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  • Private Equity Firms And The Vendor Management Conundrum (Part II)

    by Ananda Ladi, Partner, Zinnov; Anthony Kiran, Engagement Lead, Zinnov; Anant Dhir, Senior Consultant, Zinnov

    Private Equity firms

     

    Traditionally, PE firms thought about cost optimization only when their portfolio companies’ performance was not up to the mark. Come 2018, and this conventional logic has turned on its head, with PEs now evaluating cost optimization possibilities even before brokering a deal, with an eye on increasing EBITDA margins of prospective portfolio companies as early as possible. One of the most visible trends that has emerged from this shift is the need for the outsourcing processes of portfolio companies to be centralized. This can be achieved by a set of experts (external or internal) taking a 360-degree approach to vendor management, as ‘a fragmented set of vendors’ has emerged as a major pain point.

    Expeditious Cost Optimization

    In the past few years, most PE firms have been trying to maintain momentum in a difficult economy, dealing with the twin challenges of sluggish growth in developed nations and robust fundraising activities, both leading to price inflation. At a time like this, it has become crucial for PE firms to focus on cost optimization to increase the EV to EBITDA ratio of their portfolio firms. The most common cost optimizing techniques that are being implemented are analyzing spending patterns, re-evaluating vendor relationships, renegotiating existing contracts, and tweaking SLAs (as discussed in part (I) of this series).

    Vendor management is now at the heart of business performance improvement, across portfolios, from the time the portfolio companies are on-boarded. This has proven to create long-term value for PEs and have a significant impact on EBITDA growth, so much so that leading firms now seek expert help for a thorough analysis during due diligence, coupled with a detailed review of potential savings. An added advantage of cost improvements from day one is that operating partners are able to free up capital for newer investments. It has been found that cost-saving steps taken initially can deliver a quick impact; at times, in as few as 30-60 days.

    An Unavoidable Measure – Spend Analysis

    Most PE firms struggle to get a thorough outsourcing spend analysis done for their portfolio companies. But the good news is that, in most cases, savings opportunities exist. External experts have been helping PEs carry out a data-driven approach to measure their outsourcing strategies, to ensure improvements in a portfolio company’s EBITDA. A well carried out spend analysis for a rather large portfolio, additionally entails overcoming obstacles such as uncategorized data and taxonomy of vendors. At this juncture, the most important questions to be asked are –

    Private Equity firms

    Need of the Hour: A Centralized Outsourcing Process

    The strategies discussed have given rise to the much-needed optimization of the vendor footprint of a PE portfolio. Cost savings early on during a deal and spend analysis across the portfolio are strategic programs that an operating partner can initiate to gain significant EBITDA impact in a matter of months. Consolidated outsourcing initiatives have helped PEs to combine the indirect spend across their portfolio with a few key vendors.

    Private Equity firms

    Regardless of the vendor engagement model adopted by the PEs, the benefits of a consolidated outsourcing strategy are seen in terms of EBITDA growth, cash flow, and competitive advantage. As an example, let’s take a portfolio company with $300 Mn in revenue, $200 Mn in outsourcing costs, and $30 Mn in EBITDA. A typical outsourcing optimization program addresses 50%, or $100 Mn, of the total spend. The evolved outsourcing program can lead to savings of approximately 10%, which is $10 Mn. At an average PE market multiple of 9x EBITDA, the value of savings becomes $90 Mn, as compared to the acquisition value of $270 Mn (9x$30 Mn EBITDA), thus leading to a 30% growth in EBITDA.

    Mileage Gained by Vendor Consolidation

    1. The perfect match: A centralized team, be it external or internal, has a systematic approach to managing vendors. This is beneficial, especially for a PE, since the partners lose sleep over finding the right vendor for multiple companies. A centralized team will usually have extensive experience to pick the right vendor and negotiate the right price for its portfolio. An added advantage here is the ease of vendor and contract analysis and RFP roll out.
    2. Leadership visibility: Most portfolio companies are sub-billion-dollar technology companies that struggle in getting leadership attention from the vendor, due to the smaller deal values. An optimized strategy helps the vendor treat the PE firm as a whole, and in turn provide more leadership visibility. Through vendor optimization, PEs consolidate a few small-size deals into one major deal. This helps not only with delivery quality, but also with niche technologies that the portfolio company focuses on. Individual outsourcing contracts tend to suffer since the vendor organization is not agile enough to provide talent with niche skills.
    3. Talent advantage: Smaller deals always face a problem with talent. Once the vendor treats all portfolio companies as one entity, the PE has the liberty to demand quality talent to work on outsourcing engagements without the fear of talent moving out midway during an engagement. PEs now have an opportunity to ask for what they want as a clause in the master agreement. Once the MSA has clearly defined clauses about talent, knowledge transition, and engagement model, the vendor, more than likely, complies by it.
    4. Scale your business: Vendor consolidation leads to a win-win situation for both sides. PEs are able to increase the size of the deals, which gives them added benefits such as delivery quality, talent stickiness, and leadership attention. At the same time, vendors are able to scale their business by attracting bigger deals in terms of value and talent.

