- Common Vendors — if both legacy companies are buying goods and services from the same vendor, then the vendor may be approached on several fronts:
- Common Categories — if both companies are buying the same (or substitutable) category of goods or services, they likely may be buying them from completely or partially different suppliers. In this case, the merger or acquisition may introduce increased supplier fragmentation within a category. This fragmentation can yield synergy savings if sourcing and/or contracting events can be used to rationalize the fragmented supplier base down to a more optimal portfolio of suppliers for the category. One of the most effective ways to reduce this fragmentation is to launch a competitive category-wide sourcing event for the category (i.e., Option #3 — Competitively Bid).
- Business Unit Requests — independent of the category spend analysis and vendor spend data, the Business Units may be able to directly identify high synergy-opportunity initiatives for SCM to add to its list of initiatives under consideration.
— If one legacy company has more favorable pricing than the other, then the merged company should immediately be able to purchase its entire merged volume under the more favorable pricing (i.e., Option #1 — Volume Shift)
— Better yet, the increased volume of the merged company may be used as leverage to renegotiate more favorable pricing and terms than either legacy company could achieve on its own (i.e., Option #2 — Renegotiate)
Lesson Learned — Re-examine in-house vs. outsource decisions. If the legacy companies have made different choices, they bring information to the table that will be instructive in making those decisions for the merged entity.
Although SCM may be well positioned to do the detailed contract analysis and financial modeling necessary to identify the range of potential synergy initiatives, only the business units can bring to bear the balanced, real-world trade-offs and technical and operational constraints on top of what may be contractually feasible and financially viable. It is imperative that SCM foster the cross-functional collaboration needed to accomplish this.
Lesson Learned — Leverage existing contract and category managers to speed the analysis process. There is no replacement for their institutional knowledge. Use uniform assessment templates to drive consistent analysis across a distributed workforce.
SCM should partner with the functional business units to incorporate operational, technical and market-facing considerations and constraints into the synergy capture option assessment and subsequent prioritization. The contract and category assessment templates should reflect this need and ensure that business unit stakeholders' views are represented.See Image 3 — Determining Synergy Capture Options
A common failure point within this process is insufficient prioritization and resource allocation due to the legacy companies' disparate category structures and naming conventions for classifying spend. Even with standard spend categories, such as Universal Standard Products and Services Classification (UNSPSC) codes, different companies may still implement spend coding differently and classify the same spend under different category codes. Although complex and time-consuming, it is imperative to map each company's spend codes to each other so spend may be compared on an apples-to-apples basis.
This cross-company spend analysis will help identify spend categories that are over-fragmented and can be sourced to produce synergy savings. Also, for both the category spend analysis and vendor spend, many companies have data integrity challenges. For example, the spend may have been incorrectly categorized or there may be multiple instances of the same vendor in the financial systems with spend spread across all instances. These discrepancies carry over into the synergy analysis if not corrected.
Lesson Learned — Data capture and normalization can be challenging given the different definitions, processes and tools used by the pre-merger companies. Rules for capturing data and reasonable assumptions (where necessary) for normalizing spend categories must be agreed upon prior to analysis. As it is rare to have the time and resources required to completely resolve all of the data integrity or category mapping issues, apply the 80/20 rule to correct and map the majority of spend in a reasonable amount of time.
Step 2: Prioritize Initiatives Based on Business Impact
Given the scarce resources that all enterprises face, organizations must prioritize the identified synergy capture initiatives in order to maximize return on investment (ROI):
- Higher synergy yield projects with shorter pay-back periods and/or those that are relatively easier to achieve should be prioritized first — the so-called "low hanging frut"
- Longer-term projects that are more difficult to achieve may be de-prioritized; however, this should be balanced with potential high-synergy yields that may be worth the investment of time and resources
Holly advocates for senior leadership to be involved in the prioritizing of synergy initiatives and encourages each company to closely evaluate the other's processes. "Each company brings to the table a unique way of tackling problems and oftentimes each company can learn a better way to do something from the other." See Image 4.