To Realize Fast Value From a Merger, Look to Procurement
Today's guest post is from Ron Pachura, VP Finance Transformation at Fiserv. Ron will be our guest at a webinar, “Addressing the Changing Landscape of M&A and Diversification,” presented in partnership with Proformative, on Tuesday August 9, 2016 at 9am PST. Here are some of his thoughts on the topic. Join us Tuesday to hear more.
Procurement has an important role to play in any merger or acquisition. Often with the main driver being accretive revenue and profits, most of the discussion centers on the revenue side of the deal. How does it help the product portfolio? What new channels can we reach? What is the go-to-market strategy? That revenue centric perspective is well justified, but the value from those activities will usually be achieved over the longer term.
At the same time, there is another significant expectation to exploit the synergies of the combined companies. In this regard, you can realize immediate cost savings by proactively looking at the procurement organizations and planning. Not only do the most immediate dollars that fall to the bottom line come through procurement, but how well you operationalize this function once the ink dries has a big impact on the internal perception of the deal.
Running Out of Toilet Paper
For example, I once worked on a merger for a manufacturing organization where they ran out of toilet paper in the factory because the new organization did not yet have a proper mechanism for buying MRO goods—the basic supplies for the plant. Consequently, they were running out of various maintenance items.
Running out of toilet paper didn’t shut down the production line, but if it had been some type of adhesive or grease it might well have--delaying sales, resulting in higher costs and compromising the ability to make the business case for the merger. As it was, this incident caused a lot of escalations and upset people to the nth degree. This is the kind of thing that exacerbates the fear of change that people are already experiencing, and can turn sentiment against the new go-forward company.
It’s somewhat laughable, and at the same this real life example illustrates why you need to pause and think about the nuances of buying indirect goods. This might not be the first on the minds of the finance or M&A teams, so you won’t see them getting too involved in it, but it is a huge lever for immediate and sustained value. The scary truth of the matter is that the operational elements of deals oftentimes aren't well examined or thoroughly thought through.
In order to facilitate that activity, it's very beneficial to have an experienced procurement organization, or a person who's executed these transactions in the past, involved and leading the effort. The goal should be to quickly consolidate, centralize, and efficiently scale back office functions to best capitalize on the combined organization’s leverage in sourcing and contract negotiations. You also have to have the right tools in place to operationalize it from day one.
Examine the Contracts
The first assignment is to look at is what the target company is spending their money on (discrete spend categories), and what contracts are in place, so you know what is most critical to address once the deal closes.
Once the business critical contracts--goods and services that potentially can shut down or cripple daily operations--are identified and renegotiated and/or renewed, the remaining contracts of both companies need to be evaluated to see where there is overlap, risk and opportunity.
You may be able to use your combined buying power to get better discounts. And you may need to structure some contracts much differently. For example, maybe you have a software license for 150 seats now, but you’ll need 225. You will have to pay for these licenses before you can use them, and there could be penalties after the fact if the contract is not done correctly.
Who Buys What?
Examine both procurement organizations. How can they combine most efficiently? What are the roles and responsibilities? Who manages what categories?
Identify who the buyers should be in the go-forward organization and the budget(s) that will be allocated across the organization. That way on day one, someone can buy toilet paper for the factory, but probably not the same person who’s allowed to buy another production line or a big piece of machinery.
You also do not want to overlook the need to review company issued credit cards. It can be a very scary situation to walk in with no understanding of who has credit cards and who has been authorized to issue new ones. This is basic discipline in any organization, but it gets elevated in a merger or acquisition. It can get pretty ugly when it’s discovered in an audit that people no longer with the company are still receiving credit cards, or worse, are still authorized to issue them.
Figure out who has them, how you control them, and who is the decision maker to issue them going forward. Otherwise, you could end up in a situation where you have new products to sell, but the sales force can’t figure out how to take a prospect to dinner. You can probably default to a previous system, but it’s better to have this figured out ahead of time so you can avoid friction and start capturing savings.
Have a Tool in Place
Ideally, you need a scalable procurement tool in place to drive this operational capability. This is where the contracts are housed, and you can see price points and volume and who's assigned ownership for a particular category. Having the capability to see that data in the system across the full organization is absolutely critical.
It’s a necessity to have a cloud-based tool that can be configured and deployed very quickly to get everyone on the same page across the organization, no matter where they’re located. If everyone can convert onto whatever system you're using in an organized manner right after the transaction, you can start accruing savings that much sooner. Without such a tool, this would be a difficult, time-consuming and largely manual effort that will eat into any economies of scale you were hoping to achieve.
Making the Business Case
Much of this has to do with how to manage day-to-day operations, so it’s not seen as strategic, but it really does tie back to the financials of the business case. Some aspects of these are examined more thoroughly than others.
The marketplace, the product line and the profitability of each of the products, the customer list, and the accounts payable are all studied in detail. It’s rare for anyone to ask, "Have we maxed out all the contracts that procurement buys?” Yet this is one of the most immediate and controllable ways to realize a positive impact in the near term.
No one can say for certain that the accretive revenue goals of a merger or acquisition will be achieved, but on the savings side there's always going to be a back office number that somebody pushes a pencil to. As soon as both companies start operating as one, you have people buying direct and indirect goods. If you gear up for a successful day one launch, rather than being surprised at what you’re running into on an operational basis, you can start accruing the budgetary savings from the business case right away.