Managing Procurement During Mergers

8/11/2019 Managing Procurement During Mergers

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2001 Booz Allen & Hamilton Inc.

Executive Summary

Procurement consistently generates the bulk of near-term savings in merger-integration

efforts. Since a high percentage of mergers fail to meet announced synergy goals, procurementhas been and will continue to be a critical element that chief executives rely upon to delivervalue from a deal.

To succeed, the CEO and the chief procurement officer must begin planning well before theconsummation of the merger. Changes in the merged companys vertical integration, product line,and organizational structure will influence the direction taken by the new procurement function.Furthermore, the merger presents an opportunity for the procurement function to reinvent itself by quickly developing capabilities that will enable it to capture the required savings.

Procurement will be among the busiest functions during merger integration. While it has thesame internal restructuring tasks as other units of the company, procurement also must dramat-ically accelerate its rate of performance to realize targeted savings. The best approach to managingthe work is to follow a phased work plan that focuses first on critical operational issues, then oncapturing synergies, and then on achieving the ultimate value of the merger after the dust settles.

Companies should organize for the merger using a team-based approach that separatesprocurement function design, synergy capture, and Day-One coordination. This distinction helpskeep priorities straight and ensures that nothing falls through the cracks. A clean room canhelp the companies collect and use confidential information without violating laws or subjectingthemselves to competitive disadvantage if the merger fails to close.

Carefully set and managed targets ensure both accountability and cooperation. While top-downtargets are necessary, there are right and wrong ways to establish targets and measure results.

Savings in a merger come from three sources: price harmonization, economies of scale, and

adoption of sourcing best practices. The first provides the low-hanging fruit, while the secondrepresents the value that was generally expected from the merger; however, the third is often thegreatest source of opportunity. The best way to achieve savings is to use a well-structured sourcingmethodology that pursues the opportunities in waves, starting with the easiest first. If procurementis managed well, companies will capture much of the mergers potential.

This Viewpoint is one in a series by BoozAllen & Hamilton on mergers, acquisitions, andintegration. We contend that capturing the value of the deal requires superior execution inaddition to good strategic fit. This Viewpoint offers practical advice and a proven approach foreffectively managing procurement through a merger.


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One of the greatest challenges confronting chief executives

today is making mergers work. Over the past decade,

merger and acquisition activity has dramatically accel-

erated, overtaking entire industries and markets. In virtually every

industry, large and small companies alike now struggle with the

hard duties of post-merger integration. Not every company will

succeed. In fact, if recent history is any guide, most mergers will

fail to meet expectations.

However, for successful companies the spoils are substantial,

particularly in the area of procurement. Whether the merged entity

is a manufacturer or a service provider, sourcing synergies typically

represent a substantial portion of the immediate savings expected

from the merger. Moreover, the post-merger environment presents a

rare opportunity for effecting step-change improvements in sourcing

performance that allow procurement to play a broader, more strategic

role in the merged organization.

Managing Procurement Through a Merger:Capturing the Value of the Deal

A Viewpoint by:

Dorian Swerdlow Harriet EngelTim Laseter Robert WeissbarthScott Cade


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Therefore, companiesconsidering a merger would dowell to focus on procurementbefore, as, and after the dealcloses. This Viewpoint offers

practical advice and a provenapproach for managing procure-ment through a merger. It coversboth the opportunities and thechallenges and suggests howcompanies should organize toextract maximum benefit fromprocurement opportunities.

The Significance of

Procurement in a Merger

F or the past few years,worldwide merger andacquisition activity hasaveraged about US$2 trillionper year. 1 Often announced withgreat fanfare and celebrated byexecutives and analysts alike,many deals have transformedthe competitive landscape of

industries the world over. Butdid they work?

According to recentBooz Allen research, 2 the answeris often no. Among the deals weanalyzed that had closed at leasttwo years previously, 47 percenthad not achieved the expecta-tions articulated in the mergerannouncement. The most commonreasons for the lack of successwere related to poor execution ,

rather than to poor strategic fit.Regardless of the stated

objectives, an acquisition maygenerally be considered to havebeen successful if cost-side syn-ergies exceeded the acquisition

premium. Even for mergers justified by revenue-side oppor-tunities, cost reduction is oftenexpected to pay for the deal bycovering the merger premium.

Since outside expenditurescan account for as much as 50to 70 percent of a companyscost structure, procurement isparticularly fertile ground forpost-merger integration initia-tives. Our research indicatesthat procurement synergies oftenapproach 50 percent of the totalvalue of all synergies realizedin a merger (see Exhibit 1).Horizontal mergers (i.e., mergersbetween companies in the sameindustry) yield some of thelargest and most straightforwardprocurement synergies becauseof similar spending patterns.

Procurement savings tendto include significant low-hangingfruit. Its a great deal easier,quicker, and less painful tocompare supply contracts andnegotiate new prices than it is torationalize infrastructure. Closingplants can take years and costmillions, and layoffs exacta heavy toll on the morale(and sometimes the capabilities)of an organization.

