Part 1: Digitalization
Every business wants to grow and growth needs strategy. In energy, one strategy for continued growth is M&A, especially when the market goes into increased volatility.
Acreage deals, when an operator wants to develop a major new area, focus on growth through acquiring new positions that don’t require significant DNC spending. These are more common and ongoing in the industry as operators move in and out of basins and regions.
The second half of 2020 was interesting as we saw more corporate deals than acreage deals — Anadarko and Oxy, Pioneer Resources and Parsley, Concho Resources and ConocoPhillips, Southwestern Energy and Montage Resources. Corporate deals are the merging of two independent companies. These are much more complex to manage.
The driver of these corporate deals is the potential of economies of scale, where the new company identifies the best practices from each company and then implements these best practices across the entire new organization.
I highlight the word “potential,” because to actually benefit from economies of scale, you have to be able to figure out which company has the best practices and then determine how to implement these practices across a new, larger organization comprised of two companies with independent, fully functional teams.
To start this process, you need to figure out which company has the best practice. If you don’t handle this properly, you can actually hinder potential growth.
The question is: How do you figure out which is the best practice between company A and B?
In this two-part blog series, we’ll discuss why digitalization and analytics are key to uncovering best practices and how to use data-driven decision-making to uncover these best practices to maximize cost savings within a new organization.
Read article two here.
Digitalization of back-office processes — the foundation for economies of scale
Processes are linked closely to the back office. Digitalization of the back office lays the groundwork that creates the opportunity for economies of scale before, during and after an M&A situation. Why?
Because digitalization of processes does two things:
- It enables faster, more collaborative workflows between different stakeholders within a company, increasing operating efficiency. A few examples include faster invoice cycles, faster spend visibility, reduced manual touchpoints with automatic invoice approvals.
- It captures spend data that, when attributed and categorized properly, enables two companies to rationalize spend analysis across both organizations.
Choose the right solution to digitalize the right way
You need a single unified digital platform to support the needs of these different stakeholders, including your suppliers. With a unified platform, you capture spend data and can rationalize spend across two companies that are involved in a merger or acquisition.
Let’s look at an example to understand why.
In an M&A scenario, you begin with two different spend teams with many of the same responsibilities, but with different workflows, processes and allocation of dollars. A spend team comprises different arms of an organization, including procurement or supply chain operations, finance and audit.
They all evaluate the same spend, but view it from different perspectives to deliver their respective value propositions to their business.
Below are the groups that make up the spend team:
- Procurement focuses on optimizing spend with suppliers. They manage and analyze supplier contracts and negotiate pricing.
- Operations focuses on optimizing spend on a per project basis. Their perspective focuses wholly on the project and how and when to execute for the greatest business benefit.
- Accounts payable and finance optimize spend based on a general ledger (GL), as well as tracking actual spend against estimates, using the GL to capture different levels of granularity in spend.
- Audit optimizes company spend by overseeing supplier adherence to contracts and their execution. There are also recovery operations that take their findings and feed those back into supply chain and procurement to further optimize the supply chain. These operations are traditionally slow and expensive.
Here is a breakdown of the spend team:
Even within a single organization, the silos that naturally arise from the different departments can make it seem like members of the same spend team are speaking entirely different languages. But these different perspectives are equally important for maximum business efficiency.
This is why a unified platform is critical. It breaks down these silos, allowing faster collaboration on workflows between these stakeholders, including suppliers, and providing a single source of accurate spend data so individual stakeholders can analyze and manage this data according to their role.
Here’s an example of process optimization and workflow where the Enverus platform provides auto-approval of financial documents. This brings efficiencies to both finance and operations.
Here is an example of a spend understanding integrated workflow. Spend understanding is where the information provided in the spend data allows different groups to do their respective analysis.
This demonstrates cost management via strategic sourcing. Procurement has visibility into supplier pricing, an understanding of vendor rationalization, and workflow modeling. Process efficiencies across finance/AP, operations and supply chain allows for early-pay discounts that also contribute positive cash flow for the suppliers.
When evaluating process efficiency best practices between two merging companies,
if either uses a digital platform to manage its source-to-settle process, you can select performance metrics to identify bottlenecks and efficiencies in each company’s process and compare the two. For example, you can compare invoice processes by company to find the bottlenecks. You can also use industry benchmarks to measure progress. For example, our best-in-class OpenInvoice PriceBook customers have close to 90% price book rate validation. These metrics will help you make an informed decision about which best practices to implement company-wide to drive economies of scale.
This article is part one of a two-part series. To continue learning about best practices to accelerate your M&A growth strategy, read article two here.
To learn more about how Enverus Business Automation solutions can help your company fast-track your M&A growth strategy, fill out the form below to speak to an expert.
The content for this article was sourced from our Cost Savings in M&A webinar hosted by Akash Sharma, director of OpenInsights, and Dave Savelle, director of Field Ticket Operations.