Daily Archives: January 20, 2015

Authoritative Damnation #64 Major Activist Investors

An activist investor is technically defined as an individual or group that purchases a large number of a company’s shares and/or tries to obtain seats on the company’s board with the intent of effecting a major change in the company. A (public) company can become a target for an activist investor if it is mismanaged, has an excess cost structure, or is not capitalizing on its value.

And while one might be tempted to think that an activist investor is only bad news for Procurement if the company has excessive costs, that’s not the case. An activist investor is always bad news. It might be the C-Suite that is overspending (on private jets and tropical locales for “strategy meeting” getaways), it might be Sales and Marketing doing a lousy job, and it might be R&D failing to focus on the right products, but the first thing the activist investor will want is a balancing of the books — and that always, always, always starts with a focus on cost reduction across the board. Procurement could be in the top tier of spend management in its vertical or industry group, with an average spend that is 5% less than the industry average benchmark, but the activist investor will still demand that the organization pursue an across the board cost reduction at least in the 5% to 15% range — a reduction that will not be possible in many of the categories currently under management.

Plus, additional opportunities will likely only be available if Procurement is able to get more categories under management — which could be difficult even with Board Support as many departments, fearful of cuts that almost always occur when activist investors sway the Board, will not want to give up budget, authority, or supplier relationships for fear of becoming unnecessary. This will make it very hard for Procurement to deliver against unreasonable demands and increase the chances that they end up under-performing on the activist investor’s scorecard and end up looking bad when they are actually the top performing department in the organization.

(And we haven’t even mentioned the expectations that will be levied if Procurement is expected to play a key role in a merger or acquisition that an activist investor, investing in multiple organizations, is trying to engineer between it’s investments — because that’s a damnation in its own right that will be discussed at a later time.)

So what can you do? Baseline, Benchmark, Model, and Expose. Specifically:

  • Baseline
    Baseline actual costs for commodity groups and categories under management.
  • Benchmark
    Benchmark against publicly available rates and obtainable GPO rates to prove that performance is good and that any additional cost comes with a value add (in the form of quality, marketing, service, additional functionality, etc.)
  • Model
    Build should cost models that justify the validity of the baselines and/or benchmarks under current market conditions.
  • Expose
    Expose the overspending in categories not under Procurement’s control using baselines, benchmarks, and should-cost models and divert the attention of the activist investor elsewhere.