Daily Archives: October 13, 2011

Do You Know Your Legal Risk In An Acquisition?

Chief Executive just ran a great article on how to evaluate legal risk in acquisitions that I believe is a must read for any Supply Management department asked to consult on a Merger or Acquisition. Especially since, like the article states, it is nearly impossible to find a company not involved in some sort of litigation. The traditional analysis of the management team, cash flow, and market share is not enough — a risk assessment on pending litigation must also be made.

So how do you assess legal risk? The first thing you do is get an expert advisor, and a litigation manager in particular. Once you have this individual, who is an attorney with a significant business background as well as a litigation background, you work with her to evaluate the:

  • materiality of the litigation, the
  • potential for future suits, and the
  • connection between the litigation and the business plan.

The materiality is important not just from a relevancy perspective (that attempts to define the validity of the claim and the chance of success by the claimant) but from a cost perspective. If the cost of defending the litigation, regardless of expected outcome, will cost the company more than it can afford, the company will be bankrupted. The potential for future suits is also important because if the business model, or technology platform, opens the company up to other potential litigations based on equally (in) valid claims, the company could be bankrupted as it grows (and becomes a target by patent pirates). Finally, it is critically important to understand if the litigation exposes a problem with the core business model. If this is the case, and there is no easy, or at least manageable way, to correct the model, there is not only a great potential for further suits but a great potential for failure and bankruptcy.

However, if a litigation manager properly evaluates the potential for materiality and future litigation, and the connection between the litigation and the business plan, and finds no significant risks, then investors, who can make informed decisions, with a full understanding of the legal risk associated with a potential company, can confidently invest in the acquisition.

Be sure to check out the article on how to evaluate legal risk in acquisitions. It has a lot of great advice and a great case study on how a residential and commercial brokerage firm sized up the risk of an acquisition.

Knowledge Based Sourcing IV – Focus Areas

Monday’s post introduced us to Knowledge Based Sourcing (KBS), Booz Allen’s entrance to the Next Generation Supply Management Arena. Tuesday’s post introduced us to the philosophy of the KBS approach that is focussed on gaining an increased understanding and knowledge of ‘ideal’ cost structures that can be used to develop better relationships with suppliers, focused on reality based improvement plans, to gain an ongoing business advantage. This philosophy revolves around a four-step continuous improvement cycle that starts, and ends, with Cost Model Generation. Yesterday’s post described the cost modelling process in detail. Today’s post will conclude our series on Knowledge Based Sourcing by describing some of the focus areas of Knowledge Based Sourcing.

As per Booz Allen’s recent article in SIG on Achieving Greater Impact Through Advanced Sourcing Approaches, Knowledge Based Sourcing is focussed on developing a deep contextual and analytical understanding of several critical areas associated with the spend category, including:

  • Supply market economics and cost drivers,
  • Drivers of price in the supply market (beyond costs),
  • Variation in supplier capabilities and cost structure (and its drivers),
  • Spend category economics, including internal usage economics as well as cost/performance trade-offs, and
  • Spend category impact on broader business objectives.

An understanding of these areas is critical because:

  • without an understanding of cost drivers, the true sources of cost can never be attacked,
  • without an understanding of costs beyond raw materials, processes can never be improved,
  • without an understanding of variation in supplier capabilities, it will be difficult to determine which suppliers are high performers and which suppliers are low performers,
  • each spend category has its own distinct cost drivers, and
  • controlling cost is only one component of the overall value equation — and the customer wants value.

Furthermore, the most appropriate spend categories for KBS are those with:

  • highly volatile market prices,
  • a large number of component inputs,
  • highly variable product specifications,
  • large fixed costs in production process,
  • scale and utilization cost sensitivity, and/or
  • complex multi-tiered supply chains.

These categories are typically tackled with:

  • Industry value chain analysis,
  • Analysis of supply-demand dynamics,
  • Production process mapping,
  • Bottom up cost build up — by component, plant or supplier,
  • Parametric modelling and regression analysis,
  • Comparative factor cost analysis across suppliers and locations,
  • Analysis of scale and utilization impact on costs, and
  • other advanced analytical techniques.

And the end result is that insights beyond price materialize, including:

  • the identification of cost-advantaged suppliers,
  • the identification of appropriate order quantities,
  • the identification of trade-offs between cost and product performance, and
  • improved transparency of underlying cost drivers that drive “win-win” outcomes.

And in the end, not only does the Supply Management organization get price under control, but it is better able to support strategic business objectives which gives it stronger positioning and credibility within the organization as a whole.