Many private equity enterprises deploy a “toolbox” of strategies designed to drive cost savings and efficiencies for new portfolio investments. Reduced operating costs and more efficient resource allocation are, in many cases, already assumed as a justification for the deal in the first place. Even more, with an eye to future transactions, the impact of the effectiveness of these “tools” can be magnified by future earnings multiples—IF those assumptions actually materialize post-acquisition and produce real, lasting P&L relief.

That’s a big IF.

Most portfolio management toolboxes revolve around putting better contracts in place for newly acquired businesses. Sometimes this involves the use of an outside sourcing partner, and sometimes this is done by in-house portfolio management resources, who implement supplier agreements that leverage spend across the portfolio. These are sensible strategies and surely produce results in many areas.

However, there are certain expenses where better contracts do not automatically produce positive P&L impact. There is a phenomenon we at Fine Tune refer to as “good contract, bad deal”, which we have observed for years within certain complex indirect expense categories.

We specialize in a handful of these categories which we refer to as “nuisance expenses.” Specifically, we’re deeply immersed in the uniform rental, waste and recycling, pest control, and security services industries; all are incredibly complex industries, and effective management tends to take more of a category manager’s time than can be justified on these lower-tier expenses.

In these categories, all of the following phenomena erode negotiated savings and render new supplier agreements less and less competitive:

• Agreements are not implemented properly, immediately costing you some of the P&L relief you expected.
• Suppliers immediately deploy counterstrategies to erode the cost savings you should have realized. These counterstrategies include (but are not limited to):
  • Billing for products that don’t actually exist at your locations
  • Billing for inventory quantities vastly higher than actual inventory in your accounts
  • Adding new line item charges not contemplated in your agreements
  • Adding off-contract products and services to locations that aren’t needed and weren’t requested by field contacts
  • Selling high-margin new products and services to field contacts that do not have authority to add them
  • Providing “free trials” of products, not removing them after the trial period ends, and then billing for them indefinitely
  • Running site-level price increases not allowed in your master agreements
  • Performing high-dollar, frequently unnecessary one-time services
• Your field-level resources—whether in procurement, operations or accounting—don’t have the subject matter expertise or time to recognize these phenomena as they’re occurring. As a result, they tend not to be “engaged in the joust” with your suppliers—or they’re engaged minimally at best, and are likely losing the joust.

As a result of all these activities and realities, the effectiveness of your toolbox is quickly eroded in these “nuisance” categories.

Without dedicated and vigilant management of these categories, those better agreements won’t be worth the paper they’re written on, and you’ll find yourself with a good contract in a file folder on your computer, and a bad deal in reality

What can you do?

Think of all of the expenses your portfolio companies incur as falling somewhere on a spectrum, with “simple widgets” at one end and “complex services” at the other. Your toolbox is probably most effective at the “simple widget” end of the spectrum. With these expenses, better agreements should actually move the needle, because there are fewer factors eroding your efforts after the deals get done.

However, at the “complex service” end of the spectrum, your strategies must go beyond the implementation of better supplier agreements. Without dedicated and vigilant management of these categories, those better agreements won’t be worth the paper they’re written on, and you’ll find yourself with a good contract in a file folder on your computer, and a bad deal in reality.

Identify your most complex indirect services—typically expenses involving multi-year service contracts—and find solutions that extend beyond procurement to actual expense management, including continuous auditing and optimization initiatives. This is the path to the sort of P&L impact you’re seeking with each new acquisition.