In promoting their firms, buyout pros often point to a troop of hard-bitten executives that can parachute into portfolio companies to perform miracles. These may be full-time operating partners, part-time special advisors, or consultants waiting in the wings. Six sigma this, outsource that, acquire a major rival—these executives deliver advice that can give a powerful lift to performance.
Now some buyout firms have begun exploiting a less glamorous, less invasive way of improving company performance. You don’t need a bewhiskered veteran of the corner office to do it. What’s required is a chief operating officer or what some firms call a chief portfolio officer. This executive listens to the cost-cutting needs of portfolio-company CFOs, then goes out and negotiates portfolio-wide contracts with health insurers, travel agents and other vendors.
To be sure, not everybody thinks this is time well-spent. The Carlyle Group, the Washington, D.C.-based mega-firm, has not embraced group purchasing because it doesn’t see big enough dividends in doing so. “We look for savings wherever we can, but we feel the best way to improve a company is through product development and market expansion,” said Christopher Ullman, director of global communications.
By contrast, fellow mega-firm The Blackstone Group is a believer. Deep in the firm’s S-1 form filed this March you can find a short paragraph describing the Cornerstone Purchasing Group. This team, according to the S-1, oversees a program in which participating portfolio companies “combine their purchasing power” to save money on goods and services. Blackstone plans to expand the program to include outsourcing, information technology and other areas, according to the S-1.
The Riverside Company, a small-market buyout shop operating out of New York, Cleveland, and five other cities, has had a strategic sourcing program in place for at least the last three years, according to its manager, Chief Operating Officer Pamela B. Hendrickson. The program helps portfolio companies save money on health-care insurance, telephone service, package shipping, information technology, as well as other products and services. From the get-go, participating companies can knock 30 percent off their telephone bills and a similar amount off their Federal Express bills, according to Hendrickson.
Since joining Riverside in early 2006, Hendrickson has overseen an expansion in the program. Thirty-seven of the more than 40 companies in Riverside’s U.S. portfolio participate, and a three-person group has been assigned part-time to administer it. After joining Riverside, Hendrickson made a priority of negotiating better deals on employee benefits, typically the second- or third-highest expense at a company. Until recently, Riverside contracted with Blue Cross and Blue Shield to provide coverage to its portfolio companies. But through her husband, an independent benefits consultant, Hendrickson had a connection to Patrick O’Keefe, who heads a start-up, 16-person private equity practice at United HealthCare Services Inc.
Launched in the spring of 2006, the private equity practice offers two features that really resonated with Riverside, Hendrickson said. One is the ability for each portfolio company to sub-contract with United HealthCare under a master contract; with sub-contracts potential buyers of the portfolio company can evaluate the precise costs of its health insurance. Second, United HealthCare promises to provide the same insurance package post-sale to potential buyers for at least 18 to 24 months. “That’s very important, because obviously we wouldn’t want a future buyer to be harmed by our programs,” Hendrickson said.
This June Riverside flipped the switch on the United HealthCare program. Savings varies depending on the claims history of particular companies. But on average, Hendrickson figures a typical portfolio company can save 5 percent to 6 percent on its health-care insurance costs by joining the United HealthCare network. With advice from benefits consulting firm Oswald Companies, Riverside has also developed group purchasing deals on employee dental (Delta Dental Insurance Co.), disability and life (Sun Life), and vision insurance (Vision Service Plan).
What’s next for Encompass? This February Riverside signed on with Adelman Travel Group to provide travel agency services across its portfolio companies; that program should be fully rolled out by the end of the year, Hendrickson said. Riverside also is seeking a vendor to provide light trucking services to its portfolio companies.
In this latest deal-making lull, buyout shops have plenty of time to think about their next move. Negotiating group purchasing deals with vendors is one to consider.