee of similar results each time a contract needs renewing.
“As an investor I’d want to know [whether] in three or four years’ time the value created from cross-portfolio procurement activities can double, triple or quadruple,” Declan says. “Then the numbers become more important in the context of a fund.”