Beyond immediate costreductions, a merger provides theopportunity to drive step-changeimprovement in overall sourcingperformance. The merger itself acts as a catalyst, spurring changes

that might not otherwise occur andaccelerating the rate of change.During merger integration, pro-curement managers expect atransformation in the way they dobusiness. They anticipate goingback to the drawing board and, in

many cases, welcome the oppor-tunity to expand and redefinetheir roles within the company.

That said, securing thebenefits of sourcing synergies

after a merger is not withoutits challenges. Because thesesynergies are often perceivedas easy pickings, procurementoften becomes highly visible ina merger context, as new seniormanagement looks to extractimmediate and considerablesavings. Top-down targets willemerge, often driven by the duediligence efforts of investmentbankers and consultants, whomay lack detailed knowledge of complex supply relationships orinsights into commodity-specificmarket conditions.

For a time, the extra work-load will be overwhelming. In themerger environment, the procure-ment function must examine andrecast every contract, dismember-ing suppliers relationships withthe old companies and forgingnew ones with the merged entity.In addition, there may be substan-tial incremental work associatedwith re-branding. In an airlinemerger, for example, procurementwill need to provide new crewuniforms, deplete the entireinventory of branded consumables(e.g., cocktail napkins), schedulehangar space for repaintingaircraft, and so forth.

Involvement at the CEO

level will be critical to providingstrategic priorities for procure-ment. The two companies maydiffer substantially in theirdegree of vertical integration,leading to make-versus-buyissues that must be resolved.

1 1999 through 2001 data from Thompson Financial Securities and Mergerstat2 Merger Integration: Delivering on the Promise, Research Summary , Booz Allen & Hamilton, 2001


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58%

50%

50%50%

50%

47%

43%

42%

38%

33%

32%

24%

23%

15%

15%

9%

7%

13%

20%

22%

21%

Merger A

Merger B

Merger CMerger D

Merger E

Merger F

Merger G

Merger H

Merger I

Merger J

Merger K

Merger L

Merger M

Merger N

Merger O

Merger P

Merger Q

Merger R

Merger S

Merger T

Merger U

Food Processing

Autos & Trucks

Autos & TrucksAerospace, Aircraft & Defense

Machinery

Transportation Equipment

Autos & Trucks

Autos & Trucks

Autos & Trucks

Transportation

Building Products

Drugs, Medical Supplies & Equipment

Food Processing

Food Processing

Chemicals

Chemicals

Metal Processing

Chemicals

Oil & Gas

Auto Parts

Oil & Gas

Source: Booz Allen & Hamilton

Exhibit 1. Procurement Savings as a Proportion of Total Merger Synergies

The companies will also have toresolve differences with regardto procurements role in thebusiness and reporting structure.Merger-related business changeswill also impact sourcing strate-gies. For example, since entireproduct lines may be spun off after the merger, it would makelittle sense to expend time and

energy re-sourcing a product linethat would soon be discontinued.In addition, site consolidationmay lead to reallocating businessamong suppliers.

Managing ProcurementThrough the Merger

WORK PLANNING

Achieving the full potential of amerger is a lengthy and difficultprocess. Well-planned mergers

are typically implemented inthree phases, focusing first onthe urgent matters of closing,next on capturing the easier syner-gies, and finally on achievingthe full potential of the merger.Procurements activities

throughout the merger shouldfollow this phased approach(see Exhibit 2).

The purpose of the firstphase is to Get Up and Running.During this phase, managementtakes stock of the future com-bined company, ensuring it willrun smoothly through the dealclosure while planning for

subsequent phases.Several critical activities

must occur pre-close to allowoperation on Day One after theclosure. The first is to ensure thatexisting contracts will be effectivefor the new entity. Some contracts


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operational changes will be imple-mented, and critical contracts willbe confirmed or renegotiated androlled out across the company.Teams will be launched to developstrategies for capturing savings

for specific commodities.In the second phase, theprimary objective is to capturemajor synergies. This phase istypically 12 to 18 months long.During this Capture Synergiesphase, many special merger-relatedteams are still in place and ableto pursue opportunities aggres-sively. The synergies come fromprocurement savings as wellas improved efficiency of the

procurement function itself.Management will expect com-modity teams launched after closeto deliver significant savings often amounting to more than athird of the total merger-relatedvalue-creation objective.

have change-of-control provisionsthat specify the contract will nolonger be valid if the customer isacquired. Sole-source agreementscould be in conflict across thetwo companies. In one airline

merger, for example, each com-pany served a different but exclu-sive brand of coffee in return fora low price from the vendor.Clearly this type of situationpresents a problem on Day One.

Another critical pre-closetask is to prepare for any opera-tional requirements imposedby management on the newcompany. Buying supplies tosupport re-branding of acquired

aircraft, crews, and supplies isan example of this.

As with all other functionswithin the new company, pro-curement may need a neworganizational structure. At thevery least, the individual who

will serve as chief procurementofficer (CPO), and those who willreport directly to the CPO, shouldbe selected before the close.Failing to identify leadershipinevitably leads to an inability

to make important decisionsrapidly after close.The pre-close phase is also

a time to get a head start on activi-ties that should be completed inthe early days of the new com-bined company. Such activitiesinclude baselining spending,estimating sourcing opportunities,developing a contract database,and finalizing work plans for themerger-integration teams.

