Private Equity Alert: Time to Take Action on “Under the Radar” Expenses
As we discussed in “Do Traditional Portfolio Management 'Tools' Provide Real P&L Relief?,” many private equity enterprises deploy a “toolbox” of strategies designed to drive cost reduction and efficiencies for new portfolio investments.
“Toolboxes” tend to include strategies for implementing better contracts and driving corporate cost control through leveraged spend across expanding portfolios. These strategies work well in many categories, achieving the desired cost reduction and supplier base efficiencies.
However, “under the radar” expenses—representing relatively low spend volume priority—tend not to receive the same attention as they would if procurement resources were more robust. This should raise a red flag for profit-minded portfolio managers as these categories—if managed efficiently and successfully—can be fantastic sources of real, lasting P&L relief.
If your portfolio includes industries such as manufacturing, food processing, retail, pharmaceutical, automotive, and/or chemical, you should be on high alert specifically to opportunities in a handful of indirect service categories where the best efforts of your procurement teams tend to fall flat.
Classic “under the radar” expenses: uniform rental, waste disposal, pest control, and security & guard services
For a plant to operate, the uniform route-driver, waste hauler, pest control technician, and security guard have to—at the very least—show up for regularly scheduled service.
The uniforms must be delivered. The waste must be hauled away. The pests must be eliminated. The building must be secured.
When the contracts in these categories are about to expire, there is a brief moment in time when these expenses command a category manager’s attention and move to the top of a busy buyer’s list of priorities. Here’s the problem—that focus never lasts long in a lean procurement department.
Once a new agreement is signed, or a renewal/extension is granted, the buyer inevitably returns to a focus on higher priorities.
This strategy—if you can call it that—is entirely reactive: an impending contract expiration demands attention. A new commitment is made. Attention moves elsewhere until it is demanded again.
This weakness is an inevitable cost of having lean procurement departments.
In lean procurement departments, we’re finding many buyers are only working on that which is completely non-negotiable at any moment in time, and they’re lacking anything but a reactionary strategy for most of their portfolio of expenses—especially the “under the radar” expenses.
We often hear: “I can’t discuss that category, I am working on MRO,” or, “I’m currently working on energy,” or, “I’m working on logistics, so I couldn’t possibly look at that right now.”
All of this translates to: “I don’t have a strategy for the stuff I’m NOT actively working on at present.”
As portfolio managers—ask the tough questions!
It’s our recommendation to P&L owners to ask your procurement team members the following two questions:
- What categories are you deeply immersed in right now?
- What’s your strategy for the categories in which you’re NOT deeply immersed?
Odds are, you won’t be terribly impressed with the answer to #2, and a teachable moment may emerge.
We often say that procurement leaders can be good at their job by doing good work across their biggest priority categories.
However, to be great at their job requires a strategy across the entire spend portfolio—even the categories they aren’t actively working on at present.
In environments where procurement is increasingly asked to do more with less and you’re constantly seeking EBITDA improvements across your investments, having a strategy across all expenses—not just the highest priority categories at only this moment in time—must be non-negotiable.