Managing Procurement Through a Merger: Capturing the Value of the Deal

To succeed, the CEO and the chief procurement officer must begin planning well before the consummation of the merger. Changes in the merged company's vertical integration, product line, and organizational structure will influence the direction taken by the new procurement function. Furthermore, the merger presents an opportunity for the procurement function to reinvent itself by quickly developing capabilities that will enable it to capture the required savings.

Procurement will be among the busiest functions during merger integration. While it has the same internal restructuring tasks as other units of the company, procurement also must dramatically accelerate its rate of performance to realize targeted savings. The best approach to managing the work is to follow a phased work plan that focuses first on critical operational issues, then on capturing synergies, and then on achieving the ultimate value of the merger after the dust settles.

Companies should organize for the merger using a team-based approach that separates procurement function design, synergy capture, and Day-One coordination. This distinction helps keep priorities straight and ensures that nothing falls through the cracks. A "clean room" can help the companies collect and use confidential information without violating laws or subjecting themselves to competitive disadvantage if the merger fails to close.

Carefully set and managed targets ensure both accountability and cooperation. While top-down targets are necessary, there are right and wrong ways to establish targets and measure results.

Savings in a merger come from three sources: price harmonization, economies of scale, and adoption of sourcing best practices. The first provides the "low-hanging fruit," while the second represents the value that was generally expected from the merger; however, the third is often the greatest source of opportunity. The best way to achieve savings is to use a well-structured sourcing methodology that pursues the opportunities in waves, starting with the easiest first. If procurement is managed well, companies will capture much of the merger's potential.

"Managing Procurement Through a Merger – Capturing the Value of the Deal" is one in a series by Booz Allen Hamilton on mergers, acquisitions, and integration. We contend that "capturing the value of the deal" requires superior execution in addition to good strategic fit. It offers practical advice and a proven approach for effectively managing procurement through a merger.

study posted August 2001