The Get Up and Runningphase generally continues forabout 100 days after close. Duringthis period, the new organizationwill be fully defined, and allemployees will know what their

jobs will be. The high-priority

First 100 DaysPre-Close

Achieve theFull Potential

Capture SynergiesGet Up and Running

First 18 Months End-Game

Develop baseline ofcombined spending

Establish contract database

Document organizationalstructures

Assess current capabilities

Select executive managementand frame new organization

Size available cost synergiesand establish capture plans

Establish contracts and

inventory depletion plans forbranded supplies

Complete contract comparisonsand launch efforts to obtainpreferred terms

Implement transition plans forbranded supplies

Launch inventory rationalization

Reorganize

Launch strategy teams for prioritycommodities

Launch procurement to supportre-branding

Integrate back-office systems

Capture committed mergersynergies

Integrate purchasing processes

Implement sourcing strategiesfor priority commodities

Integrate e-procurement tools

Complete acquisition of brand-identity and equipment-conversionmaterials and services

Fully integrate purchasingprocesses, systems, andorganizations

Embed comprehensive strategicsourcing capabilities

Move beyond committedcost savings

Further reduce costs

Improve product performance

Increase delivery reliability

Support rapid innovation

Exhibit 2. Overview of Merger Work Plan for Procurement



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As the company entersthe third phase, it should havealready achieved substantialsavings and laid the foundationfor a first-rate procurement func-

tion. It will thus be positioned toAchieve the Full Potential of the merger by moving beyondcommitted cost savings anddriving more challengingimprovements in product per-formance, delivery reliability,and rapid innovation. Thesegoals are in addition to furthercost reductions. Activities includedevelopment of differentiatedcapabilities and the institutional-ization of Strategic Sourcingthroughout the company. StrategicSourcing is a widely, yet incon-sistently, practiced methodologyfor systematically finding andapplying sourcing best practicesfor all important purchased goodsand services.

ORGANIZING

Large companies will often havemany Integration Teams tocarry out the work of a merger.

For the procurement function,these teams typically fall intofour categories (see Exhibit 3).

Procurement Blueprintteams design the new procurementfunctions organization, processes,and systems. Blueprint teamsare responsible for identifyingsavings resulting from rationaliz-ing the procurement function orsystems; however, much of theireffort will focus on procurementeffectiveness. Day-One teams areresponsible for ensuring thatthe companies operate smoothlythrough the merger close. SourcingSynergy teams find the savingsrelated to improved buying; theyidentify and quantify the savingsopportunities that result fromthe merger. Commodity-by-com-modity, they conduct the baselineand spending analysis, compare

contracts, and establish sourcingstrategies. These teams areresponsible for capitalizing onthe promise of the merger bydeveloping specific plans to real-

ize savings from scale economiesand improved sourcing.

Because these three setsof teams have to set prioritiesfor their work, they may tendto ignore smaller locations inwhich the company does busi-ness. Each country or regionoften has a different situationand set of challenges that requirea focused effort for which globalcorporate-wide integration teamslack both time and knowledge.Experience has shown the bestsolution is usually to set upcountry-specific teams to handleissues related to those countries.These teams will coordinate withthe corporate-level Blueprint,Day-One, and Synergy teams.Alternatively, some companiesfind that business-unit teamsegmentation works best.

Day-One TeamsProcurementBlueprint Teams

Sourcing Synergy Teams Country or Business-UnitProcurement Teams

Organizational Design

Budget Process Harmonization

Capability Development

Policy Standardization

e-Procurement Strategy

Systems Requirements

Compliance Contract agreements Legal requirements

Ongoing Operations Assurance

Special Operations Support

Procurement TeamLeadership

Baseline and Spending Analysis

Commodity Sourcing Contract comparison Strategy development

Sourcing Synergy

Blueprint Day-One

Exhibit 3. Procurement Integration Teams



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BLUEPRINTING

Many acquiring companies beginthe integration process with theidea that the acquired company

will be folded into the acquirer,basically keeping the old waysof doing things. In our experi-ence, capturing synergies in theefficiency and effectiveness of theprocurement function requiresa redesign of the function thattakes the best of both compa-nies and outside best practices.The first step in this approachis to blueprint the new procure-ment function.

The three key elementsof the blueprint are the organi-zational structure, businessprocesses, and systems (seeExhibit 4). Although blueprinting

each element can be a majorundertaking, speed will be criticalto keep up with the overall cor-porate merger schedule.

Organization: Most com-

panies find that the procurementfunction in each of the twocompanies has a different roleand scope of responsibilitieswithin the organization. Forexample, one companys pro-curement department may reportto manufacturing and have noresponsibility for purchases suchas advertising or travel. The othercompanys procurement depart-ment may report to the CFO andbe primarily responsible forindirect purchases. If managersfrom the two companies havevery different expectations forprocurement, they must adapt to

the CEOs expectations to form acommon vision. As procurementworks out its mission and rolewithin the company, the organi-zational structure will have to be

established, along with a transi-tion plan to migrate to the newstructure over time.

