“There is no perfect data today. In the absence of that, we have to take the knowns and extrapolate from them. We have to use our past experience. We have to use the input from our partners on it. It is a matter of building a Rubix cube with the pieces that we have.” –Paul Dhaliwal, Director, U.S. Capstone Team, KKR
In a post-pandemic, high-interest rate environment, procurement teams within private equity firms are challenged to demonstrate the value of their strategies for portfolios consisting of hundreds of firms and billions of dollars in assets.
If you ask this episode’s podcast guest, that task starts with focusing on the right elements of the procurement process. Paul Dhaliwal is a Director on the U.S. Capstone Team at KKR, a leading global investment firm that manages over $500B in assets across infrastructure, real estate, private credit, and insurance businesses. With over 230 portfolio companies worldwide, the Capstone Team collaborates with investment teams, management teams, and external partners on entire deal cycles, from due diligence to exit. I had a chance to speak with him at the 2024 CoreTrust Conference in Tampa, Florida.
Leading their focus on procurement, supply chain, and working capital, and developing and managing their cross-portfolio relationships, Paul understands the importance of engaging with programs to drive value across the business.
“The cross-portfolio relationships and programs probably are the most common way in which we work with [our portfolio companies]. If there is a business where there is significant value creation that has to do with the specific direct cost of that business, we will directly get engaged with them.”
According to Paul, it’s this engagement that allows private equity firms to thrive. Value creation, not simply identifying areas of existing value, is one of the most critical parts of private equity success. With current conditions resulting in fewer mergers and acquisitions, “it really is a tailwind for us to now accelerate our engagements with the management teams to assess and implement initiatives that drive more value on it,” said Paul.
As we continued the conversation, Paul also shared a few different ways his team measures their impact across KKR’s portfolio companies and their overall success. Re-emphasizing the importance of value creation, he highlights their focus on:
- Any changes that result in run-rate EBITDA improvements
- Capex reductions, especially savings from commercial levers and recurring capex
- Cost avoidance via historical impact tracking
Since cost avoidance tracking has traditionally been a topic of debate within procurement, I wanted to get Paul’s perspective. Speaking of leveraging cost avoidance as a measure of procurement impact, he said, “If the baseline for measuring cost avoidance is calculated as diligently as any other regular procurement initiative, we should absolutely consider that.”
Paul went on to offer his advice for podcast listeners trying to better understand the market and how to manage it, citing two key factors: figuring out the inputs that contribute to cost avoidance tracking and being very analytical in tracking those specific data points.
C-Suite stakeholders constantly seek an explanation of procurement’s activities. Offering as much information as you can (supported by proxy data and your own credibility) can help tell a better cost-saving story. “Putting those cost breakdowns on the table for discussion at least gives you something to open the conversation,” I said, agreeing with him.
We moved on to GPOs’ power in driving value creation. Paul was enthusiastic about GPOs’ effectiveness in managing cost, quality, and performance across a range of spend.
“We have a very small team. GPOs actually provide a very effective and efficient way to drive change and value across portfolio companies here.” He also affirmed how well GPOs align with KKR’s approach to value creation—leveraging scale.
“If we have a good GPO relationship, that also helps our portfolio companies get a much higher level of account management. [Also], the value of GPO is to really get more insights into the demand driven by our portfolio companies, so we can see how to further help them effectively manage it.”
While the decision to use GPOs depends on the specific portfolio and category level, the relationship with the GPO partner also plays a significant role. In cases where there is a good GPO relationship, there will likely be more clients interested in working with them, increasing the volume leverage of that order and driving additional value.
It’s also vital to consider how Procurement can position themselves as impact drivers. For Paul, that comes down to building credibility. “Finding areas to engage and drive results is the best way to build credibility, and you use that credibility to keep building further on it.” However, Procurement needs strong data as the foundation for building credibility—and as anyone in our industry can attest, data quality is still so difficult.
When I asked Paul how he approaches the “data problem,” he offered an interesting perspective. “There is no perfect data today. In the absence of that, we have to take the knowns and extrapolate from them. We have to use our past experience. We have to use the input from our partners on it. It is a matter of building a Rubix cube with the pieces that we have.”
This mindset surrounding data allows procurement professionals to approach stakeholders, not with complete confidence in the data, but rather with an honest answer of “this is what’s gone into creating this data. And in the end, it all ties back to that trustworthiness.
“If you have built a little bit of credibility with the results you have driven, then it becomes a little easier to sell a story from whatever data you have.”
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