Procurement considerations when dealing with a merger?
Aside from the basics of spend analysis and eliminating redundancy, I'm curious to hear of other's experiences in dealing with merger/acquisitions and how the cultural elements were addressed in terms of promoting the use of preferred vendors and the adoption of expense management policy.
What are some best practices to promote optimal adoption of the governing policies and procedures in the absence of spend management technology?
Answers (6)
Jon W. H
Writer and Speaker at Procurement Insights
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In Part 4 of my Changing Face of Procurement Conference Series titled Winning Strategies for Vendor Engagement, I briefly discuss an M&A case reference involving organizations within the confection or candy industry. I also make reference to it in the critically acclaimed series Yes Virginia! There is more to e-procurement than software (Part 2) - see the link in Web Resources.
Under the heading "Candy and upply base synchronization" I wrote the following:
How important is effective internal collaboration? Just ask a candy company in the U.S. mid-west. As the manufacturer of a number of leading brands, this organization grew dramatically in a very short period of time through a series of acquisitions. Unfortunately, an extemporal supply base was a byproduct of the transactions leaving the acquiring company with a highly suspicious, deeply segmented group of suppliers.
The biggest challenge as expressed by a senior procurement manager for the parent organization was convincing the former suppliers of the acquired companies that becoming part of the larger pool would expose them to opportunities for increased sales.
The suppliers weren’t buying the “increased opportunity” mantra and as a result, the transition process was challenging to say the least.
What is worth noting is that the degree of collaboration between the different purchasing organizations was not clearly established from the beginning. This only served to fuel rather than douse the internal division fires resulting in both a practical and operational lack of cohesiveness and coordination. The end result was a “territorial” struggle that manifested itself in a divided supply base. This is hardly the ideal environment for a successful consolidation. (Note: my August 3rd post titled Procurement’s expanding role and the executive of the future reviewed the results of a panel discussion hosted by CPO Agenda. This will be a worthwhile read as it demonstrates the potential repercussions of excluding supply chain personnel in the early planning stages of an organization’s acquisition strategy.)
What this as well as countless other examples of failed initiatives clearly demonstrate is that effective channels of communication and collaboration between diverse stakeholders both within and external to an organization determines the liklihood of a collective "best result" outcome.
If the organization to which your are referring is found wanting in this critical area, then no amount of data or spend management technology will make a difference. If it did, then 85%of all e-procurement/supply chain initiatives would not fail.
Ihave also included corresponding links to related articles on the disconnect that exists between purchasing and finance as well as the myth of vendor rationalization.
I hope that this helps.
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Robert S
Senior Director, Program Management at CA, Inc.
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Paul,
From a operational 'pain point' perspective:
Who owns Procurement at the highest functional level? Finance, Operations, etc. This may determine who comes out on top AFTER the merger and the culture.
Politics are huge - don't underestimate the jockying for position between the various middle managers of bothfirms. Yes they are all working together - but a merger is also the opportunity for old greivances (both inside the companies and with suppliers) to show themselves. For some it will be an opportunity - others view everything as a threat.
Be upfront with the issue of change, have a lot of meetings,to communicate changes, etc. Expect some folks to be passive agressive, actively fight (almost like a rebel group) and others to just start building their own 'new' systems during the transition as well.
If possible, having new policies in place - such as the required use of a supplier or system - and publishing them in a company-wide communication helps.
It's not easy by any means - but things tend to settle out about 6 months after the merger.
