Why 2025 is the time for private equity firms to pull the procurement value lever

Authors: Declan Feeney and Simon Whatson

2025 presents a unique window of opportunity for private equity (PE) firms to unlock significant value through a historically under-utilized lever: procurement.

In the four years since COVID-19, economies across Europe and North America have experienced inflation of 20% and more across goods and services procured from third parties, driven partly by pent-up demand following lockdowns. Similar levels of inflation have been observed in wages. Businesses, unable to mitigate or absorb these cost increases, passed most of them onto customers.

Reversing wage increases and reducing headcount come with risks, but commodity prices for many goods and services have been declining in recent months as buying behaviours return to “normal”. This change offers companies the opportunity to recover at least half of the third-party cost increases they’ve faced over the last few years.
 

Overturning the inflationary increases of recent years

The potential impact is significant; for companies that take the right approach, it could mean adding 20% to their EBITDA. Take the example of a company with $500m revenue in 2020, with people costs of $200m, third-party costs of $200, and $100m in profit. 20% inflation over four years would result in people costs of $240m and $240m of third-party costs in 2024. Assuming these increases were passed onto consumers, as was largely the case, revenue is $580m and profit is maintained at $100m. If the company makes back half of the $40m increase in third-party costs, it would add $20m, or 20%, to its EBITDA.

Why 2025? The window of opportunity

For many private equity companies, this would appear to be an initiative worth pursuing across their asset portfolio. Many portfolio companies are expected to come to market in 2025 due to pent-up demand from deals completed between 2018 and 2020. Over the last four years, private equity exits had slowed to just 10% of M&A deals, compared to 20% in the previous period. Prospective buyers will be on the lookout for strong procurement plans demonstrating robust cost reduction initiatives in their value creation plans going forward.

Leading companies are proactively resetting prices with their key suppliers who are open to sharing growth benefits with their customers. As a result, strong performing teams have plans in place for 2025 to achieve double-digit savings from an inflated spend base.

Making procurement a key part of the VCP in 2025

The first step in this initiative is running a rapid assessment of third-party spend. The aim is not only to benchmark current rates and practices and set improvement targets, but also to create buy-in and momentum from across the business. While Procurement should lead a third-party cost initiative, it requires the engagement of spend owners who sit in the business’ different functions, as they will have to approve any changes to how money is spent.

This assessment can be run in a matter of weeks to yield a prioritized list of strategic opportunities, each with a clear business case and implementation plan.

From plan to reality: Pulling the procurement value lever

The resulting plan is only likely to succeed if it is run as a program, clearly distinct from business-as-usual activities. This will help teams give it the focus it needs, with regular tracking against targets, while allowing for the transactional but necessary “keep the lights on” procurement operations to continue.

And, like any program, an initiative like this needs support from the executive- level, beyond procurement leadership, to succeed. The CFO, COO, or CEO can ensure that the targets are owned by the business, not just procurement, and clear the way for timely benefit realization. This sponsor will also need to be able to articulate to the business at large how the program feeds into wider corporate objectives.

Ultimately, the improvements that this program brings will need to remain embedded and be sustained over the long term. To achieve this, organizations should develop the maturity of the procurement function in parallel to the cost reduction plan. Invest in developing a team that has the right skills and capacity to elevate procurement to a strategic function. Having the right leader in place is the most important piece of the puzzle. This leader should be able to go toe to toe with leaders in operations and other business functions, confidently challenging spending requirements and fostering collaboration instead of simply acting as a rule enforcer.

Act now to get ahead

Companies that want to maximize these benefits from procurement need to act fast; it can take time for savings to work their way into the P&L after contracts are signed and for new deals to reach full volume. Kicking off 2025 with an assessment will give companies a head start over their competitors.