Copy of a white paper I wrote in my BravoSolution days, interesting topic, got some very positive feedback and coverage.

1. Procurement: Delivering Improved
Company Valuation
Procurement:
Delivering Improved Company Valuation
Improving an organisation’s procurement brings benefits
far beyond saving money or raising quality standards. It can
dramatically improve the valuation of the organisation
as a whole.
Author
Daniel Quinn
Senior Account Director
BravoSolution
July 2011
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2. Procurement: Delivering Improved Company Valuation
Buying into the benefits Improving an organisation’s procurement brings benefits far beyond saving
money or raising quality standards. It can dramatically improve the valuation
The dynamics of transforming business value of the organisation as a whole
through procurement can be explored in a simple
example. Take an organisation with a £100m
turnover delivering an average 10 per cent
At a time when many companies are facing tough times, procurement is
annual net profit of £10m. becoming recognised as an essential component of corporate strategy for leading
It would be an impressive achievement if the CEO
organisations. It is well understood by CEOs and CFOs that buying more efficiently
could add 10 per cent to the top line (i.e. £10m in can bring big cash savings and more revenue through improved quality of goods
revenue), especially in mature industries and those and services as well as more reliable supply chains, but its strategic impact is now
that are impacted heavily by the economic cycle.
But its impact on the bottom line (bearing in mind starting to elevate CPOs up the corporate agenda.
its average 10 per cent net margin) would only be
about £1m.
Procurement projects are traditionally aimed at reducing the purchase price of
However, if for simplicity we assume third-party goods and services and improving on the value delivered, through for example,
spend is 50 per cent of revenue, reducing these
procurement costs by 10 per cent could deliver a increased functionality or increased quality of service. They often produce very
direct increase in profitability of roughly the same quick wins which can amount to millions of pounds of value for larger organisations.
amount saved – about £5m.
Cashable savings can often be identified for a wide range of categories including
This is because there would be few additional costs indirect items (office supplies, telecoms, facilities for example), direct categories
and most of the savings could therefore fall to the
P&L bottom line, assuming the exercise was well (raw materials, front line services etc) and now even to very complex categories
managed. In our scenario this would produce about like transportation or construction, traditionally considered extremely difficult to
£5m on the bottom line – five times the benefit of
adding 10 per cent (£10m) to the top line. manage. At the same time, the supplier base can be streamlined and procurement
processes rationalised, producing further immediate benefits in terms
The effect may actually be even more dramatic
in private sector/listed companies. This increase
of lower transaction and administration costs.
in profitability could lead to a direct increase in
the company’s earnings and, if maintained, its
subsequent market valuation.
Longer term benefits
A systematic drive to improve procurement skills, process and infrastructure can
If we continue our simplified example and our
organisation trades at a Price Earnings (PE) ratio
deliver much more far-reaching benefits to customers and investors. There are
of 10 (i.e. its market value is 10 times its annual further economic and strategic prizes to be won, whether you work in private,
earnings, or to look at it another way, investors public or not-for-profit sectors. They may not be so immediately obvious, however
are prepared to pay £10 for each £1 of earnings
delivered), then the subsequent impact on its they are likely to be of far greater value in the longer term. In fact, analysts have
market value could be an incremental £50m, seen that the right blend of skills, process, and technology improves a company’s
a staggering 10 times the original saving.
financial performance by 30 pence on every pound spent. Source: AMR/Gartner;
Technically it would be less than this because of Reaching Sourcing Excellence, Part 1: How To Keep 30 Cents of Every Dollar Spent.
factors including differing cost structures, the
investment required, the cost of capital, corporate
tax and so on which will serve to dilute this number. Saving money on third-party spend and streamlining procurement processes can
But importantly, even if you are cynical and halve often deliver savings to an organisation’s Profit and Loss (P&L) “bottom line” far
the number above, the dynamic remains where more quickly and effectively than improving the top line by increasing sales.
the pound reduced from procurement costs still
has an impact on the company’s net profit/earnings/ By saving money through the traditional procurement tactics of aggregation
valuation of about five times that of a pound added (bundling spend together), rationalisation (reducing the number of suppliers)
to top-line revenue growth.
and negotiation (re-structuring or renegotiating contracts), profitability can be
In reality, the actual long-run average PE Ratio in improved dramatically.
the FTSE 100 is almost 20 (19.9 cyclically adjusted
1993-2010 – Source: Datastream.)