Process: People who havegrown up in one company oftendo not realize how different theprocesses of other companiescan be. Procurement procedures,relationships with internal cus-tomers, and performance metrics,for example, can differ dramati-cally from one company toanother. These differences willhave to be worked out quickly toensure important work does notfall through the cracks after DayOne. Policies such as spending

Systems

Transaction processing

Electronic sourcing and procurement

Knowledge management

Decision support

New business processes Strategic sourcing Business-unit interface Metrics Transactional purchasing

Capability development plan

Procurement policies Spending authority Contract theme Minority/woman-owned

business

ProcessOrganization

New organizations scope ofresponsibilities

New organizational structure Positions

Locations Key managers

Transition plan to new organizationalstructure Selection/hiring and naming Severance and relocation Timing Payroll

Exhibit 4. Elements of Procurement Function Blueprint



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authority, standard contract termsand conditions, and use of disad-vantaged businesses also need tobe brought together.

Systems: Information sys-

tems often emerge as one of themost contentious issues. Eachcompany likely worked long andhard and invested considerableresources to develop its currentsystems. The transaction systemsare likely integrated into largerenterprise resource planning(ERP) systems that are not easilyreplaced. Furthermore, corporate-level ERP decisions will usuallytrump any individual functionalorganizations desire for a partic-ular system. Procurement willhave to work to ensure theirfunction is included as thesedecisions are made. Fortunately,there are systems decisions, suchas those concerning e-sourcing,that procurement will typicallybe able to drive.

BoozAllen has long advo-cated the philosophy describedin Balanced Sourcing ,3 in whichcooperation and competitionare balanced in the companysrelationships with its suppliers.Striking such a balance is noteasy, because the more closely acompany works with its suppliers,the more difficult it is to regularlyevaluate each suppliers com-petitiveness in the marketplace.Companies who successfullyimplement Balanced Sourcing

generally have competence in atleast eight critical capabilities:

Creating sourcing strategies Modeling total cost Building and sustaining

relationships

Integrating the supply chain Leveraging suppliers in

innovation Evolving a global supply base Developing procurement

professionals Leveraging procurement

technology

As soon as possible,management should conduct acapability assessment that willdrive the design of the newprocurement function. As wenoted, the merger presents chief executives with a one-timeopportunity to revisit the basicassumptions upon which sourc-ing strategy rests. The work done by the Blueprint teams inthe first several months after themerger will set the stage for asuccessful procurement functionfor years to come.

In assessing each companyscurrent performance in the eightcapability areas, teams shouldconsider two performancemeasures: capability level andcapability effectiveness.

Capability level measuresthe sophistication of the sourcingprocesses and the degree of implementation across a com-pany. To aid in this assessment,BoozAllen has developed a setof performance-level charts toprovide objective benchmarks(see Exhibit 5).

Capability effectiveness is

a measure of how well specificcapabilities enhance the overallperformance of the sourcingfunction, relative to their cost.Effectiveness should, in theory,follow from the capability level.However, the value of achieving

each of the various capabilitiesdepends on the relevance ofthe capability to the company.Honda, for example, has severalhundred engineers engaged in

the supplier development process.Although the cost of such alarge team is steep, Honda hasmeasured the financial benefitsand the resource usage anddetermined that the return oninvestment for these engineers ishigh. Even though it is difficultto ascertain how one specificcapability contributes to overallperformance, some assessmentof effectiveness is necessaryto develop a case for adoptingone companys practices overthe others.

Underlying many of thecapabilities is the ability tocapture and share knowledge.For example, a company has aclear advantage in sourcing if itunderstands sourcing strategiesfor various commodities, familiar-izes itself with diverse supplierscapabilities, and knows com-petitive pricing levels. Sourcingknowledge can be divided intothree categories (see Exhibit 6).The first is data that are gener-ally maintained internally, suchas spending details. The secondis data that are generally main-tained by third parties, suchas supplier data. The third isinsights accumulated over time,such as commodity sourcing

strategies. In many companies,insights reside primarily withindividuals, and data are notreadily available. Part of themerger-integration work is totake stock of the knowledgepossessed by both organizations.

3 Balanced Sourcing: Cooperation and Competition in Supplier Relationships, Timothy M. Laseter,Jossey-Bass, 1998


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PREPARING FORDAY ONE

Day-One teams are chargedwith ensuring that all requiredpre-close actions are performed.They review contracts for com-pliance issues, identify specialoperations support requirements,

and generally smooth the transi-tion to closure.

As all the merger-integrationteams work, they continuallyidentify issues that need to beaddressed either before closeor soon afterward. The Day-Oneteam acts as the repository for

these Day-One issues. For exam-ple, suppliers will need to knowhow to submit their invoices tothe new company. In many cases,the team that identifies the issuewill be able to resolve it. Insuch cases, the Day-One teamsprimary interest is to monitorstatus. The Day-One teams role

becomes critical when the teamthat identifies the issue does nothave the authority or responsibilityto resolve it. The ProcurementBlueprint team, for example, mayidentify the issue of changingspending-level signoff authorityand recommend a plan, but the

CFO will likely have to approvethe changes.

The procurement teams aregenerally not burdened with thecritical Day-One issues thatcould stop the merger if notquickly addressed. However, if there are significant operationalchanges that will occur soon

after close, such as those welisted in the airline re-brandingexample, then the work requiredbefore Day One can be substan-tial. It is likely that the Day-Oneteam will track these operationalissues, but a dedicated businessteam will conduct the work.