Thanks
Rob
Paul,
During the HP/Compaq merger managers from both companies came together and defined the opportunities for "value capture" or in layman terms cost reductions. These managers also identified the best practices or processes, systems, and metrics that would be adopted by the merger of equals. In some areas HP processes and systems were chosen and in others Compaq processes/systems were superior. Once these decisions were made and the cost savings from them identified, these efforts became part of what were known as "Must Do" initiatives. These were 200 CEO mandated projects for which there was no discussion. I lead one of these 200 Must Do efforts. It was amazing how something as simple as a classifying projects at the CEO level as "Must Do" eliminated all the bureaucracy and confusion. There was also a secondary set of projects called “Must Start” which were efforts deemed important but not critical. A single senior executive was then charged with the delivery of the Must Do or Must Start project both in terms of schedule, scope, and resources along with the cost savings to be achieved. There was a merger integration team to which the senior executives were responsible for reporting the status and the actual cost savings from these Must Start and Must Do efforts on a quarterly basis. This approach sidesteps the cultural differences by focusing the team on the goal from the merger which is achieving the stated cost reductions or revenue growth opportunities.
To conclude, classifying your procurement efforts into critical [Must Do] and important [Must Start] along with a monitoring/feedback mechanism [merger integration team] to which the VP of Procurement/Supply Chain, CIO, CFO, etc. are all accountable is one set of best practices to insure your stated goal around a supplier reduction is achieved.
Paul, I think you are quite right to home in on what the newly consolidated spend base looks like post-merger (spend analysis) and also where there is duplication of resources as a basic necessity. The spend analysis should be fairly easy to do by interrogating the accounting systems and in the absense of spend management technologies which would do eg DUNS mapping for you you would need to recognise similar suppliers from each legacy company to provide a consolidated view of your top vendors. A supplier forum might then be in order to provide them with some messages of what the new company needs of them.
Quite quickly I would then look to arbitrage any agreements that you had in place with both/all legacy companies that you might continue to trade with (and even negotiate incrementally better deals based on the newly combined volumes). This would be to reaffirm the procurement value-add proposition within an environment where there would not doubt be lots of conflicting initiatives being kicked off in various parts of the business all vying for corporate priority and recognition. This would help the case for procurement gaining/retaining governance of spend management going forward, having been seen as a value-adding function delivering the arbitrage savings.
In terms of promoting the use of preferred vendors, what might have been the optimal portfolio of preferred vendors for each legacy company may not still apply for the newly merged entity and it may be that it might be better to revisit who was in the portfolio in the light of revised business requirements. However the key to me is confirming the leadership role that procurement would take for this exercise, using the weight of delivering the short term arbitrage savings that I've described above as a way of winning the right to lead the exercise.
How the organisational structure and appointment of roles within the procurement function is defined should also give an indication of what might be the prevailing culture in the post-merger organisation. This should then give some guidance on what approach to take when looking at what policies and processes to implement for the new organisation. You may already have legacy policies to bring forward; however the new merged company would probably have quite a new identity indeed and it would be better to get a view from the key stakeholders in the new organisation when formulating policies and procedures for the new organisation.
Hope this helps.
Joseph R
Logistics and Supply Chain Consultant and Professional
Best Answers in: Supply Chain Management (1)
It really depends on which side of the merger you are sitting on. The goal of the merger and the philosophy of management involved in the merger may not make a whole lot of “happy campers”. The merger itself will create internal and external trauma even at the most sedate level. Once internal issues have settled the focus will shift to external. I can’t quote you from any book or paragraph I have written. I can only give you advice from the saddle.
“When switching horses in midstream, make sure you pick the one that can swim and worry about the cost of oats later”.
Assured supply at a higher cost can be dealt with soon after. Supply disruption can cost 1,000 times more.
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Dr. Sunny D
Hands on C-level Executive and Entrepreneur,
Best Answers in: Purchasing (2), Supply Chain Management (1), Market Research and Definition (1), Enterprise Software (1)
You have put into limelight an important area of business that is ignored during M&A.
During an M&A, if the two companies have a procurement management sytems and they are same, then it is easy to consolidate. If they are different then comes the hard part, which one to keep.
There are systems like ePMX from Bellwether Corporation that support multiple corporations. These systems can help keep the two entities separate while the Merger happens and then if the departments are merged then you have a single corp system.
