How Blackstone Creates Value Through Procurement
An operating partner explains how the firm uses its scale to its advantage
As acquisition multiples hit all-time highs, private equity firms are constantly in search of new ways to create value in their portfolio companies. That’s particularly so when you happen to be Blackstone, the world’s largest alternative asset manager with more than $340B under management.
“Up until 2005, there was a lot of low-hanging fruit, companies where you could easily craft a value-creation strategy,” says Gregory Beutler, an operating partner at Blackstone. “Today, we have to be more innovative in terms of driving differentiated growth in margins and cash flows.”
Yet Blackstone’s sheer scale does give it certain advantages, especially when it comes to optimizing procurement and the supply chain. Here, Beutler explains how Blackstone leverages that scale to reduce costs at its more than 160 portfolio companies.
Blackstone uses BX Cube—proprietary software developed in 2005 by California-based SAP Ariba—to assemble, organize, and analyze spending data from its portfolio companies. The tool makes it possible to slice and dice around $35B of spend by region, supplier, and product. The platform has 75 mostly single-sourced categories for items like software, rental cars, healthcare benefits, and insurance.
Establish Relationships With Key Vendors
BX Cube data is used to find common spend. The firm then uses its scale to negotiate preferred pricing agreements with more than 75 key strategic vendors.
Annually, about $5B is spent on buying supplies and services from vendors that include FedEx, Marsh, Dell/HP, and American Express. In addition to lower costs, these and other companies provide Blackstone with differentiated services.
“We have saved over $850M since we launched the system,” says Beutler. “It’s real money and being amongst the top five to 10 customers of a vendor gives us better economies of scale and relationships.”
Leverage E-sourcing to Get the Best Value
For other vendors, Blackstone had SAP Ariba develop an e-sourcing platform that automates the bidding process. Pre-qualified vendors simply log into the software and answer standardized questions, saving everyone hours of email back-and-forth, Beutler says.
Next, the portfolio company—in collaboration with Blackstone—hosts a live auction with a twist: bidders compete to offer the lowest price to provide the product or service. When the auction is complete, Blackstone can decide whether to accept the lowest price or to walk away.
This year Blackstone expects to run about $1.5B worth of bidding events, which translates into 600 to 700 auctions. Year-to-date, the firm has saved about 14 percent using e-sourcing, according to Beutler.
Enable Knowledge Sharing
To keep everyone on the same page, Blackstone runs a shared chat group for procurement officers and arranges regular meetups to discuss issues like supply risk management. This best- practice sharing challenges each portfolio company to look at how they can improve their own procurement practices.
“To create value, you’ve got to start with talent,” Beutler says. “When you put world-class procurement leaders at portfolio companies, everything goes better and faster.”
An operating partner explains the how the firm uses its scale to its advantage.