Procurement-as-a-Service Takes Center Stage in Private Equity

CFO insights for boosting efficiency and reducing costs

When Jamie Davis first joined Bow River Capital in 2019, the Denver, Colorado-based private equity (PE) firm had less than $800 million in assets under management (AUM) and roughly 25 employees. In less than four years, Bow River Capital’s AUM has grown to $3 billion, yet the firm’s staff remains just under 50 employees.

“We’ve been growing a lot, but we’ve not been growing headcount as fast as revenue. And I think there are a lot of peers in similar situations,” says Davis, the multi-strategy firm’s Chief Financial Officer (CFO). “So much of our energy and attention is focused on delivering investment returns… there was this big black hole –this big area of spend that we just didn’t have the time and attention to focus on. But it was material dollars,” he says, noting that the firm’s spending on market data alone was in the high six digits. To save money and free staff from the headache of dealing with back-office issues, like managing data subscriptions so they can instead focus on delivering investment returns and raising capital, Davis decided to outsource the bulk of his firm’s procurement needs. And he’s not alone.

As middle market PE firms find themselves grappling with a host of issues –from economic uncertainty and a looming recession to ongoing talent shortages, ever-changing regulations, cybersecurity concerns and even the fallout of the recent bank collapses, a growing number of PE firms are turning to outsourced procurement as a way of removing back-office distractions so that employees can focus on higher priority issues for their firms. Beyond cost-saving benefits, procurement-as-a-service offers PE firms a way to supplement their organization’s expertise without the need to bring on additional employees. Outsourcing also provides an additional layer of risk management surrounding third-party relationships, a realization not lost on investors who have been helping drive the adoption of procurement outsourcing to boost firms’ own due diligence efforts.

Outsize Growth

The past decade has seen explosive growth within the private equity industry, with total assets under management more than doubling from roughly $2 trillion in 2013, to a whopping $4.4 trillion by 2023, according to EY. But while assets under management have rapidly ballooned at many PE firms, in most cases staffing has failed to keep pace. As a result, the staff at many PE firms, particularly mid-market and smaller firms, have found themselves struggling to do double duty by assuming some of the administrative tasks of overburdened back-office workers. And the problem has only been exacerbated since the onset of the “Great Resignation” as the end of the COVID-19 pandemic saw record numbers of people voluntarily leave their jobs, creating a dearth of skilled employees and expertise within many critical areas for PE firms. Atop all of that, PE firms across the board are grappling with heightened margin erosion, as fees for everything from data services to technology have soared in recent years –a problem hitting midsized and smaller firms particularly hard.

For Elliot Attie, Partner and CFO of Trilantic North America, a Manhattan-based PE firm with $7.7 billion in assets under management and with over 50 employees, it was the continuous price creep of his firm’s market data and travel costs that was the impetus for outsourcing procurement. “If somebody went to any reasonable CFO in any industry and said, ‘I can help you buy the same exact thing you buy right now, but it will cost less,’ you’d be a fool not to listen,” says Attie, who started outsourcing procurement of market data and travel through Concertiv in 2016. Yet Attie admits he was initially skeptical that Concertiv could actually deliver on the value proposition it promised. Within the first year, Concertiv delivered on that value proposition, delivering meaningful savings, both monetarily and by reducing the time Attie’s team spent managing these vendors. Seven years later, Attie remains bullish on Procurement-as-a-Service and has since added additional product offerings into the mix. Attie is quick to note that the merit of outsourcing extends beyond cost savings.

Value Added

Despite the rapid asset growth the PE industry has experienced over the past decade, soaring operational costs, combined with fee pressures, have had an impact on industry profitability. Beyond compensation and real estate, market data, travel, technology and insurance typically account for the majority of firms’ remaining expenses, particularly mid-sized and smaller firms. While bulge bracket PE firms benefit from discounts based on sheer volume, smaller firms do not benefit in the same way. Instead, given the opacity of pricing from service providers, most mid-size and smaller PE firms are left wondering if they are getting a fair price for these services, and the odds are good that they are not. According to buyside research and data discovery and spend analytics provider Substantive Research, as of 2023 many investment firms pay 2,632% (26 times) more for index data than their peers and 6 times more than their peers for both ratings data and ESG data products.

“One of the biggest complaints from our clients is the lack of transparency in the market.” When a vendor applies a 25% to 35% increase the week before a subscription is due for renewal and insists: ‘this is the best pricing we’ve given anybody,’ they have no idea if that is true, what their peers are paying or even if a product is the best one for them,” says Convertiv CEO Priya Iyer. “Also, the vendor landscape is continuously changing –there is M&A and consolidation in some areas, innovation and new entrants in others –all of these contribute to significant changes in market dynamics that is impossible for our clients to keep up with. They are often unaware of their options and get taken advantage of.” Given how integral services such as data and technology are to PE firms’ day-to-day operations, combined with the fact that most critical services run through a limited number of vendors who exercise pricing confidentiality agreements, she notes that most CFOs feel they have their feet to the fire and have no other options. But that’s not entirely true, as a growing number of PE firms are waking up to the multiple benefits that procurement-as-a-service can provide.