    To reap these benefits of vendor consolidation, the central program management office (PMO) needs to play a critical role. A PMO is the need of the hour for PEs due to the looming burden of managing an increasing list of vendor partners. This office, further facilitates cross-portfolio spend analysis and cost optimization activities across the portfolio of companies. It also institutionalizes a systematic approach to lower outsourcing costs and increased EBITDA, while implementing a regular cadence of governance measures.

    Vendor consolidation and a central PMO together address all the vendor-related challenges faced by the PEs as discussed in our part (I) of the series. However, not many individual companies or PE firms have the expertise in establishing the PMO and consolidating their vendors. It involves expertise in dealing with a wide network of stakeholders, multiple companies, unrelated industries, distinct SLAs, and business criticality, all at the same time. The PE firms need to closely keep a track of their outsourcing costs and work with external experts to establish a central PMO that can drive vendor consolidation effectively.


    To get in touch with Zinnov’s Centralized PMO team, in order to optimize your outsourcing footprint, please write to us at info@zinnov.com
    Summary
    Private Equity Firms And The Vendor Management Conundrum (Part II)
    Article Name
    Private Equity Firms And The Vendor Management Conundrum (Part II)
    Description
    Private Equity firms look out for cost optimization techniques for their portfolio companies. How does a consolidated vendor management system help? Here's how.
    Author

  • Private Equity Firms And The Vendor Management Conundrum (Part I)

    by Ananda Ladi, Partner, Zinnov; Anthony Kiran, Engagement Lead, Zinnov; Anant Dhir, Senior Consultant, Zinnov

    Private Equity firms

     

    What if I told you that a poorly managed company spends around 7,500-10,000 person-hours every year, per $50 million worth of program management done for outsourcing and other purchases? Whereas, a best-in-class company focused on cost effectiveness, efficiency, cycle time, and productivity, spends only a fraction (1/5th) of that time? Vendor management is a necessary evil for organizations that are always on the lookout to reduce costs and increase efficiency. Key factors that deter organizations from reaching vendor management nirvana are long cycle times, large number of vendors, and quality of delivery, among others. These are ubiquitous to every CPO you speak with.

    The challenges are magnified in the PE world. Large portfolio of companies to manage, the pressure to increase the EV to EBITDA ratio, and a thin management layer, make it even more challenging for a Private Equity firm to manage its overall vendor footprint. Typically, a PE would cut down the costs as soon as it acquires a new organization. Most common cost optimizing techniques implemented are analyzing the spending patterns, relooking at vendor partners, renegotiating the existing contracts and tweaking the SLAs.

    The implemented optimizing techniques would yield results in any large organization, but the PEs face an uncommon challenge as most of their portfolio companies are sub-billion-dollar companies with revenues that can go as low as $50 million or less. Due to the small size of the portfolio companies, they neither have the scale of large organizations nor do they command enough attention from their vendor partners. Therefore, PEs face a specific set of challenges such as lack of management attention from vendors, absence of knowledge on latest technologies and rigid SLAs that do not favor small tech companies.

    A best in class PE plays to its strength and uses the experience of managing multiple portfolio companies. They enable collaboration among the companies, build a platform to share best practices, provide means to price comparisons, explore consolidation of similar services that bring scale and attention from vendors, and manage portfolio companies as one single large organization. These strategies are implemented successfully by very few PEs as things stand.

    Private Equity firms

    In this part (I) of the blog series, we will delve into the challenges faced by PE firms in terms of vendor management, whereas in the next part we will explore vendor optimization strategies.

    Take a look at a few typical challenges that PEs and their portfolio companies face.

