Printer Friendly

With acquisitions, procurement planning pays: with the proper procurement planning, companies can produce 40 percent more value in their acquisition activity in the first year. It's not a a fairy tale, though the story is reminiscent of the Wizard of Oz.

Once upon a time ... There was a time when corporations could rest assured that if they had done their due diligence and selected acquisition targets with good potential for return, they would eventually reach the "Emerald City" of realized synergy targets. Unfortunately, in recent years many have struggled to extract that hoped-for value. A. T. Kearney's analysis of 50 deals that closed between 2006 and 2008 revealed that over half failed to improve Total Shareholder Return (TSR) relative to the market within two years following close of the deal. These findings are in line with broader industry research, now spanning several decades, indicating that the majority of mergers fail to achieve synergy targets.

Fortunately, some mergers are successful. And there are some common elements among those that do succeed--prominent among them is the early engagement of procurement. Corporations that engage the procurement organization strategically and early in the merger process will deliver powerful cost savings in Year One. Over and above that obvious benefit, these Year One cost savings play an important role in signaling success to the markets.

Follow the Yellow Brick Road

While there are plenty of flying monkeys along the way to hinder merger success in our complex, global and highly competitive economic environment, the road is paved with a few reliable indicators of success. Among the deals that actually did create value in our analysis of recent mergers, those that targeted procurement benefits had higher average TSR than those that omitted procurement. There was also a significant correlation between strong TSR and the practice of publicly announcing and reporting on synergy targets.

We have found that those deals most effectively targeting procurement, and thus having synergy benefits to report, had three key components:

* The courage to start before close.

* The brains to sort out complex spend taxonomies and identify the true areas of overlapping spend.

* The heart to go beyond simple contract comparisons and unilaterally adopt the practices of the acquirer.

Let's take a closer look at each of these qualities.

Courage

While it may seem less risky to take a wait-and-see approach to merger planning, executives face an uphill battle if they wait until all of the "i's" are dotted and "t's" are crossed to begin merger integration activities. Procurement leadership must have the courage to move quickly and begin supply management planning as soon as possible. Because many synergies require a relatively long time to realize, procurement often provides an especially important source of early success.

Whether for procurement or for other types of synergies, there is no substitute for starting the integration process before the deal is closed. Yet while pre-close planning will both accelerate and amplify procurement synergies, it can be challenging to execute. One challenge is adherence to legal requirements that prohibit sharing of confidential information before the deal is closed, which includes many of the basic elements required to build a baseline understanding of procurement opportunity.

To ensure legal compliance, a clean room is often established to begin merger planning while protecting confidential information. The clean room team is invaluable in identifying and confirming synergies and beginning the plan for Day One. When an effective team is operating in that pre-close, clean-room environment, we typically see implementation of integration plans start four to six months earlier and capture 40 percent more value in Year One.

Brains

Companies often estimate synergy benefits across merging organizations based on approximating a rough savings level (e.g., high, medium, low) to budget line items. While this may be sufficient to prioritize initial areas of focus, it falls short with complex spend categories. In all but the simplest areas, developing a robust merger supply strategy requires understanding the category at a deeper level. This usually involves establishing a common spend taxonomy between merging companies, extracting information from disparate financial systems, normalizing spend categorizations, building a combined spend cube for the merging entities, and mapping spend in major sub-categories.

The spend cube is a powerful decision tool that links purchasing and accounting data sets and organizes around market-facing spend categories. Spend cubes can help answer questions like how much and when money is spent, what goods and services are purchased, which groups are making those purchases, the level of supplier consolidation in a category, and existence of mega-suppliers that span categories. The most sophisticated cubes incorporate meta-data for categorization, fuzzy logic normalization, and detailed pricing and contract information that can better inform prioritization decisions. The bulk of this type of decision making and analysis can be completed in a clean room environment, before the deal is closed.

Heart

Once a clean room is established and a combined spend cube is created, it may seem as though the difficult work is done and that a straightforward contract comparison will identify procurement synergies. However, comparing contracts between acquirer and acquired for similar purchases and picking the one with the lowest price is rarely enough to deliver significant value. Mergers that achieve the highest returns go beyond the simple contract comparison to application of bi-directional synergies based on the application of quantitative and qualitative best practices across both companies.

Rewards from the spend analysis are realized when normalized data can be broken out for side-by-side comparison across the companies being merged. This makes it easier to identify situations where the combined new company would be:

* Paying different prices for the same items.

* Using the same suppliers for some goods and services and different ones for others.

* Giving business to non-preferred suppliers.

* Using far too many vendors to effectively leverage purchasing power.

The benefits of undertaking an in-depth spend analysis--as opposed to simply conducting a quick contract comparison between organizations--are enormous. In one situation we know of, it resulted in cost savings exceeding 60 percent.

Behind the Curtain

In addition to a robust Spend Cube decision tool, the clean room team will gather historical information on spend category strategies, contracts, purchasing processes, and supplier performance metrics. The clean room team can then develop negotiation strategies and ready-to-launch RFPs that are ready to execute on Day One, if not before. In addition, synergy summits can be conducted during the pre-close months that contribute to strategy development, implementation planning, agreement on benefit tracking and budgetary adjustments as well as overall consensus building. All of this has to be done in collaboration with legal counsel and in coordination with other merger integration efforts--while continuing to run each business involved in the merger in as close to "normal" fashion as possible.

Kish Khemani (kish.khemani@ atkearney.com) is a partner with A.T. Kearney and Brent Ross (brent.ross@ atkearney.com) is a principal with A.T. Kearney, both based in Chicago. A.T. Kearney consultants Mathias Wiecher, Michael Phillips, Joe Blount, and Jay Raghavan also contributed.
COPYRIGHT 2013 Peerless Media, LLC
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2013 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:The OPERaTIONS ADvANTAGE
Author:Khemani, Kish; Ross, Brent
Publication:Supply Chain Management Review
Geographic Code:1USA
Date:Mar 1, 2013
Words:1123
Previous Article:Transpacific chief shoots from the hip.
Next Article:What users want from software leaders: here's what analysts, supply chain pros, and a recent SCMR survey say customers want and expect from the...
Topics:

Terms of use | Privacy policy | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters