In Part 1, we discussed fundamentals that reveal why M&A could be on the rise. To prepare, procurement organizations need to understand how to leverage the best process and technologies for delivering the promised synergies through cost savings in the newly merged companies. As stated in Part 1, there are many elements that go into post- M&A planning. However, one element that’s essential to procurement’s success is the reliance on eSourcing technologies that can quickly, yet fairly, assess the “new” or “modified” supply base, and the contractual commitments tied to them.
In a post-merger environment, procurement needs to focus on a number of areas such as integrating purchasing systems, realigning organizational structures, analyzing business standards and assessing skill gaps/overlaps. While the plan to make these changes happens over time, supplier optimization through an initial “rationalization” can be the low hanging fruit for establishing a quick win in the newly merged entity.
Let’s assume the spend of two newly merged organizations can easily be gathered, compared and analyzed through the use of spend analytics. Assembling a sourcing team from members of each merged company to develop the framework for the new supply base provides the basis for starting the supplier rationalization process. The analysis of category spend and suppliers would likely demonstrate spend areas that could be easily combined for moving to a smaller group of suppliers. Moreover, if supplier redundancies of common categories are found, the results of this analysis would typically lead to one of two strategic sourcing approaches – RFx or eAuction.
So, why are eAuctions a perfect tool for procurement in post M&A scenarios?
While each method provides its own advantages and disadvantages, the former has traditional elements that may be less desirable when trying to establish quick wins for the newly merged entities. Challenges that could occur with traditional RFx approaches include:
- Multiple rounds, which could be time consuming or inefficient (days, weeks, or even months)
- Individual communications between buyer and suppliers during the course of the RFx
- Increased potential of supplier frustration and angst from suppliers on being replaced
- Direct negotiations creating an adversarial relationship for suppliers feeling out of the loop
eAuctions may be a more suitable approach in the post-merger environment by:
- Putting the negotiations directly into the hands of the suppliers
- Creating fair competition between suppliers by creating a level playing field
- Having suppliers get more direct / immediate feedback on their position in the market
- Driving “truer” market pricing and justifications for establishing baselines post-merger
Furthermore, based on Iasta’s direct client experience, Centrica notes several misinformed preconceptions of eAuctions including:
- eAuctions focus only on price – This statement is only partly correct, since the award decision can be made up of weighted non-price factors in combination with price (this can be factored in with weighted bids).
- eAuctions are only for commodities – While being true that the early auctions were on commodities and products, eAuctions for services and increasingly complex procurements have become more common.
- Only awarding the supplier who wins the auction – This approach is best practice as quality and other factors can be built into the auction, but this approach must be communicated to the suppliers and could damage the credibility of the auction process
By effectively implementing approaches such as weighted bidding, quality assessments and price discovery as a sourcing strategy, eAuctions could be deemed as a competitive advantage for industries frequently involved in M&A activities. Furthermore, as the modern sourcing enterprise continues to evolve, the traditional reluctance to use eAuctions is being dispelled with advanced sourcing platforms that demonstrate purpose-driven functionality.