How Private Equity Can Revitalize Procurement
The procurement cycle looks very different in publicly listed companies compared to private equity.
The pandemic highlighted the important role of procurement in managing health initiatives, navigating new areas of risk management, taking on economic, social and corporate governance (ESG) initiatives, and encouraging diversity, equity and inclusion (DEL).
Yet anyone who is in procurement knows that supply chain management is one of the least prioritized departments in a corporation. Poor communication within a company and with its external vendors and suppliers affects purchasing and buying decisions, while fluctuating prices and demand make the process challenging to control and difficult to streamline.
With a broad understanding of available options, private equity (PE) companies are in a better position than publicly listed ones to alleviate these pain points and make procurement a more fulfilling area in which to work.
Disadvantages of procurement in publicly listed businesses
Different funding sources mean publicly listed companies can be less concerned with the procurement cycle. Thanks to the misery of quarterly reporting, they focus on the resources needed to accomplish an opportunity and react like a light switch. Have a bad quarter and the CFO flips procurement off, throttling back on the investment. If the company has a good quarter, it flips back on and they expect you to work harder and make the procurement process even faster.
But you can't learn a procurement cycle with an on/off investment that is based on how the business is performing. There are so many factors that can dilute that outcome, turn off that switch and stop progress in its tracks. Without the pressure and stress of quarterly reporting, a PE company can measure its progress against the transformation plan, rather than the company's quarterly performance, and drive faster and more effective change.
Advantages of procurement in private equity
Unlike publicly listed companies, PE companies are more interested in the time it takes for the business to start seeing value. When a PE company I worked for identified procurement as a value lever that they wanted quickly, it came with an awful lot of forensic inquiry around that value. They challenged me to think about creating more meaningful valuation opportunities. Never in my experience working for publicly listed businesses had I felt such a direct correlation between what I do and the overall financial performance of a company.
Most publicly listed businesses take an organic approach to creating value with no real value creation playbook. They work within the status quo, attempting to create value through their normal business operations and end up like organizational treacle — a thick syrup that slows things down.
PE companies, on the other hand, are much less sticky. They have ambitious leadership with a game plan and a reputation for buying unloved, under-transformed assets. They apply a whole set of tools, including procurement, to create more value — then they go public or exit. They bring energy to conversations around radical transformation and drive it hard, not out of desperation, but to strengthen and improve performance.
More flexibility and greater peace of mind
Some opportunities might save money, but PE firms focus more on optionality than getting the absolute lowest price. A PE business might encourage the most savings possible, but not if pursuing those savings would limit their strategic options or change the composition or shape of the business. They would rather go with a sourcing solution with more flexibility.
This flexibility allows PE companies to be more sensitive to ESG and DEI agendas. They seek to incorporate diverse thinking that challenges the status quo, especially in areas of transformation, and their successes encourage portfolio companies to embrace DEI in their own companies.
With changing customer behaviors and increased demand, ESG has also become a value driver with an increasingly serious impact on long-term costs and talent acquisition. At the heart, a PE company has several billion dollars of invested funds that everyone wants to turn into a higher valuation, so if their investors want them to invest in assets with ESG or DEI responsibility, PE companies take that seriously.
PE and listed businesses have different approaches to procurement, which means people in procurement looking to get into either space should know the value drivers that both are looking for. PE firms offer many advantages in the area of procurement, but be prepared for the dynamics of balancing and embracing relationships with different stakeholders. They will challenge the ambition of your plans, but these challenges will help you grow. In the end, your work will have a more direct impact on the company, resulting in a more satisfying role in procurement.
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