Together we stand

Mergers and acquisitions are often in the headlines – and procurement can help make them work. But there are important issues to consider when such a move is announced, say participants in the ELP Executive Roundtable.

The challenges and opportunities presented when two organisations decide to merge – or when one is acquired by the other – are well known. The most obvious is in the economy of scale a new, larger company can offer. Procurement can play a large part in delivering the benefits, but there are also challenges. In the latest ELP Executive Roundtable, chaired by Mark Perera, procurement leaders met to discuss the issues and to compare their own experiences.

Mark Perera: Let’s start by looking at cost savings and how we identify those as part of the merger and acquisition process. I’m sure this is when most of the business looks to procurement as discussions start around acquiring a new company or being acquired.

Roland Verdon: It's a key driver. I would say that the basic and the most urgent thing is to have a clear spend analysis done to identify what we mean when we talk about savings potential. Sometimes at the higher level where procurement isn't involved, there are discussions going on saying you can probably achieve that amount of savings. Later on procurement discover that this is what they're expected to deliver. I believe that when an acquisition is starting, we should immediately run a financial spend analysis of the whole corporation, look at performance, the current involvement of purchasing people, and work out how much are we covering in both companies.

Tony Sullivan: It's about bringing new suppliers into the supply base. The reason for doing that is to save money. But defining what the savings have been is a challenge.

Padraic Phelan: The question is whether the board have a clear plan as to where value is going to come from, whether it's through the synergy of the organisations coming together or within the procurement contracts. At TUI, we had 27 purchase schedules to interrogate to get any sort of understanding of across-group spend. We ended up with something like 750,000 lines of Excel to wade through. How do you get down to the detail, because that's where the savings are?

Stuart Glover: There's always going to be tension from board level people and the deal makers who want to keep information as tight as possible for obvious reasons. The question there is whether to involve procurement at that stage. I think it should be involved because you need the reality check, but don't forget, the more people you involve, the more opportunity there is for things to get out.

Mark Heffernan: Speed to market is often a useful process improvement when two companies come together, but how do you measure it? If you can't measure it, then they won't recognise it, so therefore they will go after headcount reduction instead because that is an easy thing to measure.

Haide Villuendas: The question of synergies can get blurred. Where is the frontier between the synergy to be obtained by outsourcing further or by aggregating the operational capacity of the two organisations?

Mike Butcher: There has to be a select group of people, because otherwise things get out to the marketplace that you don't want. That did enable us to have a really solid plan about how we were going to move forward and for me, it's that planning that's absolutely crucial to making sure that it all works and comes together. You have to have a plan and deliver it in a staged approach – and part of that is actually managing suppliers' expectations. That can be done prior to the merger – just informing them that we are going to be expecting to see some sharper pricing after the merger because we're dealing with bigger volumes.

MP: When they have set a target and perhaps told the market: “We’re going to make ‘X’ amount of savings from suppliers” – how do you actually deliver that?

MH: The savings target becomes a way of justifying it to the City. They pick the number and ask us to justify it after the fact. Often it's a question of asking whether they have a target already in mind. And they'll say between £50 and £100 million. And if we come back and say it's twenty million, this is where it's rock solid, then they'll say: “Make it a stretch target and you identify the areas.” Procurement then comes along, and asks: “Well how did that happen? We're on the hook for a lot more than we expected.”

SG: There's a sense of impatience around merger and acquisition environments. You need to be able to deliver results quickly and procurement savings can be delivered quickly, because it's quite easy. Often the externals are brought in after the target has been identified, and the management team has thought, “this is the target, let's bring in external consultants to solidify it for us.” Or after the deal is done, where purchasing now is suddenly half the target. And they say, “Can you tell us where the savings are going to come from?”

RV: It's important not to be shy. Sometimes you get news from the top that “this is the target”. You may be a little bit shaken, but even if the train has already started to move, there is still a chance to get in and take a leadership role. Otherwise we are in a defensive position, which is bad. We should start getting on board and talk to the stakeholders to get their buy-in at this early stage. It may not be the ideal situation but there is a chance to take on what has been said and build on it.

MH: The targets are up and cascaded from above, but what must be in place to deliver? It's something all purchasing people struggle with. You need buy-in from related functions, because it isn't necessarily just procurement that has to deliver. It's manufacturing, the operations people, it's HR, sales and so on. You need to make sure that you've got people on your team with the energy and experience to drive these home. Otherwise you find yourself alone on an island.