No capture mechanism in placeLevel 1

INCREASING CAPABILITY

FormalKnowledge-CaptureMechanismsin Place

Understandingof InnovativeStrategies forCommodity

MultifunctionalEffort

Level 2 Level 3 Level 4Supply-market history, spendhistory, supplier profiles, andsome best practices capture

No significant understanding ofhow other organizations, includingcompetitors, buy the commodity

Regular dialog with otherorganizations on best-practiceapproaches; regular assessmentof competitor sourcing strategies

No multifunctional team exists All key disciplines represented;team leader 50% on team;other resources at 20% on team;

top-management steeringcommittee in place

Current supply base, technologycapabilities, and qualityassessments available andregularly updated

Some anecdotal understandingof the range of buying strategiesof others

Teams with resources from limiteddisciplines; no full-time resource;no resources spend more than

20% of their time on the project;no formal top-managementcommittee steering the team

Comprehensive best practices andleverage points; forward-lookingsupply market trends

Systematic process for collectinginformation to identify leadingprocurement strategies; capableof describing how strategy createscompetitive advantage (evidenceof tear-down analysis, competitivesupplier benchmarking)

All key disciplines represented;team leader 100% on team; otherresources at 40%; all resources

trained in strategy-developmentapproach; top-managementsteering committee in place

Documentationof CommodityStrategies

No buying plan by category Strategy document profiles thesupply base and identifies thetarget supply structure andplanned actions

Strategy document mainlydescribes transactions to beimplemented and contains limitedperspective on the rationale

Strategy document providesdetailed understanding of thesupply market structure andleverage points; describes allelements of the strategy(suppliers capabilities, typesof relationships, mission, andperformance targets)

Targets forImprovement

No targets set for the category Price targets only; no targetson total cost of ownership,delivery, or quality

Total cost of ownership targetsplus targets on quality anddelivery; no targets ondevelopment performance

Total cost of ownership targets,targets on quality and reliability,plus development performancetargets

Exhibit 5. Performance-Level Chart for Creating Sourcing Strategies Capability



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ESTABLISHING ACLEAN ROOM

The formidable task of workingthrough a merger is further com-plicated by constraints bothcompetitive and regulatory ondata sharing between the companies.

The Day-One, Blueprint,and Synergy teams will needaccess to several types of confi-dential data to complete theirwork. Suppliers names and pricesare critical to any assessment of savings opportunities. Contracts

have to be examined for change-of-control and sole-source clauses.Yet most suppliers agreementsforbid the sharing of pricing andterms outside their customerscompanies. National laws invarious countries also imposerestrictions because sharing data

across competitors can be viewedas anti-competitive. Furthermore,since a planned merger can be

stopped at the 11th hour, thepotential mates may again findthemselves fiercely competing and wishing they had notshared so much data.

One solution to this dilemmais to create a clean room for thehandling of all sensitive data untilthe day of the merger closing(see Exhibit 7). Independentconsultants or quarantinedemployees will staff this room,

reviewing confidential agree-ments, flagging items worthy of immediate attention, and recom-mending courses of action. Theycan also aggregate data and esti-mate potential savings, reportingback to senior management with-out disclosing competitively

sensitive information. The extentto which companies share infor-mation will vary depending on thelaws governing their respectivemarkets, their attorneys interpre-

tations of pertinent regulations,and the overall sense of urgencysurrounding the merger.

ESTABLISHING ANDLIVING WITH TARGETS

All executives should be preparedfor aggressive merger-savingstargets. Top-down generatedtargets are facts of life, becausesavings need to be budgetedlong before data exists to validateopportunities. In spite of the lack of precision, the way in whichtargets are set can dramaticallyhelp or hinder the new companyssuccess. The challenges in settingand managing targets include:

Being aggressive, yet realistic Promoting both accountability

and cooperation Setting rules for measuring

results

Under-aggressive targetslead to low performance.However, over-aggressive targetsundermine performance-measure-ment systems because peopleoften will not accept accountabilityfor targets that dont seem realistic.If people are held accountablefor unrealistic targets, then good

people will suffer.How are appropriate target

numbers determined for procure-ment? Should the target for aspending area be 5 percent, 10percent, or 15 percent? Theanswer depends on at leasttwo factors. First, what is the

Internal Data Spending detail Specifications Performance metrics Historical pricing Previous RFP responses

Insights Cost-driver understanding Known strategies RFI/P/Q structure Contract structures Supplier process

understanding

External Data Supplier database

Pricing benchmarks Supplier performance

benchmarks Market data Industry profiles

Exhibit 6. Three Categories of Sourcing Knowledge



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expected cost improvement dueto increased scale? Second, howgood was each company at buyingthe particular goods or services tobegin with? Although the second

factor is a judgment call, the firstis related to characteristics ofthe particular commodity. Somecommodities (e.g., fuel oil) maydrop very little in price as spend-ing increases, while others (e.g.,furniture rental) may drop muchmore rapidly (see Exhibit 8).

