Guest Blog | Lauri Vihonen » Why should venture capital investors care about procurement?
This blog post was first published by the Finnish Venture Capitalist Association.
Procurement and the "Rule of N"
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:
Optimizing procurement can lead to direct cost savings, thus improving the company’s bottom line and increasing its valuation.
A well-developed procurement system supports a company’s growth strategies by enabling it to scale operations without incurring proportional increases in costs.
Effective procurement requires vetting suppliers for reliability and compliance, which is vital for reducing operational risks that can impact company performance.
Engaging with innovative suppliers can introduce new and improved products and services, providing a competitive advantage.
Ethical and sustainable procurement enhances brand reputation and ensures compliance with regulations.
Understanding a company’s procurement strategy provides venture capitalists with insights into the company’s operational efficiency and long-term viability.
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 establish 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 spending 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 VCs, 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.
Discuss with an expert
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 7 years. The project commissioner is most often a member of the company's executive team, and the
duration is typically 6-11 months.
Leader’s Beacon Group Oy
+358 50 4381912
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