What can we learn?
Following any merger or acquisition, one of the key objectives is leveraging synergies from scale to deliver bottom line savings, but many procurement functions are struggling to achieve the targets set by their leadership teams. Bain found that 70 percent of merging companies over estimate cost savings from scale-derived benefits(1). What can we learn from these failings, and how can we do better?
Procurement’s optimization effort typically focuses on delivering savings from the economies of scale made possible by the increased spend. This normally assumes that the larger acquiring company has the best supply strategies and that the new entity will improve on these slightly. The majority of benefits, then, come from the smaller entity improving its commercial position. Charts and spreadsheets from major strategy houses help firms establish estimates from the top down which describe how as volume increases the unit costs fall.
In my experience, these scale-focused approaches characterized by buying the same things cheaper are flawed. It’s no surprise that Procurement functions are failing to meet their targets when the thought process is, the bigger the organization is, the better it is.
This traditional thinking is based on eroding supplier’s margins due to the increased purchasing power. When the average net profit margin in the S&P 500 is 11%, why are organizations fixated on scale benefits(2)?
Having supported many organizations through the savings realization phase, we have repeatedly seen organizations face these five pitfalls:
- Focusing on scale and not the full supply chain
- Using benchmarks from non-comparable sources
- Failing to consider the commitments in current supply contracts
- Not validating clean room estimates with subject matter experts
- Creating cultural tension from a one sided strategy
Different thinking will deliver different results
Organizations need to focus on identifying savings on both sides of the fence, and look at synergy as an opportunity to build strategies that fit the new business and deliver the program as a joined up procurement function. To deliver value from scale, organizations need to explore all value levers and see scale as an opportunity to draw on greater knowledge, expertise, and insight. Procurement functions need to ask themselves: how do we move beyond focusing on suppliers’ 11% margin and instead address the full 100% of spend?
From our experience in the market, we think that success can be achieved by leveraging the following strategies:
Different thinking will deliver different results
Organizations need to focus on identifying savings on both sides of the fence, and look at synergy as an opportunity to build strategies that fit the new business and deliver the program as a joined up procurement function. To deliver value from scale, organizations need to explore all value levers and see scale as an opportunity to draw on greater knowledge, expertise, and insight. Procurement functions need to ask themselves: how do we move beyond focusing on suppliers’ 11% margin and instead address the full 100% of spend?
From our experience in the market, we think that success can be achieved by leveraging the following strategies:
- Extensive collaborative working across the new function
- Fresh thinking strategies which look at the new spend and forget the past
- Acknowledging current contractual hurdles and deliver phased improvements
- Remembering that current contracts are not untouchable and some benefits can still be realized
- Validating the savings forecasts based on known high level variables, such as procurement capability and last tendered date
To learn more about delivering improved procurement outcomes following a merger or an acquisition please click here.
Footnotes
(1) https://www.bain.com/insights/why-some-merging-companies-become-synergy-overachievers/
(2) https://insight.factset.com/sp-500-reporting-record-high-net-profit-margin-for-q1-2018