Targets are likely to be setearly, but information improvesover time. Rather than settingtargets that are subject to change,

executives will find it moreadvantageous to implement aprocess that pushes targets downinto the organization as betterinformation becomes available.

Targets should be assignedin a way that promotes accounta-bility and cooperation. Wherethere is a strong central procure-ment function, the challenge

is typically to encourage cooper-ation between procurement andbusiness units. Where there isno strong procurement function,the challenge is often to get thebusinesses working together forthe common good.

Consider a company witha strong procurement functioncharged with finding procurementsavings across the entire company.Assigning top-level cost-reduction

targets to each business unit andeach function will ensure account-ability for results. For example,presume that the procurementfunction is tasked with finding$45 million in savings, and the

German business unit (BU)needs to find $26 million. Oneway to clarify accountability isto tell the German BU that itmust find nonprocurement sav-

ings, because the procurementorganization will be responsiblefor procurement opportunities.Accountability is clear.

The problem with thisexample is that procurement willusually need the cooperation of theGerman BU to achieve the savings.For example, the German BUmay need to approve product-linerationalization decisions or specifi-cation changes. However, given

the large nonprocurement targetassigned to the German BU, theBU may not have time to investin cooperating with procurement.An alternative could be to assignoverlapping targets that specify a

Integration Teams

Clean Room Consolidation and

analysis: Consolidated spending Sanitized data roll-ups Pricing implications Other

Modelwhat if scenarios

Company A Company B

Sensitive data: Specific strategies Supplier names Pricing Contract terms

Sensitive data: Specific strategies Supplier names Pricing Contract terms

Nonsensitive data: Head count Asset descriptions Schedules Operational

procedures

Desensitized data and/oranalysis findings: Consolidated spending Discount implications Implications ofwhat if

analyses

Nonsensitive data: Head count Asset descriptions Schedules Operational

procedures

Exhibit 7. Establishing a Clean Room to Share Sensitive Data



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$10 million target for procure-

ment savings in Germany (seeExhibit 9). This encourages coop-eration, although accountabilitybecomes blurred. The best choicewill depend on the companiesorganizational structures, incen-tives, and cultures.

One difficulty that often

emerges is how to account forsavings initiatives that wereunder way before the merger. Itis generally best to count theseas if they were new ideas. Sincethe new cost target will be meas-ured from a spending baseline

established prior to the merger,

whether or not the cost changeswere already planned is irrelevant.Doing otherwise simply repre-sents low-value accountingrather than a true value-addedeffort focused on the prize.

CombinedVolume

1,000 1,500 2,000 2,500 3,000 3,500

110

100

90

80

70

60

50

5% Scale Factor*

15% Scale Factor*

*The scale factor is thepercentage of declinein cost for a doublingof quantity. It is aunique characteristicfor each commodity.

P r i c e

( $ / U n

i t )

Quantity (Units)

Company A

Company B

Exhibit 8. Example of Commodity Price Declines Related to Increasing Quantity


Procurement

France

Germany

UK

Netherlands

Total

$ 10M

$ 10M

$ 20M

$ 5M

$ 45M

Engineering Manufacturing

BusinessUnit

TotalFunctional Area

Other

$ 4M $ 8M $ 4M $ 26M

Exhibit 9. Promoting Cooperation Through Joint Accountability for Targets



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Finding the Savings

There are typically threesources of post-mergerprocurement opportunity.

First, during post-merger integra-tion, companies often find thatthey have been paying differentprices for the same products andservices. These are the easiest andfastest opportunities to capture.Second, there is an opportunityto re-bid, especially given theincreased spending (see the scaleeffect in the earlier target-setting

discussion). Note, however, thatscale effects apply only wherethere is overlap in commoditieswithin the relevant geographicscope. A doubling of volume inoffice furniture will not help if one company primarily does busi-ness in Europe and the other inAustralia. Third, savings resultfrom the companies differinglevels of sourcing sophistication.

For any given commodity, wetypically find that one companyssourcing strategy is superior tothe others. Furthermore, bothcompanies can often benefit by

adopting external best practices.The three sources of savings

are illustrated in an example takenfrom BoozAllens work on an oilcompany merger (see Exhibit 10).The teams found an opportunityto reduce cost by 10 percent:2 percent due to different pricespaid for the same commodities;2 percent due to volume discountsthat could be gained from the newsize; and the greatest portion, 6percent, from broader implemen-tation of Strategic Sourcing.

Management needs a well-structured approach to identify,prioritize, and capture savings.Prioritization leads to a plan tocapture savings in waves of sourcing activity. The BoozAllenapproach quickly reconcilestargets with opportunities and

then proceeds to find the moneythrough assessment of supply-sideand demand-side opportunities(see Exhibit 11).

Although the waves may

be planned around attackingthe easier commodities first, themost efficient plan may be tostructure around opportunitieswithin commodities. For example,the first wave may includesimple re-bidding among knownsuppliers. The second wave mayinvolve some supply-chainrestructuring and some demand-side opportunities. The thirdwave may involve complexchanges in product design afterreassessing value delivered tothe end customer (see Exhibit 12).Note that, in the early waves, thesourcing teams must not lock thecompany into long-term arrange-ments that will tie the hands of the teams looking for much biggeropportunities in later waves.

