How Private Equity Firms Reduce Costs in Portfolio Companies
Private equity firms focus on achieving measurable cost savings in newly acquired portfolio companies.
This process involves targeted actions in restructuring, leveraging technology, and optimizing spending. Below, we detail specific steps that drive results.
1. Restructuring to Eliminate Redundancies
Restructuring isn’t just about cutting headcount. It starts with an in-depth process analysis to identify overlapping responsibilities and operational inefficiencies.
For example:
Evaluate shared services across the portfolio. Transition overlapping HR, IT, and finance functions into centralized teams to reduce duplicated roles.
Map workflows across departments. Eliminate redundant approval steps and consolidate fragmented processes. For one client, we streamlined reporting functions across regional teams, cutting labor costs by 15%.
Use RACI (Responsible, Accountable, Consulted, Informed) charts to clarify ownership of tasks and remove unnecessary handoffs.
2. Leveraging Technology and Automation
Cost savings through technology go beyond implementing software. It’s about selecting solutions that solve specific inefficiencies.
Examples include:
Deploying workflow automation in invoice processing, which reduces manual errors and improves payment cycle times.
Using predictive analytics in supply chain operations to optimize inventory levels, reducing overstock by 20%.
Migrating legacy systems to cloud-based platforms. This reduces maintenance costs while increasing system scalability and data accessibility.
3. Strategic Sourcing for Spend Optimization
Strategic sourcing focuses on reevaluating vendor agreements and spend categories.
What we do:
Conduct a category-level spend analysis to identify cost-saving opportunities in areas like IT services, logistics, and raw materials. For one portfolio company, we identified $1.8 million in savings by consolidating suppliers across regional operations.
Rebid contracts. Issue competitive RFQs (Request for Quotes) to suppliers with clear KPIs for price reductions and service quality improvements.
Explore alternative vendors for key categories. Secure long-term agreements with better payment terms while maintaining service levels.
4. Renegotiating Contracts and Exploring Cost-Effective Vendors
Contract renegotiations are often overlooked as a quick win for cost savings. Focus on measurable outcomes.
For example:
Revisit SLAs (Service Level Agreements) to align vendor performance metrics with updated operational priorities and quality goals of the organization.
Secure volume discounts by consolidating purchases across portfolio companies.
Use benchmarking data to negotiate better terms with existing vendors, ensuring competitive rates in line with market standards.