    1. Choosing the right vendor for specific requirements is only ‘half the job done’

    Identifying the right vendor for the right job has always been a challenge for most organizations. Unlike major ones, that have an army of procurement executives for conducting vendor evaluations through RFPs / RFIs, smaller ones neither have the expertise nor the resources to assess and choose the right partners. Due to the limited number of partners in a PE, it is challenging for the portfolio company to get enough time and mindshare from them.

    A PE’s management team might not have the required time for vendor evaluation, but they have the pool of companies, a few of which have the expertise in vendor selection process. There is a need for a common platform where all portfolio companies can interact and share the best practices, common pitfalls, and if possible, preferred vendor lists with each other. This enables the smaller tech companies to learn from their peer portfolio companies and pick the right vendor.

    2. High value deals are always on ‘fast-track,’ and small deals naturally move to ‘loop-line’

    A vendor always lays importance on strategic high value deals that involve 100s of FTEs, since an unmet SLA could break the deal. Such deals eat up most of the vendor leadership’s time, which limits the attention and value-add from the vendors to small deals. Small tech portfolio companies typically have low deal value or few FTEs, which typically don’t attract any time from the vendor management, and in a few cases, is very poorly managed. Reluctance to change in the scope, inefficient processes, no steps taken to cut down costs, low quality of work delivered are some of the challenges that portfolio companies face with their vendors.

    Facilitating a mechanism that enables periodic reviews of the efficiency metrics and cost reduction measures included in the vendor contract at the time of the deal, can prove beneficial. This provides the portfolio companies an upper hand in the deal along with clear visibility of the performance of the vendor as per SLAs.

    3. Niche skills, quality talent, efficient knowledge transition – ‘pick one’

    Talent plays a pivotal role in any engagement with a vendor since the very beginning of the deal. A thorough due diligence about the quality of the talent from the vendor and the specific skills that are required by the organization is needed before the contract is finalized. Quite often, vendors showcase talent who have worked on similar engagements; however, it need not necessarily mean that the same talent would work on the organization’s engagement too. This leads to a precarious situation where the client needs to rebuild the domain-specific understanding with the new team, while efficiency gains promised are lost, and quality takes a back seat.

    PE firms should also be aware of talent moving within the vendor organization to another engagement where a direct competitor is involved. This can potentially jeopardize the data security / IP of the client which pulls the PE firm into ugly IP wars. Clients need to ensure that they have the necessary clauses in the MSA (Master Service Agreement) to prevent similar moves from the vendor side. This gives more control over the talent that will be engaged to the client organization, and creates a stable team throughout the engagement.

    Another major factor that affects quality of the delivery is attrition of crucial vendor resources. Attrition of a key team member will not just reduce the quality and timeliness of the delivery but also the knowledge gained over a long period. Therefore, vendors are required to provide shadow FTEs and have a back-up resource in place with the necessary skills and knowledge transition (KT), so that neither the delivery quality nor the timeliness is affected. The MSA should contain a detailed plan from the vendor side to replace the attrition and cover details such as the number of days for replacement, KT procedure and shadow resource.

    4. ‘Choose your pricing battles wisely’ – fixed price / time & material / outcome-based

    The portfolio companies in question here are sub-million-dollar companies which are small and tend to work with large vendors. A pricing model that is widely used in the industry may not always be the best suited for such companies. These companies (owned by a PE) are typically very dynamic in nature, with a constant flux of ideas, management churns, and in a few cases, major technology makeovers, that are bound to happen during the course of the engagement. Such scenarios demand an equally agile and dynamic response from the vendor side too. Thus, common pricing-based models such as ‘fixed price,’ ‘time & material,’ or ‘outcome-based’ do not serve the purpose of the company.

    In such high-octane environments, PEs should also consider other options such as ‘pay by grade’ approaches where the billing is done based on the seniority or the skillsets required rather than a pre-determined model.  

    5. Technology Leader or Laggard

    Smaller companies tend to work on niche technology areas where finding vendors is challenging, as the universe of vendors to choose from shrinks considerably. After the right vendor is identified, it is hard to expect innovation and swift development from the vendor as they are not agile enough. They typically evolve at a much slower pace than that of the industry, while technology companies always want to be ahead of the curve. Also, due to small teams in the portfolio companies, they work on very niche technology solutions which are not viable for a service provider, as such niche solutions do not provide scale to them. Therefore, organizations should be well informed about the technical capabilities of the vendor before entering the engagement.