12%

10%

8%

6%

4%

2%

0%

10%6%

2%

2%

Same Product, Different Price Scale Strategic Sourcing Total

S a v i n g s

( % o

f S p e n d

i n g )

Exhibit 10. Post-Merger Procurement Savings (Booz Allen Client Example)



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Basic data Category databases Supplier analysis

Top-down Bottom-up Money on the table

Realization

of Savings

Commodity Strategy

Development

Sizing the

Opportunity

Baselining Defining projects andprioritization

Analysis ofbest practices

Performancemeasurement

Demand analysis Strategy development Implementation

Targets Quick wins

Specific data ITERATEPROCESSWAVE-BY-WAVE

Exhibit 11. The Booz Allen Sourcing Approach


SOURCING PRINCIPLES

BoozAllen adheres to sixprinciples in sourcing. Theseprinciples are designed tomaximize benefit and achieve

results as quickly as possible.

1. Define scope broadly. Targetwaste in the whole supplychain, focusing on total cost.For example,consider inventorycost, shipping, and how thepurchased goods affect othercosts. Focus on supply- anddemand-side opportunities.Supply-side levers changehow a company buys, whereas

demand-side levers changewhat is purchased. For example,negotiating a volume discountat a hotel is supply side; stay-ing at a more modest hotel isdemand side.

2. Organize for success. Usemultifunctional teams andsuppliers involvement to findthe best ideas and promotebuy-in for changes. Lead withsenior management so that

changes can be made outsideof procurement.

3. Use targeted, objectiveanalysis. Only collect dataand conduct analyses that willsupport a plan that may work.Poorly focused data collectionefforts are a waste of resources.Make sure to quantify thebenefits of any idea, sincemany good ideas prove

not so good after examiningthe net present value.Develop strategy based oncost-driver understanding.Cost drivers relate total costto specific changes.

4. Optimize across the extendedenterprise. Share informationwith suppliers if the opportunityto reduce cost exceeds anyimpact on negotiation power.Choose suppliers for specificroles based on capabilitiesand cost. Work with suppliersacross multiple levels andfunctions, such as engineeringand manufacturing.

5. Balance cooperation andcompetition in supplierrelationships. In their effortsto collaborate with suppliers,some companies form veryclose relationships with them.

These suppliers can becomecomplacent and lose competi-tiveness in the marketplace.Maintaining a healthycompetitive tension while


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working together is not easy.To keep market forces active,top companies build a set of advanced capabilities forworking with suppliers.

6. Dont reinvent the wheel.Your company is not thefirst to source office supplies,long-distance service, or per-sonal computers. Start withknown best practices for eachcommodity. Capture and shareinsights across the company.

CONTRACTCOMPARISON

The easiest savings to capture arethose that come from resolvingdifferent prices paid by the twocompanies for similar productsor services. Finding these dis-crepancies generally requires a

comprehensive contract compar-ison. This work should be donein coordination with the Day-Oneteam, because the team will belooking for contract terms that

may cause difficulties after close(such as sole-source agreementsor change-of-control provisions).

While price comparisonseems to be a straightforwardway of finding opportunities,making apples-to-apples compar-isons is often difficult. Contractsmay differ in terms of the degreeof included services, discountstructure, volume or investmentcommitments, and so forth (see

Exhibit 13). For example, a com-parison of handset prices after atelco merger found a variety of prices but also different market-ing support packages and termsthat had to be quantified to allowdirect price comparisons. To add

to the difficulty, sometimes theseunderstandings are not writtendown. Suppliers have differentstandards of service, and theymay have developed special

working relationships over time.Therefore, some interviewingmay be required to determine thetrue level of service.

e-SOURCING TOOLS

After a merger, a company will berevisiting the sourcing of almostall purchased goods and services.This can be the perfect opportunityto introduce an e-sourcing tool

set, due to the need to rapidlyre-bid many commodities. A goode-sourcing tool set will acceleratethe sourcing process and facilitatethe capture of knowledge alongthe way.

Focus

Approach

Time Scale

Examples

Price and other quick wins

Volume leverage and supply-baserationalization

0 to 6 months

Price comparison Price benchmarking Bidding or auction Credible threat of switching

Drivers of cost

Supply-chain optimization anddemand management

4 to 18 months

Finding cost-advantaged suppliers Supply-base rationalization Direct delivery EOQ ordering

Just-in-time Volume reductions Service specification management

Drivers of value

Product redesign

6 to 24 months

Value engineering Incorporating suppliers into

product development Joint R&D planning with suppliers

Wave 1 Wave 2 Wave 3

Exhibit 12. Capturing Procurement Savings in Waves



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There are a variety ofe-sourcing tools in the marketplace.Not to be confused with transac-tional e-procurement systems(which are often adopted as partof the implementation of a sourc-ing strategy), e-sourcing toolssupport the Strategic Sourcingprocess. These e-sourcing toolsfrequently include:

On-line market research On-line Request for Information

(RFI), Request for Proposal (RFP),and Request for Quote (RFQ)

On-line auctions Knowledge management Sourcing project management Contract management

The market for e-sourcingproviders is changing too rapidlyto provide an up-to-date list.However, the large number of sourcing projects after a mergerwill provide a good forum forpiloting e-sourcing softwarefrom one or more vendors.

