When it comes to procurement, everything is based on the “Rule of N”. The “Rule of N” posits that external spending (N) is a share of revenue and is indicative of potential for cost savings. A larger ‘N’ suggests a greater opportunity to reduce costs and increase efficiency.
Ferovalo’s procurement expert, Lauri Vihonen, believes VCs should care about procurement because it can significantly affect a company’s profitability and scalability—two essential factors that determine the potential return on investment.
Procurement is not just a tactical function but a strategic one that can add considerable value to a company in several ways. Procurement can be used as a tool to develop a single company, or it can be utilized to develop a portfolio of companies.
Here are a few examples of how procurement can add value to any company, according to Lauri:
Cost Management
Optimizing procurement can lead to direct cost savings, thus improving the company’s bottom line and increasing its valuation.
Scalability
A well-developed procurement system supports a company’s growth strategies by enabling it to scale operations without incurring proportional increases in costs.
Risk Mitigation
Effective procurement requires vetting suppliers for reliability and compliance, which is vital for reducing operational risks that can impact company performance.
Innovation
Engaging with innovative suppliers can introduce new and improved products and services, providing a competitive advantage.
Sustainability
Ethical and sustainable procurement enhances brand reputation and ensures compliance with regulations.
Due Diligence
Understanding a company’s procurement strategy provides venture capitalists with insights into the company’s operational efficiency and long-term viability.
Strategic Partnerships
Strategic procurement aligns the company with suppliers that offer competitive advantages or access to new markets.
Low Effort, High Return
Usually, the input required for developing procurement is very small compared to the benefit achieved. To leverage procurement effectively, companies need to follow certain steps, procurement building blocks, to establishing the fundamentals of procurement operations.
1. Analyze Spending: Spending analysis gives visibility into who is spending what and with whom, harmonizing data across a company of a portfolio of companies, and identifying spend addressable with procurement.
2. Segment Spending: Segmenting spending into categories that have synergies, acknowledging that different segments have different characteristics and financial values.
3. Create Plan: Setting targets, running opportunity analyses, and creating action plans for each segment.
4. Execute Plan: Implementing the action plans to achieve the desired cost savings and efficiency.
For venture capitalists, the key takeaway is that procurement can unlock hidden value in a company and should be an integral part of their investment evaluation process. This encompasses both immediate cost-saving opportunities and long-term strategic benefits that can drive growth and competitive differentiation.
Writer: Lauri Vihonen
Lauri Vihonen is one of Finland’s leading experts in procurement management and development. He has served as a C-level procurement, information management, sales, and chief executive officer in Finland and internationally. He has worked on projects for many of Ferovalo’s clients in various roles over the past seven years. The project commissioner is most often a member of the company’s executive team, and the duration is typically 6-11 months.
About Ferovalo
The world of strategic-level talent is not limited to procurement. Whether it’s filling a leadership position, finding a board member, or addressing sudden employee vacancies— Ferovalo connects the best companies with the best talent. Through their partnership with Best Best Talent Platform, Ferovalo has access to over 1300 C-level professionals. Companies discuss their talent needs with Ferovalo, turn it into an open assignment on Best Best Talent Platform and motivated professionals begin to apply. Ferovalo screens the applications, checks references, and presents the best of the best candidates to the company. From there, the company has the option to conduct interviews and —if they find the right fit— select a candidate for their open position.
The member blogs are views on current topics from various experts of FVCA’s member companies.