    6. Perception of Scale

    PEs that have individual outsourcing contracts face a bigger challenge with respect to vendors as it becomes harder for portfolio companies to scale their outsourcing deals in terms of talent and value. Vice versa of this holds true as well – vendors are unable to provide the right attention to clients with smaller deal size. PEs would benefit if they consolidated their list of vendors across the portfolio companies to a smaller number to provide better quality of work. This way, both – the client and the vendor – are able to scale their business and reduce problems faced in the client-vendor relationship.

    As the number of companies increases in their portfolio, PEs need to be aware of the above vendor management challenges and ensure that a befitting mitigation strategy is implemented. Unlike other organizations, PEs have the necessary resources to share best practices, co-source, and consolidate their vendor partners with a single dashboard view of all the vital metrics. This drives out the inefficiencies and enables the PEs to play on their strengths, thereby increasing the EV of each of the portfolio company.

    In part (II) of this series, we will be exploring how a PE firm can co-source and/or consolidate its portfolio companies’ vendors in order to gain scale and efficiencies.


    To optimize costs and outline a consolidated vendor management system, write to us at info@zinnov.com.
    Summary
    Private Equity Firms And The Vendor Management Conundrum (Part I)
    Article Name
    Private Equity Firms And The Vendor Management Conundrum (Part I)
    Description
    Private Equity firms face a conundrum of an inefficient vendor management system. What are the challenges faced by the PE firms in vendor management? Is there a solution to optimize this relationship?
    Author

Client speak

“Zinnov has helped us immensely in optimizing our operations at our GIC in Romania, and to build a better ROI from it. ”

Sudha Chandran

Microsoft

Blog

Driving internal innovation initiatives effectively at your Organization

By Vivek Gupta July 25, 2016 by zinnov

That continuous innovation is the mantra for survival & success for organizations globally is now an established fact. Avenues such as setting up accelerators/ incubators, startups connects, leveraging the existing developer ecosystem, academic connects etc. can provide an impetus to innovation-related aspirations of the organization.

Zinnov Insights

  • Blogs

    Private Equity Firms And The Vendor Management Conundrum (Part II)

    by Ananda Ladi, Partner, Zinnov; Anthony Kiran, Engagement Lead, Zinnov; Anant Dhir, Senior Consultant, Zinnov

    Private Equity firms

     

    Traditionally, PE firms thought about cost optimization only when their portfolio companies’ performance was not up to the mark. Come 2018, and this conventional logic has turned on its head, with PEs now evaluating cost optimization possibilities even before brokering a deal, with an eye on increasing EBITDA margins of prospective portfolio companies as early as possible. One of the most visible trends that has emerged from this shift is the need for the outsourcing processes of portfolio companies to be centralized. This can be achieved by a set of experts (external or internal) taking a 360-degree approach to vendor management, as ‘a fragmented set of vendors’ has emerged as a major pain point.

    Expeditious Cost Optimization

    In the past few years, most PE firms have been trying to maintain momentum in a difficult economy, dealing with the twin challenges of sluggish growth in developed nations and robust fundraising activities, both leading to price inflation. At a time like this, it has become crucial for PE firms to focus on cost optimization to increase the EV to EBITDA ratio of their portfolio firms. The most common cost optimizing techniques that are being implemented are analyzing spending patterns, re-evaluating vendor relationships, renegotiating existing contracts, and tweaking SLAs (as discussed in part (I) of this series).

    Vendor management is now at the heart of business performance improvement, across portfolios, from the time the portfolio companies are on-boarded. This has proven to create long-term value for PEs and have a significant impact on EBITDA growth, so much so that leading firms now seek expert help for a thorough analysis during due diligence, coupled with a detailed review of potential savings. An added advantage of cost improvements from day one is that operating partners are able to free up capital for newer investments. It has been found that cost-saving steps taken initially can deliver a quick impact; at times, in as few as 30-60 days.

