Equity Firm Arcapita Reaps the Value of Strategic Sourcing

Advocate Methodology Cuts Telecom Expense and Boosts Valuation

Trim overhead significantly and an almost magical thing happens to your corporate valuation. It goes up—sometimes way up. That financial reality prompted Johnny M. Campbell, a director for Arcapita, a global private equity firm, to engage Advocate Networks in 2004.

“We oversee a portfolio of companies,” Campbell says. “They operate separately, but we saw an opportunity to leverage their combined spending. Based on a recommendation from one of our strategic partners, Insight Sourcing Group, we asked Advocate to help us with the telecom piece of the cost-cutting effort.”

Data Drives the Process

Gauging the potential for savings required digging into each company’s telecom records, notes Advocate Networks co-president Tim Wise.

“We follow a strategic sourcing methodology, which requires evaluating a company’s existing services, contracts, and terms,” he says. “For Arcapita, our team used the methodology to build a baseline understanding of the telecom requirements at all seven companies.”

RFP Quality is the Key to Savings

After evaluating this data, the Advocate consultants saw opportunities for significant savings and recommended pursuing a group agreement through a competitive bid process. The consultants supported this effort by creating a detailed request for proposals (RFP) and then assisting with proposal evaluation and vendor negotiation.

“We were very impressed with their knowledge, professionalism, and negotiation skill,” Campbell says. “They just kept pounding away until we had the best agreement possible.”

That three-year agreement reduced Arcapita’s telecom expense by 41 percent, a $1.8 million cost reduction that translated to a $4.4 million boost in company valuation as determine by EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Each Engagement is Unique

In 2007 Campbell asked Advocate to assist with negotiating a new telecom agreement for the firm’s current portfolio of companies. For this engagement, the Advocate Team anticipates negotiating three agreements. The first agreement, which covers two large companies with multiple retail locations, has already been concluded. Negotiation for the remaining contracts is ongoing.

“So far Advocate has been able to negotiate annual savings of approximately $1,100,000 or 20% of the expense of approximately $5.4 million,” Campbell says.

Those results were realized even though telecom pricing has been flat in recent years, Wise notes. “It shows the ongoing value of strategic sourcing for companies—especially when it’s applied by a knowledgeable partner who has a firm grasp of the marketplace and a proven sourcing process.”

To learn more, contact Tim Wise or Scott Fogle.