The Private Company Paradox - Procurement News

Generation Procurement | by Kelly (McCarthy) Barner on 02/08/2018 01:54 | 0 comments |

Procurement is going to have to do some extra work when it comes to evaluating private companies.  Kelly Barner outlines the common pitfalls to be ready for…

Benoit Daoust / Shutterstock

Many procurement teams have been tasked with diversifying the supply base. This often means partnering with small, diverse, or locally-sourced suppliers.

One challenge that arises is that many of the companies that qualify for such programs are privately owned. The lack of information that usually accompanies private ownership is at odds with procurement’s transparent supplier evaluation frameworks. Add to this the fact that participating in an RFP process just to be ‘diversity fodder’ is onerous and potentially even harmful to small businesses, and we’re left with a paradox:

How can procurement stay true to our mandate while also finding mutually beneficial opportunities for small and diverse businesses?

Procurement will have to do some extra work when evaluating private companies. Here are some common pitfalls to be ready for:

1. Limited or no access to current financials

This begins in the opening section of an RFx: ‘Please attach your company’s most recent corporate financials here.’ To which the supplier responds, ‘N/A: we are a privately held company and as such do not publish our financial statements’. That may be true, but it does not eliminate the need for the supplier to demonstrate that they are financially sound enough to justify an award.

2. Inability to determine risk levels

Procurement has to determine if there are concerns about the supplier’s ability to stay in business. What does their revenue pipeline look like? What are their customer retention rates? Keep in mind that this is a challenge with all companies, not just privately held ones. Procurement has to ensure that private companies are not hiding behind their ‘privateness’.

3. Few customers able to serve as relevant references

While private companies are not always new or small, it is a common combination of characteristics. The customers of small, privately held companies may be as tight lipped as the company they buy from. In fact, some may view their relationship with the private supplier as a competitive advantage or not want to accept the risk associated with speaking for or against such a company in the customer reference checking process.

4. Missing rigor from the expectations of shareholders

Being privately held means drawing capital from angel investors, venture capitalists, and sometimes employees or ‘friends and family’ investors. Who can procurement look to when trying to ensure that the leadership team faces appropriate challenges to their decisions?

Part of this dynamic needs to come from the relationships between leadership team members. Hopefully they (if not their private investors) are willing to fight to ensure the company stays on track.

5. Looming prospect of acquisition

Most private companies are on a journey towards either IPO or acquisition. While both can be disruptive for customers, having a privately held supplier acquired by a larger company is perhaps the greater concern. What changes will be made to contracts or terms of service?

Will the relationship be valued in the same way? Not having the answers to these questions (in large part because the private company’s leadership team doesn’t have them either) can make it hard to commit to a long enough term contract that both parties realise the desired level of value from the arrangement.

Being a private company shouldn’t be the only reason not to consider an otherwise qualified supplier for a contract. The problem is a circular one: if procurement doesn’t have access to the same level of information we do with publicly traded suppliers, how can we determine if they are qualified or not? The answer is likely to be a combination of pushing for additional information and accepting that some of what we are looking for isn’t available. As with all strategic decisions, we can never be 100 per cent certain that our choice is the right one. All procurement can do is maximise the availability of facts to ensure that the decision to contract a private supplier – like all other procurement informed decisions – is based on analysis, not assumptions.


Share this article


Author

Kelly Barner owns, manages, and edits Buyers Meeting Point. She has a unique perspective on procurement from the numerous roles she has held during her 15+ years in procurement. Kelly worked for Ahold USA (parent company of grocery chains Stop & Shop, Hannaford, Giant Landover, and more) on their not for resale sourcing team, specializing in systems implementation and hired services category sourcing. She spent three years as the Associate Director of consulting services at Emptoris before it was acquired by IBM in 2011. Since 2009, she has covered procurement news, events, publications, solutions, trends, and relevant economics at Buyers Meeting Point. Buyers Meeting Point provides the procurement industry with an events calendar, blog, active social media network, and podcast, all of which are trusted sources of information for practitioners and solution providers alike. Kelly has several regular columns throughout the industry, and in the summer of 2016 was appointed to become the Business Survey Chair for the ISM-New York Report on Business. Kelly has her MBA from Babson College as well as an MS in Library and Information Science from Simmons College. Kelly has co-authored three books: ‘Supply Market Intelligence for Procurement Professionals: Research, Process, and Resources’ (2014), ‘Procurement at a Crossroads: Career Impacting Insights into a Rapidly Changing Industry’ (2016), and 'Finance Unleashed: Leveraging the CFO for Innovation' (2017). Kelly is also the General Manager of Art of Procurement.


More from this author