#ProcurementExcellence

Delivering Margin Improvement

Making Excellence Sustainable

Turning Data into Actionable Insight

Procurement Excellence in Private Equity

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We are specialists in procurement cost reduction. Our consultants work closely with all kinds of organisations to improve their profitability by identifying, delivering and maintaining savings in third party expenditure.

RICHARD MCINTOSH Managing Partner, Procura Consulting

The impact of Procurement Excellence

For most businesses, external costs can account for up to 70% of total costs. Every pound, dollar, or euro saved is a pound, dollar or euro improvement to profitability.

But, it’s not just cost reduction that is key. Better procurement drives significant softer benefits also. For private equity owned businesses, procurement excellence is competitive advantage and this is reflected in the valuation multiple.

There are three stages to make the impact.

1) Identify the savings potential and build an execution plan Undertake a Spend Analysis & Opportunity Assessment to accurately identify where savings can be achieved, precisely how much can be saved and build an implementation plan to deliver.

2) Deliver a programme of procurement cost reductionA managed programme of procurement cost reduction will be required; typically 6-8 months of procurement split into multiple category workstreams each going through a process of strategic sourcing. Quick wins will come out in 2-3 months and will usually ensure the project is self-funding

3) Transform and build capability to ensure improvement is sustainableSustainability is vital. We ensure that when the consulting team leave the savings are not only sustainable but can be drive year-on-year.

The outcome: EBIT impact with multiplier effect on equity valuation

For a Private Equity business, addressing procurement spend is one of the key levers to improving profitability and increasing value

Procurement transformation can be one of the biggest drivers of EBIT and subsequent equity valuation improvement.

Procura provide support to Private Equity businesses across all stages of their activity cycles:

• Pre-acquisition due-diligence to identify savings, synergies, risks and opportunities

• ‘Carve-Out’ analysis and planning to assess and guide capability, capacity, operational delivery allocation and planning

• Procurement “in-a-box” total managedservice support

• First 100 days’ rapid procurement cost reduction

• Deep-dive strategic sourcing• Cross-portfolio spend analysis• Cross-portfolio procurement aggregation

opportunity (GPOs)

A relentless focus on bottom-line results combined with our deep supply-market knowledge ensures that spend is optimised – and stays optimised.

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Unlocking the power of procurement in high growth companies

Specific industry sectors have been enjoying high growth with big opportunities for further expansion in 2019. In the United States over 210,000 new jobs were created in the construction sector in 2017. Cybersecurity is another booming industry, with companies, governments, and individuals increasing spending to protect themselves online. Technology remains a strong growth industry with pundits suggesting it will continue to grow up to 30% quicker than the economy as a whole over the course of the next 5 years.

Other fast growth areas include:

• The ‘green’ industry, driven by increasing consumer demand• online gaming which has seen a revolution in digital channels

for customers• the provision of care for an aging population, which, according

to the World Health Organisation will see 22% of the global population at over 60 years of age by 2050.

Areas for short and mid-term focusIn the short term working in partnership with an external procurement specialist can pay significant dividends. In the medium term a commercial ‘gain share’ model, where an external partner base their fee on a % of savings delivered, reduces risk whilst ensuring a growing rate of return over subsequent years.

Points to consider

• Certain industries are set to enjoy high growth in 2019• Procurement opportunities can be overlooked as top line

numbers deliver healthy EBITDA• There are excellent opportunities to deliver additional profits

by focusing on procurement in the short term• Implementing effective procurement transformation to

support growth – now and in the future – is a key strategic area of focus for many of the most forward-thinking organisations

Procurement is a key lever for profit improvement. Cost reduction has bigger direct impact than increasing revenue

Procurement is the biggest profit lever…

• Depending upon sector, external expenditure can be responsible for up to 70% of an organisation’s costs

• Procurement has a direct impact on the bottom-line (1$ saved = 1 $ improvement to EBITDA)

