In short, the answer is Digital Procurement, as reflected in a recent article by McKinsey: Digital Procurement in Private Equity (see here
). Leading private equity firms are achieving step-changing improvements in earnings before interest, taxes, depreciation, and amortisation (EBITDA) within six months by turning to digital tools and advanced analytics to drive comprehensive, digital procurement transformation.
However, not all digital procurement tools and approaches are created equal. There have been numerous advances recently in enterprise technology and, for most portfolio companies without a prior track record of digital procurement transformation, sizeable opportunities commonly exist in at least one of the areas described below.
Sourcing & Category Management Excellence
To identify cost-saving opportunities and to monitor company-wide expenditure, finance and procurement professionals require detailed and holistic spend visibility. Modern spend analytic solutions not only bring together data from various sources, they leverage machine learning capabilities (ML) to reliably categorise and enrich even poor data - bringing granular spend visibility across categories and business units.
This ensures that commercial professionals can focus their efforts on identifying opportunities such as spend consolidation and cross-portfolio synergies, as opposed to wasting time 'wrangling' data. Where applicable such solutions also provide the required granularity to support and accelerate advanced approaches such as zero-based-budgeting (ZBB) initiatives.
An early adopter, a global PE firm, started using a digital spend analytics tool in 2005, achieving significant savings by consolidating and analysing spend data across its portfolio companies to identify synergies and negotiate preferred pricing agreements. Once established, adding and analysing new portfolio company’s data to the 'spend cube' can be achieved with minimal effort.
Digital Buying / Purchasing
Unproductive expenditure and inadequate budget adherence are typical pain points for any organisation. It is critical that all company expenditure, regardless of category, is captured via approved buying & payment channels, compliant with applicable policies, approved as required and ideally checked against available budgets prior to making a commitment with an external supplier. For most organisations without a user-friendly digital buying application this remains a significant challenge, resulting in millions of dollars of avoidable, unproductive expenditure.
Modern cloud-based purchasing / buying applications not only ensure the accurate accounting of transactions, they provide a consumer-like user experience, elegantly and efficiently guiding business users through the process. They automatically apply relevant policies, funnel spend to preferred pricing agreements and ensure the required budget checks and approvals are completed in advance of any commitment. Most importantly, they lift overall productivity and employee experience by ensuring that all business users can efficiently procure what they need to get their job done.
A large Australian service provider was able to significantly increase the productivity and employee experience of their customer-facing maintenance teams through a mobile accessible digital buying application, eliminating hours of weekly paperwork. This, in turn, translated in significant bottom-line savings.
Electronic Collaboration & Transactional Automation
Procurement has traditionally been associated with inordinate amounts of paper. Some improvements in this area have included the digitisation of physical and electronic documents or supplier specific system-to-system connections using electronic data interchange (EDI). But this often fails to achieve the sought-after efficiencies & scale.
Leading organisations fundamentally change the way how they collaborate with their suppliers, leveraging smart, digital business networks to truly achieve sustainable efficiencies at scale. These represent large, trillion-dollar marketplaces such as the SAP Ariba Network, that provide a variety of new capabilities: automated business rules, flexible supplier connectivity options and enriched information exchanges, to cater for all suppliers and a broad range of transaction types.
Private equity-backed WINC Australia have turbo-charged their supply chain operations by leveraging the SAP Ariba business network to electronically and efficiently exchange supply chain transactions with their suppliers. 75.6% of such supplier transactions are now touchless, removing transactional friction from the supply chain and allowing WINC to delight their customers with 96.8% of orders being delivered the next working day.
According to the Harvard Business Review, intangible assets such as brand equity and goodwill account for 70-80% of a company’s market value – making a company’s reputation a critical asset. With an average of 50-70% of a company’s cost base being related to external suppliers, external suppliers arguably play a critical role in maintaining or breaking that reputation. This critical importance is amplified by recent legislation such as the Australian Modern Slavery Act, which on a name-and-shame basis demands companies to publicly report on their understanding of exposure and efforts to combat modern slavery.
Organisations that lead in this space capture and maintain more information from their suppliers using supplier self-service options and they overlay third-party information to enrich their supplier information. This enables them to gain and maintain comprehensive insights in relation to their supplier risk exposure across a broad range of impact areas – environmental, financial, ethical, operational and regulatory – to proactively avoid or minimise potential impact.
Such capability allows PE firms and their portfolio companies to achieve more control over their reputation and demonstrate corporate responsibility leadership in the marketplace.
If you’d like to know more about SAP’s work in this area, as the world’s leading digital procurement organisation, and for additional information, please contact Dima Ceban, SAP Australia Pty Ltd (email@example.com
) and Christoph Guettinger, SAP Intelligent Spend Management (firstname.lastname@example.org