PP: There's the management of the tensions, trying to shepherd the stakeholders. What we have found, moving from having been a centralised function, is that suddenly you have a whole assembly of acquisitions and you're trying to bring everybody along, most of whom don't want to come, regardless of what targets have been set. You also need a realistic timeline. It may take six months to get to that stage where everyone's on board.

HV: Procurement has two jobs. One is to obtain savings, and the other to develop innovative products or services. You need to be clear on how you are going to handle the supplier base – you may get rid of the guy who can deliver you the innovation longer term.

MP: When the decision’s been made, how can procurement use this change of business to take a more strategic role in the process?

MB: I'm not sure I see a merger or acquisition as being any different from normal business. It's all about procurement being involved at the ground floor, and being involved upstream early in the process.

SG: It depends whether you're talking about procurement with a capital “P” as a function, or with a small “p” as an activity. If it's a small “p”, absolutely, you need procurement people involved in merger and acquisition. The capital “P” procurement, where it's actually the function, I always believe there's real opportunity to add more value, because often there's more value around the procurement area than people first predict.

MH: I think procurement can add value both in the actual negotiation of the deal and also in helping to restructure the organisation to be better and stronger after the deal, but we need time to think about this before we go into those discussions.

RV: What usually happens is you have two companies and two departments. The problem is if purchasing is only talking to purchasing people, without the clear involvement of other departments, then they may be isolated. One of the values that purchasing can bring to the board is to bridge between the two organisations. HV
It can also help with savings, because if you also know from the marketing team, for example, what kind of areas the company wants to get into and what will be rationalised out, then you focus your savings on the things that will remain.

MB: If you've got targets and they're in one function, they're not linked to others, and people's roles and responsibilities aren't aligned and they're not logical, then you're not going to do it.

HV: I think another challenge is where the board acquires a company but decides to leave it untouched for a year because it doesn't want to break their culture. It's the role of procurement to highlight the lost benefits to be had, particularly when the supplier base is confused as to whether you are one company or not.

PP: We're just about to enter a merger with First Choice in the UK. What we found was that we had to be very clear about the actual services that procurement were going to supply to the business. It's very important to define how you actually engage the heads of the source markets and their business units, because people were happily saying “Oh, yes, we should do this.” But in practice people go out and do the wrong thing and suddenly you discover you've got various contracts. It's easy for value to just drain away.

RV: We're talking usually about pretty long term, two years, three years, sometimes more. I think one good way to get visibility and attention from the board is to have quick wins.

TS: Another point is about raising levels of confidence. If you can show that what you're doing is adding value and actually helping then confidence obviously rises. Quick wins can help if they've got some substance to them.

HV: This point about confidence and integration is very much related to the kind of people that you have in the procurement team, and so you use this opportunity to review who's out there and take the best from the two organisations. This has to be done fairly quickly. If you have people with the wrong mentality, no matter what kind of integration structure you set up, it's not going to work.

MH: I've seen organisations which look good on paper, but underneath one is extremely traditional and the other one is fast-moving. One says do it faster, and the other says no. People leave, which is the last thing you want because you need the resources. It's not just looking at the numbers but at the people. Can they work together? What's the culture?

MP: We’re all familiar with companies where the cultures haven’t come together after a merger.

HV: I think the other challenge is who is going to be the head of procurement and the subsequent leaders in that procurement team. Where you have rivalry and competition people think there's been an unfair approach in selecting leaders, and that can also alienate the teams below, who then think the merger isn't a fair deal.

MP: What we want to look at now is the first 100 days of a new business and how procurement can make savings and have the biggest impact.

MH: It goes back to what the purpose of the merger or acquisition was. You should be able to identify what the drivers for the deal were and how much was expected – and then try and build up a case for what portion of that you can deliver.

RV: The first 100 days are key, because that is the time you have to deliver realistic figures, actions and projects. One may need a consulting company to help because sometimes it is not easy to do it alone. You have to have access to the appropriate data. But the business cases have to be delivered quickly.

MP: Mike, how do you find that? You are past the 100-day mark.

MB: Yes, you are absolutely right. The first 100 days is absolutely crucial in establishing your credibility within your organisation. We had a very stiff savings target for the first 60 days but it enabled us to get all of the purchasing people from the two companies and the new organisation focused on delivering.

It was a case of, “this is our target”, and then it was pretty much sleeves up and let's get on with the savings. It was only after the 100 days that we could start to look at some of the niceties; how we organise ourselves, look at action plans, get new ideas and deliver new concepts throughout the organisation.

HV: I have seen major swings in the agreed savings, depending how you calculate them, depending on what assumptions you took, and that can be nerve-racking.