    An Unavoidable Measure – Spend Analysis

    Most PE firms struggle to get a thorough outsourcing spend analysis done for their portfolio companies. But the good news is that, in most cases, savings opportunities exist. External experts have been helping PEs carry out a data-driven approach to measure their outsourcing strategies, to ensure improvements in a portfolio company’s EBITDA. A well carried out spend analysis for a rather large portfolio, additionally entails overcoming obstacles such as uncategorized data and taxonomy of vendors. At this juncture, the most important questions to be asked are –

    Private Equity firms

    Need of the Hour: A Centralized Outsourcing Process

    The strategies discussed have given rise to the much-needed optimization of the vendor footprint of a PE portfolio. Cost savings early on during a deal and spend analysis across the portfolio are strategic programs that an operating partner can initiate to gain significant EBITDA impact in a matter of months. Consolidated outsourcing initiatives have helped PEs to combine the indirect spend across their portfolio with a few key vendors.

    Private Equity firms

    Regardless of the vendor engagement model adopted by the PEs, the benefits of a consolidated outsourcing strategy are seen in terms of EBITDA growth, cash flow, and competitive advantage. As an example, let’s take a portfolio company with $300 Mn in revenue, $200 Mn in outsourcing costs, and $30 Mn in EBITDA. A typical outsourcing optimization program addresses 50%, or $100 Mn, of the total spend. The evolved outsourcing program can lead to savings of approximately 10%, which is $10 Mn. At an average PE market multiple of 9x EBITDA, the value of savings becomes $90 Mn, as compared to the acquisition value of $270 Mn (9x$30 Mn EBITDA), thus leading to a 30% growth in EBITDA.

    Mileage Gained by Vendor Consolidation

    1. The perfect match: A centralized team, be it external or internal, has a systematic approach to managing vendors. This is beneficial, especially for a PE, since the partners lose sleep over finding the right vendor for multiple companies. A centralized team will usually have extensive experience to pick the right vendor and negotiate the right price for its portfolio. An added advantage here is the ease of vendor and contract analysis and RFP roll out.
    2. Leadership visibility: Most portfolio companies are sub-billion-dollar technology companies that struggle in getting leadership attention from the vendor, due to the smaller deal values. An optimized strategy helps the vendor treat the PE firm as a whole, and in turn provide more leadership visibility. Through vendor optimization, PEs consolidate a few small-size deals into one major deal. This helps not only with delivery quality, but also with niche technologies that the portfolio company focuses on. Individual outsourcing contracts tend to suffer since the vendor organization is not agile enough to provide talent with niche skills.
    3. Talent advantage: Smaller deals always face a problem with talent. Once the vendor treats all portfolio companies as one entity, the PE has the liberty to demand quality talent to work on outsourcing engagements without the fear of talent moving out midway during an engagement. PEs now have an opportunity to ask for what they want as a clause in the master agreement. Once the MSA has clearly defined clauses about talent, knowledge transition, and engagement model, the vendor, more than likely, complies by it.
    4. Scale your business: Vendor consolidation leads to a win-win situation for both sides. PEs are able to increase the size of the deals, which gives them added benefits such as delivery quality, talent stickiness, and leadership attention. At the same time, vendors are able to scale their business by attracting bigger deals in terms of value and talent.

    To reap these benefits of vendor consolidation, the central program management office (PMO) needs to play a critical role. A PMO is the need of the hour for PEs due to the looming burden of managing an increasing list of vendor partners. This office, further facilitates cross-portfolio spend analysis and cost optimization activities across the portfolio of companies. It also institutionalizes a systematic approach to lower outsourcing costs and increased EBITDA, while implementing a regular cadence of governance measures.

    Vendor consolidation and a central PMO together address all the vendor-related challenges faced by the PEs as discussed in our part (I) of the series. However, not many individual companies or PE firms have the expertise in establishing the PMO and consolidating their vendors. It involves expertise in dealing with a wide network of stakeholders, multiple companies, unrelated industries, distinct SLAs, and business criticality, all at the same time. The PE firms need to closely keep a track of their outsourcing costs and work with external experts to establish a central PMO that can drive vendor consolidation effectively.


