Procurement. A fundamental lever in private equity value creation

As previously highlighted, private equity is in its golden age. With so much investment being pushed into PE funds, we are seeing pre-deal valuations, at times, over priced due to the competition. Procurement has a key role to play as proactive value creation is becoming ever more important.

As competition across the private equity industry continues and funds look for their next investment, procurement optimization remains one of the most tangible value drivers to quickly boost operational performance within portfolio companies.

While most mature organizations have already recognized the value of establishing solid procurement teams, there is still evidence of firms who do not have a focus on procurement or have an under performing procurement function.

7 Step Solutions Private Equity Value Creation team takes an end to end view of the procurement function and influences it across three key stages in the investment lifecycle: pre-transaction diligence, post-transaction maturity reviews and ongoing procurement optimization delivery.

Leveraging our operational expertise we provide a thorough assessment and help establish and drive the execution of an integrated procurement function that allows for robust control over margins throughout the investment lifecycle.

Pre-Acquisition Procurement Diligence

Increasing numbers of PE firms are now beginning to assess the procurement opportunities in the pre-acquisition stage. 7SS uses this time to build a robust model with executable post-acquisition actions that will produce an EBITDA lift.

During pre-acquisition, investors should review all critical investment case drivers related to procurement, including continuous improvement (CI) programs and planned sourcing events, as well as in-flight procurement initiatives, validating the strengths and weaknesses of these activities.

An integrated pre-acquisition assessment should also include a complete review of all Pareto legacy supplier relationships and contracts to validate the strength of the as-is and identify potential risks.

Post-Acquisition Procurement Transformation Assessment

Once the deal has been completed, PE firms can then focus on executing the strategy developed during pre-transaction to create a procurement function that will support the growth of the company and allow investors to capture the enhanced EBITDA value during the investment period and at sale.

Using 7SS’s Procurement Maturity Matrix, we evaluate where each company falls across the following key attributes:

• Procurement Strategy
• Governance & Organization
• Category Management
• Procurement Operation
• Enablers in Place

Understanding the company’s overall procurement maturity allows investors to identify areas that need focus and prioritize areas for future improvement.

Ongoing Procurement Value Creation

With the M&A process completed and the maturity of the function assessed, owners and managers need to consider what weaknesses should be addressed and how the function should evolve to achieve maximum value. What should the company “go after” next for greatest impact, keeping in mind both the short and long-term of the ownership lifecycle?

After identifying areas of opportunity and / or deficiency, resources can then be deployed to execute strategies against:

• Data clarity
• Category sourcing support
• Purchase to pay (P-2-P) process assessment and development
• Offshoring / low-cost country assessment and execution
• Procurement opportunity assessment and execution
• Contract negotiations support
• Make versus buy considerations
• Interim procurement management
• Procurement target operating model assessment and deployment

The impact of ignoring the importance of procurement, whether during pre-transaction or later during ownership, should not be understated. Spend leakage, due to poor sourcing capabilities, compliance, or vendor management, equates to profit leakage, as every spend pound equals an EBITDA pound. 7SS not only identifies where these leaks exist, but we are fully equipped to remove them through actions driven directly at the source, performed by experienced professionals that know the right levers to pull.

A solid procurement organization is a good way to deliver short-term value to portfolio companies and has a measurable return on investment. The value delivered can then be redeployed into more complex initiatives, with increased returns, in the long-term.

By having a focus on the procurement function and ensuring the PE investment proposal includes sustainable improvement in this area, margins can be controlled supporting the future EBITDA growth.