In this blog, we share key insights on how to make a post-merger integration successful by procurement.
How can your Procurement organization play a significant role in, and fully benefit from, a merger both in the short –and long term?
For most of the 7.543 mergers in 2016, the shareholders’ objective was to realise deal value, which can be synergies, market share and innovation utilisation, but in a stand-alone situation it mostly was about reducing costs of both companies of which procurement synergies is often the most important.
Organisations are more and more dependent of their supplier base (50%-80% third party spend as % of the revenue). Procurement savings is one of the synergies that is often communicated to the market. As such, CFOs and CPOs often receive the objective to deliver these synergies. However, integration activities run in a different pace than regular Procurement operations & projects do, often resulting in a misalignment between integration teams and procurement departments. Based on experience in supporting Post Merger Integrations, KPMG distinguishes four approaches to unlock Procurement synergies.
These four approaches are a result of two questions that should be answered during the clean room (pre-merger) phase:
1. Is the degree of overlap in suppliers between both companies high or low?
2. Is the degree of overlap in goods or services procured between both companies high or low?
The combination of answers to these two questions results in a different suggested approach:
I. If both companies buy similar goods from a highly overlapping supplier base the focus will be put on applying the best conditions of one of the companies over the joined spend for both companies plus a volume discount. Contracts are consolidated and rationalized, which allows the Procurement organization to grasp the “low hanging fruit” in the short term. Since specifications are similar and no conflicting supplier preferences exist, the difficulty of implementation is relatively low. This will be a phase 1 post integration action.
II. Subsequently, if both companies have similar suppliers but buy different goods the focus will be put on either harmonizing specifications or on leveraging scale and thereby negotiating better price and other commercial conditions. Precondition is that business owners have to accept that their specifications might change. First focus on the desired functionality of the goods before directly diving into the specification is crucial in order to harvest the potential synergies. This will be a phase 2 post integration action.
III. Thirdly, if both companies buy similar goods from different suppliers the focus will be put on phasing out one of the suppliers, harmonizing commercial conditions over suppliers and/or selecting a new overall supplier and leverage the increased buying power. Value lever workshops and category strategies should be used to determine, from a supplier risk perspective, whether it is desirable to consolidate (parts of) the supplier base. Eventually, the Procurement organization should compare supplier conditions and utilize its market position. This will be a phase 3 post integration action.
IV. In the fourth situation, there is limited supplier overlap and limited goods overlap. In this situation, the Procurement organization should critically assess its sourced goods, and see if transformational changes are needed to either rationalize the supplier base or goods base. Expected synergies in this approach are significantly higher because Procurement will influence demand. In addition, this approach reduces the proliferation of suppliers and/or goods and thereby the business complexity.
Mature Procurement organizations focus more heavily on comparing functionality rather than on comparing specifications because the comparison of the functionality is regarded as more ‘objective’, and therefore easier to negotiate. This often reveals that there is more overlap than expected and enables sourcing managers to critically assess their current specifications and to consider to rationalize them.
Also when there is a cross-border post-merger integration, it is key to bring together both procurement managers and business owners from the affiliated countries and from both merger partners. Not to convince each other of the advantages of their own procurement strategy, but to be able to determine the most cost-efficient sourcing propositions together with the most logical specifications. A mind-set needs to be created that promotes managers not to strive for their own country benefits, but for the overall benefit of the merged organisation. By organizing an embedded cross border alignment between procurement managers, you create a ‘regional’ focus instead of a country focus. A timely collaboration ensures both a more effective (bundling volumes) and a more efficient (taking best practices from each other) procurement approach.
In conclusion, it is important to acknowledge different Procurement synergy areas all requiring a slightly different approach rather than attempting to apply a “one-size-fits-all”-approach for the whole goods and supplier base. Quantifying the goods and supplier overlap helps the Procurement organization in prioritizing its actions and contributes to unlocking the estimated Procurement synergies within the agreed timelines.