    To get in touch with Zinnov’s Centralized PMO team, in order to optimize your outsourcing footprint, please write to us at info@zinnov.com
    Summary
    Private Equity Firms And The Vendor Management Conundrum (Part II)
    Article Name
    Private Equity Firms And The Vendor Management Conundrum (Part II)
    Description
    Private Equity firms look out for cost optimization techniques for their portfolio companies. How does a consolidated vendor management system help? Here's how.
    Author

  • Blogs

    Private Equity Firms And The Vendor Management Conundrum (Part I)

    by Ananda Ladi, Partner, Zinnov; Anthony Kiran, Engagement Lead, Zinnov; Anant Dhir, Senior Consultant, Zinnov

    Private Equity firms

     

    What if I told you that a poorly managed company spends around 7,500-10,000 person-hours every year, per $50 million worth of program management done for outsourcing and other purchases? Whereas, a best-in-class company focused on cost effectiveness, efficiency, cycle time, and productivity, spends only a fraction (1/5th) of that time? Vendor management is a necessary evil for organizations that are always on the lookout to reduce costs and increase efficiency. Key factors that deter organizations from reaching vendor management nirvana are long cycle times, large number of vendors, and quality of delivery, among others. These are ubiquitous to every CPO you speak with.

    The challenges are magnified in the PE world. Large portfolio of companies to manage, the pressure to increase the EV to EBITDA ratio, and a thin management layer, make it even more challenging for a Private Equity firm to manage its overall vendor footprint. Typically, a PE would cut down the costs as soon as it acquires a new organization. Most common cost optimizing techniques implemented are analyzing the spending patterns, relooking at vendor partners, renegotiating the existing contracts and tweaking the SLAs.

    The implemented optimizing techniques would yield results in any large organization, but the PEs face an uncommon challenge as most of their portfolio companies are sub-billion-dollar companies with revenues that can go as low as $50 million or less. Due to the small size of the portfolio companies, they neither have the scale of large organizations nor do they command enough attention from their vendor partners. Therefore, PEs face a specific set of challenges such as lack of management attention from vendors, absence of knowledge on latest technologies and rigid SLAs that do not favor small tech companies.

    A best in class PE plays to its strength and uses the experience of managing multiple portfolio companies. They enable collaboration among the companies, build a platform to share best practices, provide means to price comparisons, explore consolidation of similar services that bring scale and attention from vendors, and manage portfolio companies as one single large organization. These strategies are implemented successfully by very few PEs as things stand.

    Private Equity firms

    In this part (I) of the blog series, we will delve into the challenges faced by PE firms in terms of vendor management, whereas in the next part we will explore vendor optimization strategies.

    Take a look at a few typical challenges that PEs and their portfolio companies face.

    1. Choosing the right vendor for specific requirements is only ‘half the job done’

    Identifying the right vendor for the right job has always been a challenge for most organizations. Unlike major ones, that have an army of procurement executives for conducting vendor evaluations through RFPs / RFIs, smaller ones neither have the expertise nor the resources to assess and choose the right partners. Due to the limited number of partners in a PE, it is challenging for the portfolio company to get enough time and mindshare from them.

    A PE’s management team might not have the required time for vendor evaluation, but they have the pool of companies, a few of which have the expertise in vendor selection process. There is a need for a common platform where all portfolio companies can interact and share the best practices, common pitfalls, and if possible, preferred vendor lists with each other. This enables the smaller tech companies to learn from their peer portfolio companies and pick the right vendor.

    2. High value deals are always on ‘fast-track,’ and small deals naturally move to ‘loop-line’

    A vendor always lays importance on strategic high value deals that involve 100s of FTEs, since an unmet SLA could break the deal. Such deals eat up most of the vendor leadership’s time, which limits the attention and value-add from the vendors to small deals. Small tech portfolio companies typically have low deal value or few FTEs, which typically don’t attract any time from the vendor management, and in a few cases, is very poorly managed. Reluctance to change in the scope, inefficient processes, no steps taken to cut down costs, low quality of work delivered are some of the challenges that portfolio companies face with their vendors.

    Facilitating a mechanism that enables periodic reviews of the efficiency metrics and cost reduction measures included in the vendor contract at the time of the deal, can prove beneficial. This provides the portfolio companies an upper hand in the deal along with clear visibility of the performance of the vendor as per SLAs.

    3. Niche skills, quality talent, efficient knowledge transition – ‘pick one’

    Talent plays a pivotal role in any engagement with a vendor since the very beginning of the deal. A thorough due diligence about the quality of the talent from the vendor and the specific skills that are required by the organization is needed before the contract is finalized. Quite often, vendors showcase talent who have worked on similar engagements; however, it need not necessarily mean that the same talent would work on the organization’s engagement too. This leads to a precarious situation where the client needs to rebuild the domain-specific understanding with the new team, while efficiency gains promised are lost, and quality takes a back seat.

