Why Growing Businesses need Procurement too

Why Growing Businesses need Procurement too

A common misconception is that procurement is only for businesses “in trouble” or businesses which have plateaued, won’t grow and need to improve profits by cutting costs. Whilst it applies to these businesses procurement and savings are extremely effective and beneficial for growing – or planning to grow – businesses.

Our current clients include all three types and the only difference between the growing ones and the others is that the growing ones didn’t leave it too late!

So, why do growing businesses need good procurement and what are the benefits.

Let’s work through a growing business’s life cycle and illustrate the case.

A shrewd individual gets a hunch about a gap in the market, starts a business and it’s exciting, up-and-down, punishingly hard-work, cashflow’s tight and the owner(s) know where every penny goes. They negotiate all supply deals themselves, haggle like hell and the business grows and builds a reputation. Maybe it makes an acquisition and the top-line sales keep growing. Analysts at Private Equity houses take an interest as do competitors and all of a sudden the owner’s getting offers and life’s looking good. Private equity has big plans for this business and the owners sell it to an ambitious management team backed by an even more ambitious private equity team or a slightly less ambitious trade buyer. So far, so good and if the business has always maintained sound & innovative procurement practice even better. However, that’s unlikely and if it hasn’t and doesn’t then the success story can falter and fantastic opportunities can be lost. We’re not saying every business lives or dies by its procurement – although House of Fraser may prove otherwise – but unfortunately, we see lost opportunities all the time and here’s 5 lessons about what’s missed:

  1. Acquisition Valuations are Based on Profits (Earnings)
  2. Eyes on sales not costs
  3. Supplier Base needs to Adapt to Growth
  4. Procurement due diligence ignored
  5. Changes to procurement too late
  6. Growth costs cash

Acquisitions are Based on Profits

When procurement delivers cost savings 100% of these go to to increase profits whereas only 5-10% of sales go to increase profits. The effort to bring-in sales is enormous and uncertain much more-so than delivering savings. Business valuations are more-often-than-not based on profits so on an exit p/e ratio of 8 a saving of £1 increases the value of the business by £8, whereas an increase in sales of £1 increases the value by 40-80 pence.

It’s the same post-acquisition; if a new management team, Private Equity house, trade buyer is looking to increase profits it’s quicker and easier to start with costs and then let sales build over time.

Eyes are on Sales not Costs

The business grows and all the emphasis is on growth, which is fine while growth continues but once it falters or falls – and it always will at some point – that increased cost base becomes a huge burden. This is especially true where the drop in sales isn’t predicted…Brexit, internet’s impact on high-street retailers etc. Drastic steps are needed and that takes time and hits morale, will the business survive, will suppliers support it, where will profit growth come from?

It’s not just about survival. We see a lot of instances where a growing business hasn’t appreciated that as it grows it’s giving more and more business to its suppliers without stepping back and re-negotiating deals based on increased volumes. Sales are growing but margins are staying the same and suppliers are laughing all the way to the bank. It’s also awkward to negotiate with suppliers who’ve been with he business a log time and with whom there’s a strong bond. That’s when you need a 3rd party to look at it objectively and without any baggage

Supplier Base Needs to Adapt to Growth

It’s very tempting to stick with suppliers who supported the business in the early days. However, the right supplier for a £1m turnover business, isn’t necessarily the same for a £10m or £100m business.

Those suppliers who were loyal in the early days will constrain your growth if they can’t support you. Do they want to grow? They can stifle innovation by stopping you looking outside. There’s also something we hear a lot “our business is unique and there aren’t any other suppliers out there.”) Firstly that’s never true and secondly if it were true you have a very big problem and need to find/develop an alternative supplier…

We also see businesses with a huge number of suppliers that have been collected over the years and need consolidating. That 80% tail of suppliers adds little value and slows processes, costing money. And, by the way has the business

Growth Costs Cash

Let’s not forget that growing businesses burn cash, ask any tech entrepreneur. If you can raise some of that cash from costs savings, better terms with suppliers etc. it’s far cheaper and easier than borrowing, even in these times of low interest. Even better, you never need to pay it back.

Procurement Due Diligence Ignored

Acquiring companies spend fortunes on due diligence, I know I also used to do the due diligence work and I used to instruct those that did it. All sorts of due diligence; legal, financial, insurance etc.However, very few do Procurement due diligence and I have no idea why not because that’s going to deliver immediate synergies. In fact it’s actually going to deliver something worthwhile rather than just protection.

Many companies leave it to the Finance Director ignoring the fact that you need a procurement expert. I’ve been a Finance Director and met many very good ones but they have very different skill sets than a good procurement person and it’s the procurement person that will really tell you where the savings are.

Changes to Procurement too Late

Finally, growing businesses will stop growing one day and they don’t know when that will be. It’s often only when the party stopes that they begin to look for profits growth via savings. By then they’ve missed the most opportune time and spent much more than they’ve needed to along the way.