Although it is extremely use-ful, e-sourcing cannot substitutefor a sound Strategic Sourcing

process. Even with the bestInternet sourcing tools, buyersstill need to define commoditystrategies, consider demand-sideissues, search out suppliers, andstructure bidding and selectionprocesses. The core competenciesof procurement remain the same.

Conclusion

P rocurement should be onthe agenda of the CEOin any large merger.Procurement savings tend to befaster and larger than many othersources of value from the merger,so effective execution in procure-ment can often make or breakthe mergers success.

Beyond capturing savings,the merger presents an opportunityfor the procurement function toreinvent itself. Management shouldthink strategically about procure-ments potential contribution to

Contract BContract A

Background data Name of vendor

Internal contact information(e.g., buyer or user)

Products provided

Services provided Materials purchasing Inspection Transportation/warehousing Engineering:

product/process design Maintenance Cleaning On-site support Disposal Other

Scope of application Customer spending with

this supplier Total customer spending

on these products/services Customer facilities served Type of projects served

(e.g., new construction,maintenance)

Pricing structure Base pricing

Discounts (e.g., volume) Incentives/penalties Rebates Warranty Price

Year-over-yearreductions/increases

Pass-through pricing Indexing Target costing Cost-reduction sharing

Performance requirements Capability commitments Lead-times Volume/mix change

accommodation Quality assurance

Working relationship Contract length/expiration

Volume commitments Inventory ownership Equipment ownership Supply-chain linkage

(e.g., order processing,capacity planning)

Information sharing(e.g., costs, cost drivers)

Performance measurements Indemnification agreements

and insurance

Investment commitments Technology development Production capabilities

(property, plant, equipment) Supply-chain integration

Other key items Sole-source agreements Change-of-control provisions

Exhibit 13. Contract Comparison Checklist



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the new company. Only afterdetermining procurements rolecan the company make informeddecisions about the appropriatecapabilities to build.

Even the most experiencedprocurement executives will findit a monumental task to designand build this new organizationwhile simultaneously achievingdramatic savings and keepingoperations running. Fortunately,the numerous recent mergers haveprovided many lessons that willhelp todays executives capturethe potential values of the deals.

What BoozAllen Brings

B oozAllen & Hamilton isa global management andtechnology consultingfirm. In more than 100 countries,our team of 10,000 professionalsserves the worlds leading indus-trial, service, and governmentalorganizations. Each member of our multinational team has asingle common goal to helpevery client we serve achieveand maintain success.

As world markets mature,and competition on an interna-tional scale quickens, we areharnessing the strengths of ourentire firm to address the needsof our clients. For over a decade,BoozAllen has been helping

clients achieve sourcing savingsand build procurement capabilities.

BoozAllen has also guided someof the worlds largest corporationsthrough many successful mergers.This combined expertise uniquelypositions us to help companies

develop their merger procurementstrategies and to achieve the poten-tial that procurement has to offer.

We judge the quality of ourwork just as our clients do bythe results. Their confidence inour abilities is reflected in thefact that more than 85 percent of the work we do is for clients wehave served before. Since ourfounding in 1914, we havealways considered client satisfac-tion our most important measureof success.

Consistent with our posi-tion as a business thoughtleader, BoozAllen sponsorsstrategy+business , a quarterly

journal containing the best ideasin business. Visit the BoozAllenWeb site at www.boozallen.comand the strategy+business Website at www.strategy-business.com.

For more information on man-aging procurement through amerger, please contact anymember of the BoozAllen team:

AmsterdamSteven VeldhoenVice [email protected]

Scott [email protected]

Boston

John HarrisSenior Vice [email protected]

Buenos Aires

Jorge FortezaSenior Vice [email protected]

Chicago

Gary NeilsonSenior Vice [email protected]

Vinay CoutoVice [email protected]

Bill JacksonVice President312-578-4745

[email protected]


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Dallas

Harry QuarlsSenior Vice [email protected]

Dsseldorf

Peter HeckmannVice [email protected]

Houston

Matt McKennaVice President713-650-4156

[email protected] London

R. Keith OliverSenior Vice [email protected]

Los Angeles

Narayan NallicheriVice President310-297-2101

[email protected]

Munich

Klaus-Peter GushurstVice [email protected]

New York

Gerald AdolphSenior Vice [email protected]

John JonesVice President212-551-6713

[email protected]

Dorian [email protected]

Paris

Pierre RodocanachiSenior Vice [email protected]

San Francisco

Ed FreyVice [email protected]

So Paulo

Leticia CostaVice [email protected]

Luiz VieiraVice [email protected]

Seoul

Jong Hyun ChangVice [email protected]

Stockholm

Jan-Olof DahlenVice President46-8-506 190 [email protected]

Torbjorn KihlstedtVice President46-8-506 190 [email protected]

Sydney

Ian BuchananVice [email protected]

Tim JacksonVice President61-2-9321-1923

[email protected]

Tokyo

Eric SpiegelSenior Vice [email protected]

Washington, D.C.

Tim LaseterVice [email protected]


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Managing Procurement During Mergers

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