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1st Floor, 85 London Wall, London EC2M 7AD
T: +44 (0)20 7796 4170
E: info@bravosolution.co.uk
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3. Procurement: Delivering Improved Company Valuation
The real effect is that an increase in profitability could lead to
a direct rise in the company’s earnings and, if maintained, its
subsequent market valuation. Factors including differing cost
structures, the amount of investment required, cost of capital,
corporate tax and so on must be taken into account. But on a
simple calculation, a pound cut from procurement costs can
have an impact on the company’s net valuation equivalent to
about five times that of a pound added to top-line revenue
growth (see sidebar on page 1).
In addition, improved procurement and organisational
economics can create competitive advantage. Lower prices and
improved value and quality in the goods and services on offer,
especially if they are embedded and sustainable, can lead to the
organisation differentiating itself from the competition. This can
in turn lead to a better reputation in the marketplace, growing
customer loyalty and improved sales.
These benefits can then produce further strengthening of
the company’s reputation, often driving a virtuous cycle of
overall improvement. Low-cost retailers routinely invest in
their procurement organisations to reduce purchase prices
in order to cut retail prices, creating improved turnover and
customer loyalty leading to improved market share and further
reinvestment in the cycle.
the procurement team does not have the proper motivation,
Achieving lasting changes skills and tools to pro-actively manage the budget, contract
In all these ways, procurement can become a lever for lifecycle and eventual contract renewal.
fundamental and lasting changes in an organisation’s
performance. Third, to deliver and retain these benefits, investment in
systems, processes and people capabilities must be established
How can these benefits be achieved? to ensure that they comply with best practice and are designed
to produce long-term benefits. The first phase of a programme,
First, let us manage expectations; identifying savings can be broadly speaking, is to identify and target the opportunities
difficult and purely theoretical until delivered. Pro-active that can be achieved. This can itself be a costly undertaking if
management is essential if all the benefits of an otherwise the technology is not in place to identify spend/opportunities
excellent procurement project are to be delivered and secured accurately and help managers “see the wood for the trees”.
in the long-term.
Fourth, once these targets have been identified, however, it
Secondly, it is long-term improvements in earnings that can lead is essential that they are executed through the establishment
to higher valuation by the market, so it is vital to lock them of effective processes based on clear understanding of best
in. Unfortunately hard-earned savings often erode over time if practice modern strategic sourcing approaches, tools and
Contact Us
1st Floor, 85 London Wall, London EC2M 7AD
T: +44 (0)20 7796 4170
E: info@bravosolution.co.uk
www.bravosolution.com
3

4. Procurement: Delivering Improved Company Valuation
techniques, and, importantly, pan-organisational compliance and organisational economics, CEOs, strategists and senior
to these approaches. managers looking to make a significant impact in their
organisation’s economics should understand that investments
Fifth, there must be effective contract and supplier made in procurement capabilities and tools often lead to
performance and relationship management tools that track sustainable long term benefits and contribute significantly to
obligations, performance, risk, price variances, off-contract the company’s bottom line. For organisations this can mean
spend and measures savings to plan, and if necessary, prompt dramatic improvement in valuation and share price.
corrective action.
This may mean, for example, initiating a programme of About BravoSolution
education and change within the organisation to build BravoSolution is an international leader in Supply Management
capabilities, upskill resources and ensure that procurement’s solutions, uniquely positioned to significantly enhance the
objectives are clear to all, and reflected within personal targets/ performance of a company’s entire sourcing cycle.
objectives and reward systems.
Our solutions interlink to provide cohesion between robust
technology and professional services expertise, a combination
that guarantees businesses will receive optimal support in
achieving their strategic procurement objectives.
As of today, over 400 companies in the private and public sector,
40,000 procurement professionals in 60 countries are benefiting
from BravoSolution’s technology and services, unlocking
tangible benefits including of increased process efficiency,
decision support, cost reduction, improved process governance,
greater quality relationships with vendors and the ability to
share, understand and act upon the wealth of sourcing-related
data held within their organisation.
About the Author
Finally, it is crucial that the organisation’s top management is Daniel Quinn
fully signed up to the programme’s objectives and provides Senior Account Director
visible, tangible and, if required, financial support to the build BravoSolution
the long-term capability. The boardroom must understand that
procurement is a strategic function engaged in critical work Dan has over 10 years professional procurement and
of value to the organisation as a whole, and be prepared to management experience across various private and public
exercise their leadership to invest in procurement’s success. sector organisations. He is an MBA and has category strategy,
business planning and project management qualifications and
Summary experience. He is currently a Senior Account Director with
It is well known to CPOs that procurement can deliver results BravoSolution in the UK advising private sector and government
quickly in terms of savings and better value for money. When organisations worldwide on the strategic deployment of
it comes to investing in improving competitive advantage sourcing solutions.
Contact Us
1st Floor, 85 London Wall, London EC2M 7AD
T: +44 (0)20 7796 4170
E: info@bravosolution.co.uk
www.bravosolution.com
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