Adding to EBITDA: Lessons from the Private Equity Sector
December 19, 2013
In the current flat revenue environment, where projected GDP growth rates for 2014 fall below 3 percent, CEOs are challenging their senior executives to find new ways to drive growth in EBITDA.
In recent years, Private Equity (PE) firms have become important bellwethers for best practices in bottom-line improvement. Contrary to the popular assumption that PE firms make money by simply slashing headcount and selling off assets, today’s most successful PE firms are focused on a much overlooked part of their organizations to drive EBITDA: Procurement.
Why Procurement, Why Now?
One private equity executive I talk with frequently brings his 50+ CPOs together twice a year to rally around the need to improve Procurement’s bottom line value.
In his last gathering, this executive informed CFOs and CPOs that “effectively managing indirect spend is no longer an IQ test–it’s an employment test!”
Why are leading companies and PE firms focusing more on Procurement as the “last mile” in EBITDA enhancement?
• Pure economics: With companies spending between 8% and 20% of revenue on the acquisition of indirect goods and services, a 10% decrease in cost across the board will bring a bottom line margin improvement of .8 to 2%. All this, without really changing anything structurally about the business.
• Information Transparency: Everyone agrees that–for the consumer–the advent of Amazon and “shopping bots” have driven down the cost of goods due to the ubiquity of pricing information. With such technology-enabled “marketplaces” in the corporate world (think reverse auction), Information Transparency can now have the same effect on B2B commerce.
• Technology Trends. The introduction of cloud computing into corporate America has reduced both CapEx commitments and speed to effectively implement technology-related procurement initiatives.
Are You Prepared for Procurement Transformation?
PE managers are powerful stakeholders in driving organizational change. However, absent this level of top-down influence, Procurement executives seeking to drive tangible results face significant challenges despite the promise of bottom-line benefits. According to McKinsey & Company, about 70 percent of change management initiatives fail. How can you overcome obstacles to your success? The following three questions provide a quick assessment of your preparedness for driving lasting change in your company.
Am I personally committed to organizational change? Much has been written about the desire of CPOs to better align their departments with enterprise strategies. But change can only occur as the result of strong and impassioned leadership. Are you and your department in a position to commit to long term procurement transformation?
Can I gain support from the CEO and senior leadership team? While top-down support is no guarantee for success, it is essential for establishing the visibility and credibility of your initiative. Lip service is not enough. Senior leaders need to be prepared to “walk the talk” in helping to drive organizational change.
Can I motivate front-line managers who ask “What’s in it for me?” This is where most change initiatives get stalled in their tracks. It’s not enough to explain that savings will benefit the company’s bottom line. To drive adoption, you need to understand the unmet needs of your business stakeholders and position your procurement transformation initiative as an enabler for their success.
If you confidently answered “Yes” to each of the three questions above, then you are uniquely positioned to drive change. If, however, your answers are less than certain, we’ll be happy to provide you with some insights and guidance based on Shelby’s many years of experience in helping to drive successful procurement transformation initiatives. Contact us at firstname.lastname@example.org
The Shelby Group