SG: Everybody assumes you are going to get this beautifully presented data, so that you can say, here are all my targets, go away and start building the projects. But my experience is that the data that comes through isn't what you thought it would be. So you ask yourself, at what point do I stop looking at the data and start trying to step in to get something done?

It is a period where you start looking for genuine quick wins, because you want credibility. It's a painful period when the whole organisation is looking at you.

MP: It is interesting looking at merger and acquisition activity when the large BPO players come in. It seems spend analysis is the crucial part of getting the process in place.

MH: But it is more than just the numbers, it is also around the requirements for success, so you can challenge assumptions that were used that were incorrect the first time round.

HV: Probably the healthiest thing to do is to forget what the top targets were and ask a functional group of people from both organisations to strategically evaluate a certain spend area without telling them what the targets are, and see what they can come up with – and then compare the two. You may get an even higher figure than was originally estimated.

MB: We had a number of shared suppliers in China and we did a lot of work under nondisclosure agreements. The announcement of the merger was made in advance so they had time to adjust. Our plan from day one was to take the best price that was available and then manage the expectations of those suppliers to look at negotiating better deals with double the volume.

MH: If you have to get savings quickly one of the easiest ways is to e-source, but you need to have specifications so simple that they are easy to be auctioned. If you make a mistake in the early days, they will never forgive you.

MP: How do you make sure that procurement gets recognition for the savings coming through?

HV: For me the biggest issues have been where the head of the business unit does not want to be involved in a certain integration of volume.

RV: I think the key is to get the buy-in of stakeholders right. If you have resistance it is difficult, so it is a whole task to sit with the appropriate people and make sure that they understand the rationale and their involvement and the benefits. It is a whole in-house marketing process that you have to go through.

PP: Getting buy-in from stakeholders and getting them to agree the allocation of savings comes down to the credibility of the procurement individual to be able to get them to sign up.

TS: The way I dealt with the target issue was to make it one target for everybody.

HV: General management would say “I don't want the quality of my product to deteriorate because of the switch,” so they are the ultimate authority. You have to make sure that they are aligned from the start and supportive. And then you have to create incentives in a multifunctional group, and make sure that you celebrate successes.

TS: Yes, absolutely, this is all about the behaviours that these people demonstrate, that they are willing to take on change and not be risk-averse.

MH: My experience, unfortunately, is that one of the hardest things to accept is yes, there is always discussions about the savings, who gets them down the road, no matter how little or how big.

SG: That is a perennial conversation for procurement. Often it is a question of what you are going to do with those savings. So even though I can sign off on the savings, what happens then? Do you then say “I am going to cut your budget by the amount of savings that you told me you have made?”

PP: It is that whole commerciality around the saving. First getting the saving recognised, and then reinvesting in the product so that it doesn't evaporate in the finance community.

MP: When you were taken over by Merck, Roland, there must have been some savings targets there. Were they set by procurement or by the business?

RV: Procurement, but in close co-ordination with the business. I think this is the only way to do it. If procurement comes up with targets that haven't been agreed by business units and stakeholders, it is not credible at the end of the day.

MP: Mark, do you find that these targets are set realistically?

MH: The trend is that we are often brought in early to find the savings and work with the teams to deliver them. We always go through the assessment and say,
realistically this is the target. Sometimes it is recalibrated.

MP: Have you had consultants in?

RV: A consultancy was hired for the whole integration period and every team had to work exclusively with this company.

MH: We had one client who was very clever and they said, yes we would like to hire you but we want to interview every person before they join the team. It worked well and they were extremely satisfied, so now we have got an ongoing relationship with that client. I would recommend it, although it makes life more difficult for us.

MP: Tony, you are the change agent for Sainsbury’s on the global sourcing scale.

TS: That's right. The company realised that it needed someone internal who knew everyone and had relationships and I was lucky enough to get the job. It has proven to be the best part of what I do.

MB: We appointed an integration project officer. We had a global one and then we had a local one. It has taught us a lot of lessons about the way we bring the business together.

MP: Let’s look at the question of cultural change in a merger or acquisition situation.

PP: It very much depends on the capabilities and abilities of the individuals within the team and whether they have the experience of dealing with new business units, or acquisitions and mergers. If they haven't had that experience they would need outside support. The question is do you replace them or support them? It is a piece of work that has to be done very quickly if you are not to see synergies disappear.

RV: The key is to exercise a kind of listening capacity to the people and understand where they come from and what they have been doing. You have to involve them in the whole process.

PP: You are looking at who is the architect of the change and then who is the agent of the change. You need to identify those people up front so you can, if necessary, put the right incentives in place in the organisation. They might be absolutely critical to selling in the business change that is required to make it work.