In the case of Concertiv, deep expertise within four specialty areas –travel, market data, technology, and insurance, coupled with the pooled buying power of clients, enables the procurement firm to provide mid-market PE firms with pricing discounts comparable to those given to the industry’s largest players. Beyond cost savings, the in-depth knowledge of Concertiv’s staff benefits mid-market PE firms by helping determine which products and services truly add value to their business and identifying any resource gaps within their portfolios. Take, for instance, data services. Not only are Concertiv’s experts well versed in the latest product offerings available, and knowledgeable about the pricing that major PE firms have access to, they conduct usage audits on a PE firm’s subscriptions to determine which data services employees are truly utilizing and which may have outlived their usefulness –information used to identify products that can be eliminated or where usage fees can be significantly negotiated down. Beyond cost cutting, Concertiv also focuses on cost optimization and the identification of areas where opportunities exist to create greater efficiencies, enhance productivity and reallocate spending to more productive areas.

“We went into this thinking, ‘Oh, these are people who do procurement and negotiation day in and day out, so they’ll be able to save us a little bit of money.’ But it’s really been much more than that… they’ve had a huge impact in helping us understand what we’ve bought and how we’re utilizing it,” says Bow River’s Davis. Within just the first few months of bringing on Concertiv, he says the firm rapidly dug into employee usage of Bow River’s data subscriptions, immediately identifying two subscriptions that were underutilized or no longer useful –savings the firm was able to reallocate to things that can better help bolster its bottom line. “You can almost liken it to a real-life audit on all levels,” says Davis, pointing to the frustration he experienced trying to determine exactly what his firm was paying one prominent data provider for, and how much was being utilized. While Davis himself had gone back and forth with the company no less than 20 times, to no avail, Concertiv quickly sorted things out and help pared down the subscription. “It was really helpful navigating that –something I just would not have had the time to do, or maybe even known to think about,” says Davis.

Though it was data costs that spurred Davis to embrace procurement outsourcing, another major pain point for Bow River was its spending on travel, an area where PE firms across the board have been endeavoring to keep costs in check. In the wake of soaring oil prices, business travel costs rose 48.5% in 2022, according to research from travel management company CWT and the Global Business Travel Association, which predict they will rise an additional 8.4% in 2023. Davis says travel was the first place it became clear how much value outsourcing could add, as substantial savings through Concertiv’s travel offerings were instantly visible.

Another area where Concertiv’s deep knowledge base adds value for PE firms is risk management. With expertise in the ins and outs of specialty areas such as legal compliance, the firm can help identify potential risks PE firms could inadvertently be opening themselves up to through third-party service provider relationships. “Institutional investors are asking these management companies ‘Where is my risk and how are you managing vendor risk in your portfolio company?” says Concertiv’s Iyer. She notes that, among other things, a PE firm’s data concerns need to extend beyond the type and quality of data they are purchasing to usage compliance and the security of employees and customers’ personal information. To assist PE firms in assessing third-party vendor risks, Concertiv provides scorecards that track individual vendors’ performance in multiple areas on a year-to-year basis.

“Even if a firm said ‘Hey, I’m going to do the procurement of my market data services in-house,’ they would need someone with legal expertise, someone with compliance expertise, a superstar negotiator and someone who has deep market data knowledge –the different skill sets that a bulge bracket firm can afford, but mid-market clients can’t,” says Iyer. On the data front alone, she says Concertiv’s expertise extends to multiple areas such as desktop platforms, expert networks, ESG research and in-depth knowledge of several industry specific research that are extremely valuable to the PE industry, but which no one mid-market firm could ever afford to match internally.

Trilantic North America’s Attie believes the value of tapping outside expertise for procurement is prudent “In private equity, we spend a lot of time performing due diligence before we make an investment, which includes relying on subject matter experts across a variety of areas. So why wouldn’t we also apply a similar mindset to the service providers we engage? They can now also be diligenced, benchmarked and assessed by subject matter experts who can inform us on what we are buying before we commit to do so.”

In 2022 in the area of technology, the average mid-market financial service firm used 33 separate vendors, according to Concertiv. When service providers across the board are collectively tallied, from accountants and lawyers to consultants and investment banks, Attie says it is not uncommon for middle market PE firms to spend up to or beyond seven figures. Though the majority of bulge bracket PE firms continue to manage back-office functions internally (those with more than $15 billion in AUM), roughly half have turned to technology and outsourcing to help with their efforts to reign in margin erosion. According to EY, 72% of firms within this group have embraced technology to help offset margin erosion, while 62% have utilized outsourcing2. Mid-sized and smaller firms, on the other hand, absent the deep pockets of their biggest competitors and faced with an ongoing scarcity of qualified talent, have begun to more actively outsource the entirety of their back-office. As a growing number of CFOs at mid-sized firms seek more time to focus on strategy and overseeing more critical areas of the business, such as capital raising and identifying profit generating investment opportunities, outsourcing is an attractive solution.

Nonetheless, many mid-sized and smaller PE firms continue trying to balance procurement on top of their investment activities –something Attie attributes to the fact that they either don’t realize it is an available service or don’t believe the valuation proposition of outsourcing procurement to be a sustainable reality. “Imagine somebody coming to you and saying, ‘If you give me $1, I will save you $2 and some time..’ It’s almost too good to be true, so much so that you actually hesitate,” says Attie. “It’s a crazy thing.”

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