RESEARCH REPORT
Driving outsized returns from procurement in private equity
5-MINUTE READ
December 2, 2024
- Almost all private equity leaders (84%) seek to drive operational value through procurement.
- While some value is being wrung, the results of these efforts are often one-time and suboptimal.
- Four guiding principles separate the leaders from the pack and help firms generate outsized returns from procurement.
The strategic power of procurement
As dealmaking has slowed and generating expected returns has become harder, private equity (PE) firms have swiftly adjusted their strategies in response. According to leaders, 79% of a firm’s efforts now target operational value creation.
Among the many potential value creation levers to consider in this environment, few are as immediately measurable and impactful as procurement. In many cases, procurement can deliver an 8–12% cost reduction of direct and indirect spend in a matter of months, not years, generating positive momentum while freeing up capital for reinvestment in other value levers.
However, while getting started with procurement is relatively straightforward, generating sustained outsized returns is not.
84%
of PE leaders seek to drive operational value through procurement
58%
admit that driving value through procurement isn’t easy
The suboptimal value creation is primarily due to four reasons:
- There's insufficient early focus and analytical groundwork performed pre-close and during due diligence.
- Efforts often don’t go beyond the low-hanging fruit—tough negotiations and requests for proposals (RFPs).
- Without a tailored playbook and adequate resources, firms are unable to deliver value from procurement consistently.
- The hard-earned savings that are realized in year one after closing tend to slip over the course of the investment hold period.
We outline four guiding principles that separate the leaders from the pack.
With procurement being a low-risk, high-return play, how do you realize its full value potential?
01
Kickstart your gains
Leading firms set their procurement value creation plan in motion during the due diligence phase.
Investments where procurement opportunities are identified early are 70% more likely to capture significant procurement value. The best time to act is within the first 100 days, with goal setting and initiative planning beginning during due diligence or immediately post-close. In most cases, procurement initiatives have few dependencies and can be executed immediately in parallel with other high-priority efforts.
02
Use the full spectrum of tactics
Delivering full potential value requires more than just tough negotiations and RFPs.
Savvy firms know there is more to procurement than chasing lower prices; they tap into a wider set of non-price levers to drive real, sustainable value. True impact comes from including commercial levers like value-based deal constructs, as well as non-commercial and technical levers. Applying the full suite of advanced procurement techniques can deliver up to 3x higher savings across the investment lifecycle than focusing on price alone.
03
Craft a winning playbook
Don’t simply wait for procurement opportunities to reveal themselves within your portfolio—create them.
A third of the value potential is lost by not having a proven, repeatable procurement playbook. While playbooks should take a holistic approach addressing all key levers, they should also be customized to the specific needs of the industry the portfolio company operates in and the situation at hand, like available in-house resources and the PE management team’s intervention posture. Preparing a few application archetypes from a longer menu of options can enable teams to deploy a tailored approach at speed.
04
Solve the talent puzzle
Portfolio companies often lack the resources, expertise, technology and confidence to pursue procurement opportunities on their own.
A procurement talent shortage, especially in the mid-market, is posing a challenge. Of companies with revenues below $5 billion, only 10% had a senior executive in a procurement role. Thinking about the right way to resource these value creation opportunities is critical. But it’s not just about hands on keyboards. Leveraging procurement technology like (generative) AI can accelerate value realization, address portions of the spend stack previously deemed too labor-intensive to optimize and ensure savings reach the bottom line.
AI can help address procurement skills shortages through its potential to automate and augment tasks for key roles. (% of tasks impacted by AI)
Unlocking hidden value
As PE firms evolve their approaches to reshape their portfolio companies more profoundly than ever before, procurement is a fundamental yet underutilized value lever.
Leading firms know that optimizing their procurement approaches for speed, scale and effectiveness not only boosts margins but also frees up capital for reinvestment in other value levers—driving further returns and profitable growth.
