How to deliver synergies and savings by smoothing the post-merger transition

In the last of our three-part series on procurement’s role in M&A, we look at how early engagement with procurement teams can help smooth the post-merger transition.

Procurement plays a vital role in determining the success of a merger or acquisition. Once a deal has completed, CEOs need to deliver the synergies and savings that will have formed part of the business case presented to shareholders.

This pressure puts procurement centre stage and creates a number of challenges, says Robert Frost, Global Head of Site Procurement at life sciences firm Lonza.

“Right from the beginning you need to understand the opportunities presented by the due diligence team, as well as what the assumptions were based on,” he says. “Acquiring spend data from the new company before the actual integration begins can be difficult, as can identifying the main stakeholders in the business.”

The integration imperative

It’s also important for procurement to address its own set-up. Occasionally, the two businesses will continue to operate separately. Often though, they will be integrated, which will mean bringing together the procurement functions.

An effective way of doing this is to quickly form a new leadership body, says Frost. “CPOs should consider rapidly reshaping the leadership team by blending the two legacy teams to drive successful integration. That drives a natural process of the two becoming one. It’s something that’s certainly worked well at Lonza, helping to prevent a ‘them and us’ mentality.”

This should be accompanied by an in-depth look at the systems and processes at both businesses in an attempt to harmonise them. To get a complete picture of spend, for instance, Lonza is consolidating data from the multiple IT systems of a recently acquired entity alongside its legacy business.

Common procurement processes also need to be synchronised. One example could be the way products are sourced to maximise scale and leverage, while internally the procurement performance metrics should also be aligned.

“The way savings are measured in two different companies might be fundamentally different,” says Frost. “That alone can require a significant change in mindset for procurement professionals.”

Mergers and acquisitions also represent a significant opportunity to share best practice. A good example is adopting processes designed to prise more value out of suppliers after contracts have been signed – an area where some companies excel and others struggle. Introducing initiatives across the new organisation that are already embedded in one business is easier than starting from scratch.

International mergers

Speed is a key factor, particularly where mergers cross international boundaries. The problems of different processes and systems will multiply if action is not taken to align procurement teams from the outset.

Frost also highlights other potential consequences. “If there’s no integration plan laid down that helps individuals identify with the new strategic direction, the best talent are likely to leave the company,” he says. “And your savings delivery will probably slip at the acquired company without that focus.”

Despite the need to move quickly, merging businesses in different parts of the world requires a delicate approach. Any attempt to bring functions together should not be imposed top-down from a global head office, but should rather involve local teams and pay attention to cultural sensitivities and leadership styles.

Those leading the procurement integration for the acquiring firm must also be mindful of the cultural differences when rolling out new processes and ways of working. The way negotiations are conducted with suppliers in Japan, for instance, is totally different to countries in the West. And in China, it’s common for the country head to physically sign and stamp contracts.

“Some countries have many more layers of approval than others before a purchase order is raised and issued,” adds Frost.

Language differences can also create barriers, and project leaders need the appropriate skills to cover both organisations.

Business as usual

While the focus is on restructuring, procurement heads need to keep the day-to-day business running. Staff will need to continue to satisfy their own internal customers while everything else is going on around them.

“It’s like refurbishing a hotel while the guests are still there; your job is to help guests and get them to pay full price while you’re fixing the plumbing and heating,” says Frost. Failing to keep procurement from doing its day job could damage the reputation of those working in the function, and lead to lost credibility, he adds.

At the same time, senior procurement professionals need to prove they can lead the new-look team. “You need to be on the front foot in terms of communication. That means rallying a team who might have a strong allegiance to a former leader,” says Frost. “And it means temporarily removing yourself from delivering savings to [adopting] more of an internal communications role.”

Doing a good job in such a situation can help raise the profile of the procurement function and CPOs. “The increased communication requirement is a great opportunity to increase your visibility, and to raise your profile,” says Frost.