    PE firms should also be aware of talent moving within the vendor organization to another engagement where a direct competitor is involved. This can potentially jeopardize the data security / IP of the client which pulls the PE firm into ugly IP wars. Clients need to ensure that they have the necessary clauses in the MSA (Master Service Agreement) to prevent similar moves from the vendor side. This gives more control over the talent that will be engaged to the client organization, and creates a stable team throughout the engagement.

    Another major factor that affects quality of the delivery is attrition of crucial vendor resources. Attrition of a key team member will not just reduce the quality and timeliness of the delivery but also the knowledge gained over a long period. Therefore, vendors are required to provide shadow FTEs and have a back-up resource in place with the necessary skills and knowledge transition (KT), so that neither the delivery quality nor the timeliness is affected. The MSA should contain a detailed plan from the vendor side to replace the attrition and cover details such as the number of days for replacement, KT procedure and shadow resource.

    4. ‘Choose your pricing battles wisely’ – fixed price / time & material / outcome-based

    The portfolio companies in question here are sub-million-dollar companies which are small and tend to work with large vendors. A pricing model that is widely used in the industry may not always be the best suited for such companies. These companies (owned by a PE) are typically very dynamic in nature, with a constant flux of ideas, management churns, and in a few cases, major technology makeovers, that are bound to happen during the course of the engagement. Such scenarios demand an equally agile and dynamic response from the vendor side too. Thus, common pricing-based models such as ‘fixed price,’ ‘time & material,’ or ‘outcome-based’ do not serve the purpose of the company.

    In such high-octane environments, PEs should also consider other options such as ‘pay by grade’ approaches where the billing is done based on the seniority or the skillsets required rather than a pre-determined model.  

    5. Technology Leader or Laggard

    Smaller companies tend to work on niche technology areas where finding vendors is challenging, as the universe of vendors to choose from shrinks considerably. After the right vendor is identified, it is hard to expect innovation and swift development from the vendor as they are not agile enough. They typically evolve at a much slower pace than that of the industry, while technology companies always want to be ahead of the curve. Also, due to small teams in the portfolio companies, they work on very niche technology solutions which are not viable for a service provider, as such niche solutions do not provide scale to them. Therefore, organizations should be well informed about the technical capabilities of the vendor before entering the engagement.

    6. Perception of Scale

    PEs that have individual outsourcing contracts face a bigger challenge with respect to vendors as it becomes harder for portfolio companies to scale their outsourcing deals in terms of talent and value. Vice versa of this holds true as well – vendors are unable to provide the right attention to clients with smaller deal size. PEs would benefit if they consolidated their list of vendors across the portfolio companies to a smaller number to provide better quality of work. This way, both – the client and the vendor – are able to scale their business and reduce problems faced in the client-vendor relationship.

    As the number of companies increases in their portfolio, PEs need to be aware of the above vendor management challenges and ensure that a befitting mitigation strategy is implemented. Unlike other organizations, PEs have the necessary resources to share best practices, co-source, and consolidate their vendor partners with a single dashboard view of all the vital metrics. This drives out the inefficiencies and enables the PEs to play on their strengths, thereby increasing the EV of each of the portfolio company.

    In part (II) of this series, we will be exploring how a PE firm can co-source and/or consolidate its portfolio companies’ vendors in order to gain scale and efficiencies.


    To optimize costs and outline a consolidated vendor management system, write to us at info@zinnov.com.
    Summary
    Private Equity Firms And The Vendor Management Conundrum (Part I)
    Article Name
    Private Equity Firms And The Vendor Management Conundrum (Part I)
    Description
    Private Equity firms face a conundrum of an inefficient vendor management system. What are the challenges faced by the PE firms in vendor management? Is there a solution to optimize this relationship?
    Author

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Pari Natarajan
Co-Founder and CEO

Pari Natarajan, Co-Founder and CEO of Zinnov, has successfully spearheaded engagements for Fortune 500 companies and helped them effectively globalize their R&D initiatives and bolster their business footprint in India and across other emerging markets.

Pari Natarajan
Co-Founder and CEO

Pari Natarajan, Co-Founder and CEO of Zinnov, has successfully spearheaded engagements for Fortune 500 companies and helped them effectively globalize their R&D initiatives and bolster their business footprint in India and across other emerging markets.