Procurement Goals: The Best Way to Optimize M&A Procurement Services
For many businesses, procurement goals may include a merger and acquisition, and in terms of investment this can be very risky, learn what you need to know to optimize your strategy.
Many benefits come as a result of a merger. From reducing costs and gaining a competitive advantage to opening new markets and creating business value, there is no shortage of benefits to a merger. However, these benefits, or worse your business, can be very short-lived if you do not consider or underestimate the inherent complexities of a merger.
According to a Harvard business review report, the rate of failure among M&As sits between 70% and 90%, so it is safe to say that business mergers are quite a risky investment.
One way to improve the risk of any merger is through a well oiled and running procurement team. A procurement team plays a major role in the success of a merger. So, the best thing that a business can do is to optimize both the team and the procurement process to achieve your desired goals. And here is how.
Optimizing Procurement to Achieve Goals
Optimizing the procurement process is vital to the effectiveness of the merger or acquisition. Even though other factors like flawed legal operations and poor auditing skills are one of the many reasons why M&A doesn’t pan out, they are not as underestimated as a proper procurement process.
1. Set Up A Clean Room
A cleanroom (or M&A software) is the best place to start when it comes to optimizing procurement goals. The cleanroom is essentially a safe room where both parties can assure that there will be no leak of sensitive information. With that conformation, both companies – often along with a third party – can access, share, and scrutinize sensitive information. This third party, which is dubbed the clean team, dissects and examines data all within legal boundaries.
Now, their job is simple, which is to identify the risks associated with this merger, access long term saving opportunities, and finally formulate good integration plans. These professionals can reduce the time to merge buy at times six months. Moreover, the insight that they offer can benefit sectors of the business other than procurement. A good example of this is a cleaning team’s connections to the suppliers and their inventory holding agreements, as well as delivery performance. These connections can prove to be very useful to a company’s customer service and can help in streamlining their cash flow.
2. Assess and Reconcile Contracts
Since the old company will now be under new leadership, supplier contracts for both companies need to be gathered and gone through. Since the acquiring company will no longer be just working on their own contracts and are taking on the load of the other company, the cleanup team is looking for quick wins for the company. All of these contracts coming from the new company are put under the lens of various qualitative and quantitative criteria. So, information like legal clauses about continuity, extension options, exit clauses, evergreen clauses, and commitments is highly sought after.
More importantly, the clean team has to prove itself to both companies so they will pitch in, and reconcile contracts as well. Taking into account current market conditions and new operating practices, the clean will start to identify and resolve discrepancies in the contracts. Discrepancies like pricing strategies and supplier terms and conditions are always a great place for them to start.
3. Determining Synergy Levers
Once the clean team has gone over all of the supplier contracts and analyzes the total cost of ownership, they will move onto planning synergy levers. Synergy levels achievable opportunities for the company. These opportunities can be anything procurement, and a company can follow anyone that they please.
Synergy levers are essential to a company as they kick start a company and set it on a course for at least a hundred days. Once the clean team can determine all of the synergy levers, they will – for lack of a better term – weigh them on a scale of sorts. This scale helps determine just how good a specific opportunity is with the lowest score being none (no or bad opportunity) and the highest being high (significant or bad opportunity).
In other words, determining a synergy level can greatly reduce the time that it would take for the combined companies to start working on objectives. They can also do so with the help of a prioritization matrix.
4. Create An Action Plan
Creating an action plan is one of the best ways that any clean team is able to bring their ideas, or in this case, synergy levers, from the drawing board into proper initiatives to follow. These detailed initiatives act as the foundation upon which the success of the merger or acquisition depends. These action plans take the synergy levers, in their sometimes complicated language, and makes them much easier to understand.
The initiatives need to be simple in their context as well as their meanings. Keep in mind that this is what goes ahead to other members of each company. And although the action plans may be watered-down versions of synergy levers, they are equally important. The action plans will also contain information about why the cleaning team has chosen a specific synergy.
While the action plan will be a little light on the terminology, it will have to cover a wide range of factors such as contract expiration, anticipated savings, and of course, the importance of the business. It will also contain a list of suppliers for negotiation and all information relevant to them.
Procurement is one of the most important parts of any business, especially when it is going through an M&A process. And the best thing a company can do to speed up an M&A procedure is to optimize the overall process. With these optimization options not only will the merger happen faster, but they can also help both companies work better together. Often times during the M&A process, a lack of proper planning or improper mitigation of risks.