CPO and PE

1. www.efficioconsulting.com February 2013
Improving procurement:
What CPOs can learn from private equity
Private equity funds have invested €233 billion in Europe since 2007 and 22,000 companies
across Europe are private-equity owned. How does private equity (PE) deliver these
improvements and what part does procurement play in it?
There is no doubt that PE has refined business process improvement techniques to reduce
costs and improve performance extremely effectively so that an impressive return on
investment can be quickly realised.
Contrary to widespread perception, PE is not just about taking on troubled firms and reducing
headcount. It is about improving their performance, and the advantage is that you can take a
longer-term view on change as you do not have quarterly/annual public company targets to
hit. Industry figures show that PE investments in large European companies have improved
their productivity by 7 per cent annually.
Through our experience at Efficio of working with PE-backed companies, we believe the
sector has a lot to offer CPOs in terms of the efficient approaches to procurement it often
employs.
In this Viewpoint we highlight the approaches typically used by PE houses to add value to the
companies in which they invest. We hope CPOs will use some of the techniques to deliver
business success in their own organisations.
Declan Feeney
Director, Private Equity
When a PE firm acquires a company, it will typically examine all its business processes to
identify ways of adding value whether through sales growth, acquisitions or margin
improvement. Very often, one of the key levers is to scrutinise third-party procurement spend.
For PE operators, procurement is an important driver for value creation where substantial
savings can be made.
It is clear why: in most organisations, procurement is a key factor in the overall cost base and
can account for upwards of 60 per cent of revenues in a typical manufacturing company (see
Figure 1). If such a company achieves a 10 per cent profit margin (EBIT), and can cut 10 per
cent from its addressable direct and indirect procurement spend, this can create an increase
in profits of around 33 per cent. Procurement is a very powerful profit improvement lever.

2. www.efficioconsulting.com February 2013
Figure 1
Central to the formula is simply that the PE approach introduces a fresh pair of eyes to the
procurement operation. As experts in business processes, PE houses are masters in spotting
quickly-achievable improvements that may have historically eluded the incumbents.
Without an array of shareholders to consider, PE is able to bypass cumbersome management
hierarchies and enable fast decision-making. Potentially conflicting business functions are
more easily enabled to compromise and align behind a common objective.
In public companies, where certain business process changes may result in a dip in short-
term earnings, management teams may be less inclined to go ahead with changes despite a
potentially large longer-term return on investment (ROI).
PE managers, however, are powerful stakeholders who can quickly create incentives to align
a company’s management with its investment group. Their recommendations are usually
easily implemented.
In the procurement function there is often great potential for fast value creation because the
team may sit in a technical silo, applying the same techniques year after year and resisting
pressure to change. PE ownership tends to free up the ability of CPOs to make the necessary
changes.
Generally speaking, the biggest obstacle to effective strategic sourcing is lack of cross-
functional alignment in a company’s top team. In our experience, to combat this PE investors
will typically deploy an individual to the company board to serve as an effective facilitator
across the various members of the management team. This is good news for procurement,
which requires greater cross-functional alignment to succeed.
Another major problem for many procurement functions is that they generate “negotiated
savings” on paper but are not accountable for driving these through the P&L. PE usually

3. www.efficioconsulting.com February 2013
brings a much greater focus on real results, which again helps procurement to be more
effective.
Smaller PE-owned companies often do not have sufficient spend to be credible in the market
and lack dedicated procurement resource. Some PE houses drive leveraged deals across
their portfolio companies, typically in indirect spend areas like car rental, couriers, stationery
and IT hardware. Such deals can bring relatively easy savings in non-core areas.
Strategy and how private equity succeeds
Typically a PE-backed firm will start with a 100-day plan addressing many parts of the
business including procurement and will be actively involved in the annual budgeting process
which may include a number of procurement initiatives.
Like others in the business world, most CPOs are familiar with the returns private equity firms
are able to achieve. In Europe buyout funds have produced an average annual internal rate of
return (IRR) of 8.3 per cent from 2001-2011 compared to minus 4 per cent for the public
market index.
The question for CPOs, therefore, is what you can learn from private equity to help improve
procurement operations in your organisations.
There are certain clear pointers to success:
 Procurement must be given a strong mandate, and targeted to deliver real results
 For procurement to succeed, interests must be effectively aligned across the various
business units and/or functions impacted by procurement. It is imperative that this
alignment is reflected at top management level
 All stakeholders - finance, the CPO and the cross-functional sourcing teams - must
be quickly mobilised and engaged in the improvement process
 The company must be willing to upgrade or supplement the procurement team by
bringing in new or additional people or consulting support
 Granular measurement tools must be introduced to ensure savings are delivered to
the bottom line, converting “paper savings” to “realised savings”
If all these criteria can be achieved, PE-backed companies usually deliver improved results
and procurement will have been a major contributor to the equity value created by the
company.
Conclusion
Freed up from the constraints faced by public companies, PE-owned organisations are able
to implement a range of positive measures to add value quickly and effectively.
However, the techniques employed by PE are not unique to the sector. They are available to
all those endeavouring to improve procurement efficiency and effectiveness in their own
organisations.
Procurement professionals can learn from the approaches employed by PE houses. The
lessons for CPOs across all industry sectors are clear: if PE can do it, so can you!