12 February 2015by Jonathan Webb
Eight Best Practices From Private Equity.
Cost and Cash Managementprocurement technology
In this guest post, Procurement Leaders invites CoreTrust’s Scott Miller to look at best practices from private equity and what lessons corporate procurement can learn from those activities.
Having done business with the world’s biggest private equity (PE) firms for most of the past decade, I can assure you that they’re far ahead of where most corporate procurement teams are currently operating, and are therefore a useful source of insight.
The central reason is their focus on making operational improvements, not just growing revenues. They excel at lowering costsâ€•on labor and direct expenses as well as general business needs like IT hardware and health benefits.
Eight best practices PE firms use to support their portfolio companies can help CPOs everywhere strengthen their leadership skills:
- Review current procurement operations. When was the last time you took a serious look at the procurement function at your company? Are resources being allocated to deliver the best possible value? What tools or approaches are you lacking? Where can you root out inefficiencies? Have you taken advantage of opportunities to aggregate volume or contracts pre-negotiated on that basis to obtain best pricing and terms? The approach of seven of the top 10 PE firms includes the latter, as well as reducing or reallocating personnel to eliminate redundancies and ensure the right team is at the wheel.
- Adopt a spend analytics tool so you know where you’re spending your money. The ROI can be high if you act on the data. PE firms use such a tool to prioritize RFPs based on spend and routinely achieve 15% savings on everything from employee uniforms to flooring.
- Combine tactics. Consider coupling a spend analytics program with a reverse auction tool offered by the same supplier to further reduce outlay in your top spend categories.
- Is your procurement team talking to other departments, including IT and HR? Aligning cross-functional interests is how PE-owned companies save 20% or more on IT products as well as air fare, hotels and rental cars.
- Centralize and standardize. It’s the first order of business when a PE firm acquires a company because it creates scale and empowers the procurement department.
- Use a contract management tool. By housing and cataloging all redlined versions of a contract, it offers legal protection should a dispute arise.
- Stop cutting checks. If you instead pay suppliers with a purchasing card, it will simplify reporting and you’ll win on interest since bills will be paid 30 days later.
- Think “total cost of ownership.” This will require continual contract optimization so, for example, you don’t ship express when priority will do. Or renting only mid-sized cars because you use a travel management tool like Orbitz to drive compliance to your travel policyâ€•and then use the data from that connection to ensure you have hotel deals in the cities where employees most frequently travel and that gas tanks are filled before rental cars are dropped off at the airport.
Even if you start with a subset of these best practices, the results should improve the bottom line â€• and your next performance review.
Scott Miller is vice president of CoreTrust, an 850-member GPO for large corporations and private equity firms that provides access to a contract portfolio spanning multiple categories of indirect spend.
This contributed article has been written by a guest writer at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content.