Private equity’s next lever is the vendor stack, not headcount

Headcount is the visible cost. Vendors, agencies, software, and cloud are the invisible one, and in most mid-market portfolio companies they are where the recoverable EBITDA sits.

When a value creation plan needs EBITDA fast, headcount is the first place most people look. It's visible on the org chart, the math is simple, and cutting it shows up in the model within a quarter. It's also the lever with the highest cost: to morale, to institutional capability, and to the growth story you'll need to tell a buyer at exit. A portfolio company that grew revenue by shrinking its team is a harder sell than one that grew revenue and margin at the same time.

The lever most value creation plans under-use sits one line below headcount on the P&L: the vendor stack. Agencies, software, cloud, IT services, telecom, professional services. In a typical mid-market business these lines have grown for years without a single commercial owner, and they are almost always priced above market.

Why Sponsors Miss It

Nobody in the portfolio company owns the total. Marketing owns the agency relationships. IT owns the software estate. Engineering owns the cloud account. Finance sees the invoices but rarely the contracts behind them. Each function defends its own vendors, reasonably, because from where they sit the vendor is doing a fine job. The sponsor, looking at the P&L from outside, sees a cost base that reads as "mostly people," because that's how the reporting is structured. The vendor spend is real, it's just distributed across a dozen line items instead of sitting in one place where someone would notice it.

There's also a bias toward action that looks strategic. Renegotiating a cloud commitment or auditing an agency's fee structure doesn't photograph well in a board deck. It's detailed, commercial work, and it takes someone with category expertise sitting down with contracts and usage data rather than an org chart. A reorg is a slide with boxes on it. One of these gets prioritized in the first hundred days far more often than it should.

What It Actually Returns

We've run this analysis across enough portfolio companies to see the pattern repeat. Agency fees reset meaningfully once benchmarked against current market rates. Software licenses provisioned well above actual headcount, sometimes well beyond what current headcount would justify, sitting untouched since the last renewal. Cloud commitments sized for a growth curve the business no longer follows. Telecom and IT services contracts that auto-renewed because nobody put a date in a calendar.

None of that requires touching a single job. Most of it, done properly, improves how the business runs, because the freed-up money tends to go back into the parts of the vendor relationship that were actually working. A company that fixes its media supply chain usually gets better working media out of the same budget, not just a lower bill.

The Question Worth Asking Now

Before the hundred-day plan gets built, ask something simple in diligence: who, today, owns the total addressable vendor spend across the business, and when was each of the top ten contracts last benchmarked against market? If the honest answer is "nobody" and "we don't know," you've found a lever that hasn't been pulled. If it's already sitting in the deal model, price it that way, and don't leave it for the operating team to discover eighteen months into the hold.

Sequencing matters too. Vendor work belongs early, before the obvious cost-cutting has already happened and the operating team is fatigued from it. Do it while there's still organizational appetite for change, and while the savings can compound through the hold period instead of showing up as a one-time adjustment buried in year three.

None of this replaces a real headcount review where one is genuinely needed. But doing the vendor work first means that when you do get to headcount, you're making that call from a business that's already lean in the places that don't touch a single person's job. That's a better story for the management team to live through, and a better one to tell at exit.