• Cost reduction has a more direct profitability impact than increasing revenue

• From a PE owner perspective, Procurement Excellence directly impacts the valuation multiple

… but its not all about savings

Having an effective procurement capability provides significant benefits to an organisation• Improved service• Improved quality• Access to best suppliers/prevent competitors access• Improved supplier relationships• Compliance/assurance• Lower supply risk/Lower supplier financial risk• Lower stock/increased availability• Innovation in product/service

How procurement adds value to PE owned businesses

Procurement Excellence delivers margin improvement

Getting traction… focus on strong foundations

Spend Visibility You can’t manage what you can’t seeExecutive sponsorship Align with organisation’s strategic objectivesGovernance & Measurement Everyone agrees on the value of procurementOperational model Tailor approach to stakeholders, categories & culture

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Making Procurement Excellence sustainable

Elite Performance

Internal leadership is the ability to engage stakeholders; the critical success factor in procurement success.

External leadership (supplier based engagement) defines success in both sourcing (driving value) and supplier management (maintaining and increasing value).

The experience of many of the world’s leading procurement organisations is that it’s actually a ‘way of working’ that combines three crucial strategic, operational and behavioural-based cornerstones in a way that creates competitive advantage:

1) Direction

Direction is the strategic cornerstone of effective procurement.

This is the ability to set and articulate clear direction; to provide both vision in what a procurement function should be doing – and why – together with the intent to make it happen. Very simply this is “doing the right thing”.

2) Execution

Execution is the crucial operational cornerstone of effective procurement; the functional capability to deliver results and get things done.

A procurement function must be delivering the core processes (as detailed in the diagram below) and executing them effectively.

Strategic Sourcing, Supplier Management and Contract Management must be the core processes running through the organisation, supported by backbone processes such as Spend Analysis and all driven off a robust and efficient Purchase-To-Pay process.

Execution is the physical activity which makes things happen as a result and is the ultimate measure of procurement functional performance.

Without execution procurement does not impact profitability.

3) Leadership

Leadership is the behavioural cornerstone which galvanises the strategy and execution; it is the ability to bring others with you on the journey. In procurement, leadership has two faces; one internal and one external.

Procurement Excellence The 3 cornerstones

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One of the biggest reasons procurement initiatives fail to make a P&L impact The degree of success (or failure) of any procurement initiative can often be boiled down to one Critical Success Factor - stakeholder engagement.

Once viewed as a transactional based function, procurement must increasingly deliver far more than the old-adage of ‘on time, on budget on quality’. In many organisations today, procurement activity is expected to deliver a clear-cut P&L impact.

But without effective stakeholder engagement the impact on the P&L often equates to zero.

Procurement's critical success factor: Stakeholder engagement

Points to consider

1) Excellent procurement is not just a technical skill. Stakeholder engagement is the Critical Success factor.2) Excellent procurement cannot be done in the background.3) Successful procurement requires consultant-level skills to engage and manage senior people. If your procurement is a back-office, transactional function, their ability to impact the P&L will be limited to spend areas that are back-office and transactional; probably influencing less than 5% of total spend.

The issue is that it is relatively straightforward - and far easier - to undertake a technical procurement process independently of the business and stakeholders to which it is serving. But the net result is commercial deals not linked to the true business requirement of the organisation, delivered in isolation and, in consequence, never used.

What is a stakeholder?

• Sourcing Professionals – People that spend most of their time working across the sourcing process

• Purchase Agents - People that spend an organisation’s money but do not have procurement as a profession. E.g. Marketing Directors, IT Managers, PA’s

• Sourcing Influencers - People who have supplier contact and/or influence the sourcing process, e.g. setting the specification or defining the business needs.

You need stakeholders to help you understand the current situation; current suppliers, contracts, spend, supplier performance and business issues.

