Struggling to maximize private equity returns due to operational inefficiencies?

During my work with PE firms completing acquisitions, the assessment often started during diligence, and was part of a rollup strategy that required detailed analysis of how each acquisition would be integrated with the platform company. This included the evaluation of staff capabilities, careful modeling of throughput capacities, review of any new business segments for potential synergies, understanding the acquisition's customer base and demand, and evaluating options for consolidation and improvement. A complete pro-forma model of the platform company's performance with the acquisition bolted on, and with synergies from each evaluated option enables the acquisition integration team to select the best approach for moving forward.

Assessing delivery resillience and on-time-in-full (OTIF) metrics along with critial product quality performance is a key element for achieving operational excellence, higher customer satisfaction and retention, and a sustained competitive advantage. A thorough examination of a portfolio company's ability to reliably meet customer demands, on time and in full, is imperative. By reviewing operations on-site, a focused team can evaluate the delivery process, identify bottlenecks, and uncover existing or potential issues impacting efficiency, timeliness, and customer satisfaction.

Every successful acquisition starts with a clear understanding of the "Why." Why did we acquire this company? What unique value does it bring? And how does it align with our investment thesis and long-term vision? These fundamental questions set the stage for a purposeful acquisition integration process. Too often, acquisitions falter because they lack a cohesive strategy and focused action plan. When the purpose is clear, every decision, from operational adjustments to cultural integration, aligns with a shared goal and leads to definitive actions and initiatives that drive performance.

One of the most effective means for implementing change in acquisitions I've seen is to use an annual policy deployment process or "Hoshin Planning" (in the parlance of lean). This requires setting strategic goals at the top that are progressively decomposed through a "catchball" process to progressively more granular levels in the organization who set specific metric targets to improve at the operational level. For example, improving customer satisfaction strategically would be decomposed into specific goals such as improving delivery On Time In Full (OTIF) delivery or scrap rates.

Project planning and governance are essential for managing an acquisition's performance, especially during the integration phase. This involves: ? Setting Clear Objectives: Defining performance milestones including short-term and long-term objectives aligned with the strategic vision. ? Defining Roles and Responsibilities: Assigning tasks and responsibilities ensures accountability. A clear organizational structure and well-defined roles streamlines improvement efforts. ? Project Management: Using fundamental disciplines to track progress and manage risks ensures timely completion of integration tasks. Effective governance ensures that improvement efforts stay on track, risks are managed proactively, and stakeholder expectations are met.

Depending on the nature of asset, it is crucial to keep an eye out on the technology costs, as they can quickly add up. Review technology and cybersecurity spend, conduct tools rationalization exercise, free up resources where possible, and negotiate or rotate vendors for upcoming contract renewals to further capitalize on cost synergies.

One of the most effective means of monitoring progress I've seen is the use of "bowler" charts that track monthly performance across a range of balanced scorecard metrics. These charts look like the sheets used to keep score at a bowling alley, each column is a month (rather than a frame) and each row a key metric (rather than a bowler). Goals are set during an annual planning process for metric improvement across a range of key areas, and then tracked monthly with the executive team to identify areas that require support or action to drive improvement. These bowlers can be layered to the division or department level to drive the operational metrics that enable strategic performance levels reported to the executive team.

Implementing process improvements to increase throughput, lower labor costs, and enhance equipment and resource utilization not only reduces costs but also boosts productivity. A lean performance initiative that focuses on the front line with monthly operational metrics rolled up from visual daily monitoring is a best practice that reliably yields results as demonstrated by the strongest PE and acquisition growth firms.

Operational inefficiencies can be a drag on returns. But they are also ripe areas of opportunity to create operational efficiencies. Transforming inefficiencies into efficient processes is an excellent opportunity to enhance returns. Certainly powering through these inefficiencies can be a challenge, but that’s the reason why private equity value creation can play an important in improving businesses. A PE fund can bring on 3rd party resources, hire strong talent to support the management team, change strategies and invest capital into the business. All of these efforts can be possible when the PE firm is the controlling shareholder and able to implement change swiftly. This is a key source of driving alpha and value creation.

One of the most effective means to engage a team I have used is running a cross functional workshop centered on the evaluation and improvement of a key value stream. This approach was used to improve performance across a series of automotive plants as well as in transforming operations at a medical products manufacturer. The exercise starts with "homework" to map the target value stream using a cards-on-the-wall format and then uses structured brainstorming with front-line participants in the various functional departments to identify issues and improvement ideas that are then consolidated onto a payoff matrix. The top ideas are then crafted into a portfolio of improvement initiatives for which participants feel a real sense of ownership.

Improving delivery on-time-in-full (OTIF) performance along with ensuring reliable product quality leads to higher customer satisfaction and retention. This is a key element of the imperative to achieve operational excellence. Ensuring that scalable best practices to achieve these goals are established at the acquisition platform and then synergistically rolled out and integrated as acquisitions are bolted-on is one of the most critical elements of a successful acquisition playbook.

The best PE firms I have worked with really embrace the methods and philosophy of proponents of operational excellence such as Deming, Shewart, Ohno, and others. Without the dogma of six-sigma or lean thinking, they embrace the shift in culture, empowerment of people, and structured methods of addressing problems at the root that these popularized "fads" are based on.