By Global PMI Partners Partner, Dr. Guenther Jauck
The ultimate goal of M&A is to create value by realizing synergies. Yet more than half of mergers fail to achieve this simple goal. In fact, some sources put the failure rate of mergers as high as 83%. Companies that integrate successfully manage to maintain focus on the levers that truly impact the bottom line. One area that is surprisingly overlooked is procurement strategies.
In theory, a larger firm should have better negotiating power with its vendors thus enabling increased profitability. In reality, price reductions require work and during a merger, companies oftentimes focus primarily on both continuing to maintain daily operations while working on the minutiae of fusing two companies together… everything from ensuring everyone uses the new letterhead to getting people, processes, and data transferred to new computer systems. Sadly, the golden opportunity to negotiate better pricing with vendors ends up evaporating.
Worse, for industrial companies with tighter product margins, procurement can provide huge leverage in profit realization. Consider a company whose procured goods or services represent 60 cents per dollar of revenue. A cost reduction of 5% would have the same impact as a 30% increase in sales with adjusted proportional wages and constant fixed costs. In a merger situation, the combined company sees these cost improvements spread out over an even larger number of units.
So how can companies realize this value? It is a poorly kept secret that different companies typically have different negotiated rates with the same vendor. Even for the same vendor, part / SKU pricing might vary. Simply by picking and choosing the best prices for either company, a procurement team can reduce costs almost instantly. Further, new higher volumes could qualify the newly formed company for discounts not previously attainable.
To put these new cost savings into action as quickly as possible, executives need to properly resource a merger team dedicated to cost analysis. If a company doesn’t have personnel with the expertise to manage the process, the executive team may decide to hire advisors or consultants who do have this experience. Cost data cannot legally be shared between the companies prior to Day One. To abbreviate the timeline, there are two approaches: 1) a company may form a clean team… outside advisors who can analyze the data for both companies without showing data to anyone of either company or 2) both companies can agree on a common format for data, obtain, clean, and prepare the data, and wait to perform the analysis post merger. Typically, this means putting together a database or spreadsheet with a listing of parts and services by part category, vendor, part number, list price, purchase price, purchase volume, etc. Post-merger the team can perform a pareto analysis to quickly identify areas of focus for vendor negotiation and cost reduction. Based on broad practical experiences, by optimizing your supplier base, you could see a savings of 10% – 15% of the investigated spend volume with relatively little effort. Of course, this savings could be much higher or slightly less.
With careful planning, diligent execution, and most importantly, the focus of the management team, companies can effectively realize the value initially intended for the merger. Cost savings don’t magically materialize as though from an economics textbook, but with managerial commitment, effective execution of a procurement strategy can lead to a merger that realizes its full potential.
What has been your experience with achieving merger profitability targets through effective procurement? Comment and “Like” this post on LinkedIn by clicking here.