Data: Science & Analytics

Managed effectively, this process provides an organisation with the tools to identify and predict trends in spend, increase spend under management, and can partner with other initiatives such as eProcurement to massively increase productivity and improve the results of the procurement department

Effective procurement has always been a data driven process, and advances in Machine Learning and AI will vastly increase the speed and accuracy of data processing. Organisations that can take advantage of this technology to enhance spend visibility will be able drive significant savings with leaner procurement teams.

The key to unlocking this value is developing a robust data processing strategy, as well as training procurement professionals to understand the advantages and limitations of predictive models.

The combination of machine and expert knowledge is the best way to leverage these outputs for effective procurement strategy development.

This is where a ‘Machine Learning’ and ‘AI’ toolkit come in.

Classification and Natural Language Processing algorithms trained on large sets of historic spend data can partner with the procurement professional to automate spend analysis, freeing up their time to engage in real value-add activities such as strategic sourcing.

Building an effective data processing pipeline, combined with a robust spend analytics platform, can provide visibility of spend across an organisation that unlocks new levers for cost reduction.

For example, international companies can leverage visibility of spend across subsidiaries to take advantage of opportunities for consolidation of volumes or Global Sourcing. Refreshed regularly, this can lead to improved insights that are maintained over the long term.

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Enhanced decision making

The Future: Turning Spend Data into Actionable Insight

Points to consider

• Leveraging data for spend visibility is key for effective spend management.

• Machine Learning and AI, when coupled with a robust spend analytics platform, are fantastic new tools that can be utilised to increase the productivity of a procurement department.

• A realistic understanding of the advantages and limitations of predictive modelling is essential for effectively harnessing the technology to improve procurement strategy.

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AI: Machine Learning

Powerful new tools for procurement professionals

We certainly believe that machine Learning & AI will deliver powerful new tools for procurement professionals. And it is in the area of procurement data science where the impact will be felt first.

The first real, pragmatic and immediate use of machine learning in procurement is in the tail – the 20% of spend / 80% of suppliers that never gets addressed.

Sophisticated machine-learning based spend analytics now provides the data-based foundation for organisations to finally unlock the benefits hidden in the tail.

Even organisations with developed spend analytics often leave the tail as “uncategorised” – a huge bucket of transactions, with suppliers that never get managed and who buyers don’t even know what they do.

Some of it is true one-off, but most can be, and should be, addressed.

Algorithms just don’t get tired!

It starts with accurate categorisation.

ProIntell spend algorithms combine existing categorisations, combinations of fuzzy matching and automated database and web-scrape technologies to accurately categorise every supplier and every transaction.

The second step is learning from an organisation’s preferred suppliers to work through a sub-category by sub-category approach for where spend should be going.

This allows unmanaged spend to be directed to an organisation’s preferred suppliers according to the category strategy. This results in:

• savings (in our experience 10%-15%)• improved leverage with key suppliers - the power of growth • a reduction in the number of suppliers that require

administration• improved service to end-users negating the need for them to

attempt to source their requirements.

Of course, this isn’t a panacea, it is just a tool.

Points to consider

• Spend analysis is the foundation of Procurement Excellence

• Previously untapped benefits in terms of savings, efficiencies and end-user experience are now achievable from the long tail – the 80% of suppliers/20% of spend that never gets addressed

• Machine learning enables Tail Spend Management• Machine learning and AI is not a panacea but it can

deliver deep analysis and immediately actionable insight for expert procurement teams to action

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We are specialists in procurement cost reduction. Our consultants work closely with all kinds of organisations to improve their profitability through identifying, delivering and maintaining savings in procurement expenditure.

A relentless focus on bottom-line results combined with our deep supply-market knowledge ensures that spend is optimised – and stays optimised.

London 99 Bishopsgate London EC2M 3XD+44 (0)203 693 7275info@procuraconsulting.com

New York375 Park Avenue, Suite 2607, New York, NY 10152+1 (212) 634 6855newyork@procuraconsulting.com