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February 21, 2017
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Procurement Priorities

Going through a merger? Procurement plays an important role

Comment
The procurement department is indispensable when it comes to delivering the savings promised by a corporate merger.

There has been a lot of news about mergers lately. We've been hearing about activity involving the chemical companies Dow Chemical and DuPont, Starwood Hotels and Marriott, and security systems company Tyco International and the industrial conglomerate Johnson Controls, to name a few. The research firm Dealogic LLC reports that on a global basis, the value of announced mergers in the first half of 2016 amounted to US$1.71 trillion.

Companies merge for many reasons: to grow market share, to improve performance, and to take advantage of synergies resulting from combining operations, among others. The resulting savings can be significant. When medical device company Medtronic and health-care company Covidien announced their merger in 2014, a $42.9 billion deal, they projected that synergies created by the merger would save $850 million by 2018.

This is where procurement comes in. Management looks to procurement and its expertise in negotiation, data analytics, and project management to help deliver the savings promised when the merger is announced. (Finance, operations, and human resources contribute as well, of course.)

The savings procurement can deliver generally result from consolidating spending on goods and services purchased by the two companies, usually indirect items such as travel and credit card programs, computer hardware and software, and contingent staffing. While consolidating spending on materials, such as metals and plastics, that are used directly in the manufacture of products can produce savings as well, the process for doing so is more complex. As a result, buyers often work on indirect spend first.

Taking steps toward savings
The first step toward achieving those savings occurs when a deal is announced. Companies typically set up a "clean room" where those working on the integration can review data in a controlled and confidential environment. In the clean room, a third party, perhaps a procurement consultant, studies both companies' large contracts and points out synergies, suggesting ways the two can work together to reduce cost and improve performance.

Then, as soon as the merger has been completed, procurement's work begins. The team reviews contract terms and conditions looking for the best deals and manages the strategic sourcing process. As part of that process, procurement selects suppliers for their ability to meet price, quality, delivery, and service requirements as well as to perform within the bigger geographic scope of the new company.

With strategic sourcing underway, the chief procurement officer (CPO) and other procurement leaders develop a structure for the new procurement organization and integrate software systems, processes, policies, and procedures. They participate in change management workshops designed to help ease their team through the transition and the coming together of different cultures and management styles. They communicate with their team and suppliers sharing news on the integration and how it affects them.

While some CPOs may dedicate a team to this integration process, often it's the procurement people "in the trenches" who do all of this—that is, deliver on savings and other benefits promised as a result of the merger—while ensuring the company still has the goods and services it needs to continue to operate. That's quite a job. If your company is experiencing a merger, procurement professionals undoubtedly are going above and beyond, putting in extraordinary effort that surely deserves to be recognized.

Susan Avery is a business journalist with 30 years of experience covering the procurement profession. Currently, she is editor-in-chief of My Purchasing Center, where she manages the editorial content for the online publication.

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