Private Equity firms, like many other companies, have been preparing for a potential economic downturn since the last one in 2020. But by driving the right processes and tools within their portfolio companies, they can get a leg up on their peers.
Smart business leaders understand that negotiating contracts with suppliers and then expecting cost savings to eventually appear across their portfolio of companies is not a viable approach – especially when shrinking portfolios make every deal more financially consequential. Also, trusting this process to generate near-term value will likely frustrate and disappoint business leaders, especially those leading PE firms who may be pressured to notch quick wins vis-a-vis lengthening investment cycles.
Given today’s economic unpredictability, and the need to build up financial reserves relatively quickly, business leaders are replacing traditional sourcing methods with processes and solutions that provide real-time, actionable insights that enable them to create or uncover more value, sooner. Companies drive traditional financial value, notably greater cost savings and profit margins, by long-standing procurement best practices, including demand management, spend optimization, strategic sourcing, and sourcing optimization.
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Current data suggests this will not change anytime soon. Seventy-one percent (71%) of business leaders, from the C-Suite on down, still consider identified and realized cost savings as the most important metrics by which to assess procurement performance and value creation.
However, as the definitions of business performance and value change, many PE firms are recasting them to include meeting Environmental, Social, and Governance (ESG) initiatives, such as supplier diversity and sustainable sourcing, and other non-financial performance goals. What’s more: they are increasingly prioritizing investment in ESG initiatives, which they are tracking and measuring. The early results are eye opening.
A recent joint study conducted by Bain & Company and EcoVadis, demonstrates that ESG and financial performance correlate with each other – and that, contrary to conventional wisdom, they’re not mutually exclusive.
Turn Insights Into Action with Data and Analytics
Procurement’s bread and butter has been tracking and analyzing spend and other financial performance data to make more informed decisions that enable them to optimize their spend and sourcing behaviors. Now, with the push to include ESG performance measures into value paradigms, procurement teams and companies in general must collect and analyze additional data categories from internal, supplier, and third-party sources – potentially dozens more – to make timely, accurate, and holistic performance assessments. This can get messy, fast. Thus, they need digital solutions to help keep their heads above water.
Private equity firms, their portfolio companies, and their procurement teams need real-time data analytics solutions to track and analyze spend, identify and realize savings opportunities, and leverage these insights to make better sourcing decisions in a central location. Deploying these solutions enables business leaders to confidently and efficiently take a data-driven approach to make sourcing and supplier management decisions that yield financial and non-financial value.
Automated data analytics solutions enable business teams to synthesize internal and external data sources on one analytics platform. They collect, clean, categorize / standardize, enrich, analyze, and ultimately turn their spend data into spend intelligence. Armed with distilled and actionable spend intelligence, leaders can make strategic, value-add decisions that offer significant ROI.
With data analytics solutions, business leaders gain a holistic view of their firm’s spend, including actionable insights into sourcing and procurement decisions that can align tactical procurement decisions with their company’s strategic initiatives, including hitting ESG-related goals. They can use it to make more informed sourcing decisions – specifically, by selecting and onboarding suppliers they know align with the company’s ESG initiatives; by working with struggling suppliers to improve their ESG performance; and by offboarding suppliers that do not align and are too risky to retain.
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Procurement performance management solutions are designed specifically to drive performance across companies, including on ESG initiatives so prized by PE firms and investors, by turning spend intelligence into business actions. Companies, whether publicly or privately owned, are deploying performance management solutions to take their financial and non-financial improvement efforts to the next level in ways that are scalable, repeatable, and measurable.
For starters, procurement teams can create performance improvement projects – for example, on increasing spend with diverse suppliers, reducing Scope-3 greenhouse gas (GHG) emissions, or driving compliance to ESG-related laws and regulations. They can also pull into project templates spend, supplier, and risk data from internal sources (e.g., spend intelligence, supplier management, and risk management solutions), to build out frameworks, benchmarks, and assessment criteria for these projects. They also provide greater visibility to project creation and status, and help leaders communicate their progress to stakeholders up and down the leadership rung.
To not only survive a potential economic downturn but actually thrive, PE firms need to embrace the changing definition of business value today to include non-financial performance, especially establishing and meeting ESG goals and complying with ever more laws and regulations. ESG-focused PE firms stand to reap handsome rewards for driving ethical and sustainable business practices among their portfolio companies – now and in future business cycles.
To embrace change and overcome its associated challenges, PE firms must be set up for success. They need to take a data-driven and systematic approach to drive positive environmental and social change, and be able to show their work to stakeholders. To do this, PE firms need modern business solutions, such as data analytics and performance management solutions that are specifically designed to solve procurement challenges. Armed with these capabilities, teams can derive insights from their untapped spend data and turn insights into actions.
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