The past six months have been an interesting time for Private equity firms. A deal environment that was overflowing with exits and closes not long ago has come to a grinding slow down. Contributing factors such as interest rate increases, multiples coming back down to earth, and a pullback from LPs have all led to deal teams with more time on their hands and a renewed focus on current holdings. These current holdings are, in many instances, facing headwinds of their own as demand has slowed amid the economic downturn here in 2023. This had led GPs to spend more time focusing on the operational health of their portfolios and implementing additional workstreams to drive efficiencies. The more that can be done to generate EBITDA improvement outside of headcount reduction, the better. One way PE firms have combatted these headwinds is to deploy a firm like Treya into their portfolio companies to align with management and execute a strategic sourcing project. Improved commercial terms with vendors, risk mitigation, and internal capability development are the main outcomes of this type of work
When economic conditions are challenging, every dollar counts. Strategic sourcing can help portfolio companies reduce costs by negotiating better prices, improved payment terms, and refreshed rebate structures with suppliers. This can be achieved through a data driven approach that leverages competitive bidding process across multiple spend categories, both direct and indirect. Many suppliers are facing the same headwinds being felt across portfolios and there are many instances where suppliers who were turning away business and throttling their customers with cost increases are now in a position where they will negotiate. Portfolio companies are now, for the first time in a couple years, positioned to claw-back cost increases from their supplier base.
Economic uncertainty can also increase the risk of supplier disruption or bankruptcy. By strategically sourcing suppliers, private equity firms can mitigate this risk by diversifying their supplier base and identifying alternative suppliers. Supplier assurance and the clear establishment of primary and secondary suppliers are a meaningful byproduct of the strategic sourcing process.
Internal Capability Development
Many mid-market portfolio companies don’t have the internal resources with the proper bandwidth or experience to effectively lead a strategic sourcing initiative. In an economic environment where layoffs are quite frequent and hiring has slowed, there is a renewed prioritization of internal capability development among portfolio company employees. A strategic sourcing engagement with a 3rd party will expose key spend stakeholders to best in class procurement practices and further sharpen their skillsets going forward so that when the engagement is complete, the team members who worked closely with the consultants will retain and be able to apply those best practices moving forward to manage their new supplier contracts effectively and even improve upon them moving forward.
In conclusion, strategic sourcing is an essential tool for private equity firms and portfolio companies to prioritize, especially during periods of economic uncertainty and slowing demand where we find ourselves today. By reducing costs, mitigating risk, creating value, and developing internal procurement capability, strategic sourcing can help private equity firms maximize their returns on investment and achieve long-term success.