One of the great challenges in the workplace today is making a merger pay off. In the area of procurement, or purchasing and supply management (PSM), the payoffs can be quick and considerable, if given the proper attention. In fact, sourcing can represent a substantial amount of the immediate savings expected from a merger, and managing the effort plays a very strategic role in the new organization’s efficiency.

It is ideal to focus on PSM before, during, and after a merger since a function of a merger is to cut costs and increase profits. Management must make a commitment to meld the two procurement departments, ensuring they adopt a common vision, and eliminate costly overlaps.

Uncovering the opportunities

Procurement savings tend to be realized faster, and are larger, than many other sources of value from a merger. Research indicates PSM can reduce the total cost of goods and services purchased by merged companies by 10 to 15 percent within 12 months of the merger. These savings can recoup at least half the merger premium. Purchased goods and services, ranging from office furniture, to raw materials, to outside contractors, represent up to 75 percent of most companies’ total spending.

Post-merger PSM savings generally come from three sources:

• Price harmonization. Companies often find they’ve been paying different prices for the same products and services. These are usually the easiest and fastest opportunities to capture. An excellent way to begin is to set up a database to track each company’s 20 most expensive goods and services, including the supplier of each item, the price, and the last time supply contracts were negotiated.
• Rebidding. There is usually an opportunity to rebid during a merger, especially because of the combined companies’ higher expenditures. Suppliers have incentive to be even more competitive and may offer greater cost savings and new partnership arrangements.
• Adoption of best practices in sourcing. This is usually the greatest opportunity. The two companies’ differing levels of sourcing sophistication can be brought into line.

Prioritize the savings potential

Recouping procurement savings is the ultimate exercise in efficiency and first requires a focus on critical operational issues. This includes initially taking stock of the future combined company and ensuring it can run smoothly while the merger takes place. It’s also the time to focus on baseline spending, to estimate sourcing opportunities, develop a contract database, and finalize work plans for the merger-integration teams. These functions usually take place in the first 100 days.

Next, set up plans so as to achieve the merger’s ultimate value. This includes driving more challenging improvements in performance, delivery reliability, and rapid innovation. These goals are in addition to further cost reductions realized by PSM.
 
Introduce necessary changes

To optimize PSM savings during a merger, you may need to adjust a few mindsets. Among the changes necessary is the move to give the purchasing department “permission” to review costing and expenses that may have been traditionally outside its responsibility. This includes review of contracts and costs for things such as marketing brochures, telecommunications, office supplies, temporary labor, and travel and entertainment. By consolidating fragmented purchases, PSM can better negotiate contracts, introduce new suppliers, and even change the patterns of demand to save money. However, in most companies, PSM manages less than half the company’s total spending on goods and services. 
 
A great way to give the PSM function more credence with all areas is to assign a respected senior manager to the function during a merger. He or she can help rally the company behind PSM’s role in recapturing the merger premium. In doing so, departments will become more receptive to working with PSM and to cost scrutiny.

Optimum merger outcomes begin with PSM

While every department or function should focus on integration, meeting performance improvements, and identifying savings during a merger, procurement or PSM is an opportunity-rich area for recouping a company’s merger premium. And this puts the newly formed company in a positive light with management, shareholders, and employees alike.