Unleashing the Power of Mergers: McKinsey Reveals How Procurement Reinvention Can Drive Innovation
Are company mergers and acquisitions a shining light for how the reinvention of procurement can happen?
An article by McKinsey, “Using M&A to transform procurement,” says mergers are providing a catalyst for the function to be turned into an innovation engine and strategic partner to business leaders.
McKinsey says procurement contributes a third or more of the total synergy value in an integration, most of which can be captured within 12 months of deal close.
“By promptly delivering benefits, procurement can help set the pace for the overall integration and quickly demonstrate the value of the combined company to shareholders,” says McKinsey.
McKinsey says in today’s business landscape, most companies focus on stabilising the procurement function during a merger and capturing synergies directly linked to mergers, such as price harmonisation.
But, it says leading organisations seize the integration opportunity to reinvent the combined company’s function, advancing procurement within the first two years of closing the deal.
McKinsey suggests such early action in mergers and acquisitions can double the value of procurement synergies while laying the foundation for the future procurement organisation.
What are the top performers doing?
McKinsey says top-quartile procurement organisations have the function “tightly integrated with all other business functions.”
“It acts as a strategic partner, going beyond price to provide business leaders with a total cost of ownership view, and creates a robust set of demand and process controls around specs, spend-limit approvals, and other procurement elements,” McKinsey said.
It says the function is a “steward of all spending” and applies sophisticated systems and compliance to maximize cost efficiency.
Going one further, those teams which look for end-to-end continuous improvement work directly with vendors and customers to “uncover new sources of value.”
“For example, procurement may use its advanced analytics capabilities to help suppliers identify new formulations or manufacturing efficiencies that deliver benefits both can share. Procurement professionals may also work directly with customers to better understand their needs and use that input to influence corporate decisions on product design, service levels, and pricing. The function is a consistent source of innovation, making it a draw for top talent,” McKinsey says.
Procurement as a digital innovation engine
The cutting-edge procurement organisations go further still, according to McKinsey, by leveraging digital technologies to optimise the full value chain.
“These organisations lead the pack in the use of predictive analytics and forecasting to enable the business, its suppliers, and its customers to take a proactive approach to value creation and risk management,” McKinsey said.
McKinsey says these organisations take a strategic view to identifying improvements through customer surveys and ideation sessions with suppliers.
“In these organisations, procurement becomes the training ground for the future leaders of the company,” McKinsey says.
As procurement organisations move up the maturity scale, their ability to deliver value to the business, both financially and strategically, grows.”
How to transform procurement
McKinsey refers to four “self-reinforcing changes” procurement should look to maximise the effectiveness of its output.
- Redesigning procurement’s operating model
- Elevating the organisation’s role as a strategic partner
- Digitising the function
- Raising the team’s capabilities.
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