By: Vel Dhinagaravel --
01 June, 2015
In the past twelve months, more than $1 trillion worth of deal activity was announced in the U.S. Â Most of these transactions have been justified based on a significant amount of procurement driven synergies. M&As are therefore great opportunities for procurement to take center stage and Â address certain structural improvement opportunities with respect to supply base rationalization, spend elevation, etc. However, in most cases quick wins are prioritized over these activities. This has led to several large companies today having an "undigested" supply base!
However, today I wanted to write about procurement's role in the case of splits or divestments. Several large corporations have split/announced plans to split - Kraft Foods, HP and DuPont are a few examples. In many ways, the two companies that are split out have the same amount of complexity -- but they can only afford half the overheads.
When cost goes up as percentage of revenue, then the expectation to improve upon the baseline goes up as well. For example, if you are at 1 percent of topline in terms of procurement cost, you might have 5 percent savings target. Now, post-split, if you are at 1.5 percent then the expectation would be to deliver even more bottom-line impact. Another challenge is that divestitures may not be uniform; one company may have a faster growth market while other one may be exposed to slower markets. So procurement organizations will have to split by such attributes, which is no easy task.
One connected point - Several deals in the past few months have been structured as tax inversions involving the shift of tax jurisdiction to a lower tax regime than the U.S. (typically the UK/Canada/Netherlands/Switzerland/Ireland). One thought that I had - Given the opportunity to create tax efficiency through the creation of a procurement company, could this be a much less expensive/disruptive way to bring about the same impact?
Further, with an increased number of activist investors launching campaigns demanding quick shareholder returns, I believe that an effective procurement organization that delivers a market beating cost structure is one of the best defenses against activists. I would encourage CPOs to ask for additional investment in procurement as an insurance policy against the massive disruptions/distractions associated with activist campaigns.
Clearly, Procurement is going through an evolutionary phase; gone are the days when Purchase Price Variance (PPV) was the main agendaâ€¦but not anymore. The metamorphosis of procurement will eventually lead to Category ManagementÂ and "Benchmarking against Competition".
Procurement has the power to deliver strategic value to the corporation. And challenges notwithstanding, they have an opportunity to showcase their strengths amidst the continuing wave of M&A, divestitures and activist campaigns.