What motivated you to pursue common vendor contracts?
We sat down and thought: what else can we do to save money? Here we have all these companies that we can leverage one to another, and we have the backdrop of the brand of Bear Stearns – which has its own heft – and 12,000 employees and big spending in some real big areas. What could we do to bring this all together?
We contacted the big consulting firms who really hadn't done a lot in this area and found a boutique firm in Chicago called Alaris Consulting. They had done one-off projects renegotiating some master contracts for a couple of smaller private equity firms. But I went one step further and said, ?Well, I don't want to do it as a one-off project. If this really works, I want to create this expertise in-house so we can use it as a platform to think of other ways to develop synergy among our companies, and really build a business out of it.? It's kind of a virtual centralization. So, we brought on the key guy at Alaris, David Knoch, to spearhead this for us.
How did you get your portfolio companies to sign on?
We went to the companies and said we'd like to take a shot at looking at common spend areas and common vendors. We said to our CEOs, ?Listen, give us the data, let us take a look, it's going to be on our nickel. And if we can come back to you and identify some area and show you some savings, then we want you to buy into doing this project with us.? So we spent a couple of months doing that, and then in December 2004, I had them all in a room and we went through a presentation on our findings. We picked 10 common areas for cutting costs through renegotiating contracts – everything from temp labor, telecommunications, insurance, plastic bags, transportation, overnight packages, office supplies, travel.
There isn't anything more effective than sitting down with a management team and saying, ?Let's talk about your telecom bill. How much do you spend – a couple million dollars? Let me show you our contract: I can shave $300,000 or $400,000 off that right now.? You're talking a language that they understand, and they become more receptive to doing other things.
Can you give us some examples of how this works?
We own a company called Reddy Ice that owns about two-thirds of ice production in the United States. They spend about $20 million on plastic bags each year. Someone like Reddy Ice is going to be state-of-the-art with its vendor relationships, with its contracts, because it's such a key component of what it's doing. By renegotiating, we saved close to $1 million in plastic bags. And that's for somebody who already does it well.
Another example is telecommunications, where Bear is spending $40 million a year; you take our initial 10 companies in this program, they're spending another $12 million. Now tell me what happens when you sit down with a vendor and you can put $52 million to spend on the table, versus BSMB's portfolio company New York and Company's $1 million, or the next guy's $1 million. We saved 25 to 30 percent off the bat for New York and Company in telecommunications.
What hurdles did you encounter in implementing this strategy?
The hardest thing we worked on in all of this was figuring out a way to make these contracts portable, so that each of these companies, when they leave our fold – whether we sell them or take them public – can take their participation in this contract with them. That's the key.