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Savings larger than the profits
Savings that don't add up
Picture a procurement team announcing it saved $700 million at a company with $400 million of EBITDA. By that math the company would be at negative $300 million without the savings. Numbers like that are divorced from reality.
Why buyouts expose it
Private equity makes the gap hard to ignore. A firm buys a company at a certain price, and if it can't make the business better, it can't sell for more than it paid. So the attention goes to what shows up in the financials.
Working with management
Working on the portfolio side at KKR meant sitting with the management team, since KKR usually owns the company. Theory doesn't help there: either the company becomes a way better company alongside management or it doesn't.
Why do claimed savings miss the income statement?
Procurement savings are often measured against a baseline such as last year's price or a budget, which means a saving can be claimed even when total spending rose. Cost avoidance, where a price increase was smaller than expected, counts toward the headline but does not reduce any bill. Finance teams separate these from hard savings, the ones that lower actual spend and flow into earnings.
How do buyout firms actually make returns?
Value creation in a buyout is usually attributed to three sources: growth in earnings, expansion of the multiple the company sells for, and paying down debt with the company's cash flow. Earnings growth is the one an owner controls most directly, which is why buyout firms work with management on operations. Debt amplifies the result in both directions, since the equity owners keep whatever remains after the loans are repaid.
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