Most private equity (PE) firms aren’t leveraging a key source of hidden value and optimization that can be found within the portfolio of every company.
This shortfall remains untapped because it involves a part of finance that’s not viewed as being significant or strategic: indirect spend and the procurement function that supports it.
Indirect spending includes all the goods and services needed to run a business, such as office equipment, HR services and more.
These expenses and the procurement behind them usually have room for improvement with the help of indirect spend management experts. In fact, we have a track record of uncovering significant savings even when the client believes it’s already getting good terms and discounts.
For CFOs and PE managers
Procurement optimization is one of the most powerful drivers of EBITDA improvement for PE firms and their operating partners. Because a company’s procurement spending is often several times greater than its EBITDA:
Reducing indirect spending by ten percent could improve EBITDA by 20-40%
Unfortunately, many companies do not adequately track indirect spend data and do not understand their business expenses at a granular level. Compounding this problem, many PE firms themselves underestimate the value of spend visibility. Significantly, they overlook the part it plays in helping to optimize the procurement function, track contract compliance, reduce waste and errors and maximize savings.
Common spend category with 60-70% savings potential
I’m going to delve into just one example of additional value we’ve identified for one of our PE clients. It involves a major business expense: printing and copying. We created a savings solution for multifunctional devices (MFDs) and printers across all their portfolio companies.
We begin all client engagements with a current state assessment and identification of goals and objectives.
Goals for this PE client portfolio:
- Evaluate current equipment and its pricing with associated procurement process.
- Determine specific equipment needs for each portfolio company.
- Create an optimized custom solution based on portfolio needs.
- Fix service pricing and no-contract minimums.
- Replace equipment and right-size the equipment fleet.
- Enhance procurement to give each location the resources to manage this expense category independently.
- Reveal hidden fees and other tactics to improve cost transparency.
- Create co-terminus lease-end dates to align on the same date.
Combining buying power for purchasing leverage
After vetting the current state of equipment, service, locations and procurement strategies of the companies within the portfolio, we recommended the following to gain leverage:
- Utilize one equipment provider for MFDs and a second equipment provider for printers and consolidate invoices to pay one price for all MFDs.
- Remove outdated and costly printers and replace them with a selected handful of recommended printers from a preferred manufacturer.
- Implement print management on one fixed cost-per-print to reduce toner costs, improve service and create cost transparency.
- Transition MFDs and printers to create maximum savings and address equipment needs quickly.
Regarding service terms and agreements (SLAs), we developed a plan to:
- Separate service from leases to allow payment for actual usage only.
- Empower each company to protect itself if service expectations are not met.
- Delineate service response commitment, service performance guaranty (technical expectations) and equipment performance guaranty (uptime).
- Up to 60% savings on MFDs per company
- Up to 70% savings on printers per company
These savings encompass equipment, toner and service.
PE portfolio consolidated buying power
We typically work with PE firms that are managing portfolios of between five and twenty companies, in which we can leverage groups of companies aggregated in a PE portfolio. Volume leverage means that each company participates in a larger contract negotiation, in this way achieving volume discounts and service advantages.
Yet consolidating buying power doesn’t mean one-size-fits-all solutions. Working individually with each company in the portfolio, we understand their needs, taking into account the nuances of each business—nuances like unique situations or how to obtain the best prices for brands the company prefers. We then continue to oversee the performance of the portfolio model, comparing old-versus-new spending on an ongoing basis.
As the companies prosper and grow larger, the new contracts we negotiate are designed to accommodate expansion. They allow portfolio companies to continue to work with the same vendor and continue to enjoy the same service advantages as the company’s needs expand, develop and diversify.
Spend management focus and objectivity
Because our niche expertise lies in indirect spend and procurement efficiency, we offer:
- Access to the latest cost-benchmark data and spend-management trends for specific markets, industries and suppliers.
- Vendor-neutral advocacy, with knowledge of the full provider spectrum.
- Negotiating acumen to optimize requests for proposals (RFPs), terms and conditions and contract compliance.
Our experience and cross-market experience allows us to identify and attain all possible savings opportunities. For example, we might observe inefficient spending involving the use of several different vendors and redirect purchases accordingly.
Don’t underestimate the power of centralized purchasing and other indirect spend strategies and tactics. Procurement optimization can release additional value hiding in your PE portfolio.