ASSESSING AND PRIORITIZING QUICK WINS IN PRIVATE EQUITY VALUE CREATION

Creating Impact in the Operating Model through Managing Variable Cost?

Value Creation and EBITDA expansion is a mantra and an operational model for Private Equity backed firms.? The hold period ( while getting longer) is a challenging factor as transformation is difficult for management teams that have limited experience implementing growth plans. The second and third mantras have something more about identifying and taking advantage of quick wins and the level of involvement and support that will come from the PE fund.? These two topics are intertwined.? Value Creation and EBITDA expansion comes from a growing intentional top line in a cost optimized operating model. Quick wins are usually identifiable cost drivers of the P&L that if studied and deconstructed could turn into those desired quick wins. The issue is how to efficiently drive insights to prioritize those quick wins. Using Tech Enabled Services that drive insights of core costs in the P&L is a critical time saver. Also, tools that can also build new data sets is a key criteria of use and a foundational step of building BI capabilities.

The two desired outcomes in PE-portfolio company alignment are; 1. The PE firm and portfolio company leadership must be aligned on the cadence of reporting and check-ins, and 2. What month end reporting is made up of and can it be consistently reported and slowly improved. The variable costs in the P&L relating to supply chain optimization, shortening cash conversion cycle and strengthening of the product/service pipeline though tech enabled data that can be modeled into predictive modeling is where the search for quick wins comes.

Tech Enabled Services brings value creation levers and scale for Operating Partners

Operating Partners need talent and discrete knowledge on demand to address the best quick wins identified through the use of tech enabled services and SAAS subscriptions for analysis.? Operating Partner models can be generalist and focused domain expertise as an organizing approach. ?Transformations over the course of years in value creation for a PE fund are not equally impactful. Capturing the rigor in documentation of repeatably plays is positive though they cannot be implemented at scale at all portfolio companies.? All transformations are different and require different commitments of human talent at both the portfolio company and from the Operating Partner model.? The inability of Operating Partner models to execute at scale is due to the possible multi month commitments that transformations can entail.? PE firms are simply not set up to build insights, lead execution of initiatives, interview 3rd party solution providers and work with the organization to drive results in a compressed timeline at scale.

Tech Enabled Tools that can build the datasets and with them begin initial predictive modeling that saves time and resources. It pivots more immediate focus to the challenge of sourcing the talent model required.? The Operating Group can decide if the fastest way to execute and drive value is though the Operating Partner Group, or the Operating Executives ( mostly in semi-intentional 1099 models). The other option is a 3rd party Solution provider.? The tracking of execution success and value creation measurement becomes the next stage.? Portfolio company ownership of the wins has to be where the commitment is.? The tech tools speed up the ability of the PE firm’s operating model to identify and prioritize the possibilities and impact levels of different priorities.?

The use of such tools gives the PE firm scale advantages, and the portfolio company gets to own, implement and demonstrate transformation.? It is important that the Tech Enabled Service/SaaS tool is delivered in gain share or as close to cost neutral to begin implementation.? This also gives the PE firm the ability to make introductions to more services to drive the Value Creation and EBITDA expansion.

The process of identifying and implementing P&L cost optimization through Tech Enabled Services is allowing the portco to build the foundational parts of the cost optimized operating system. This is the place where focus on the P&L line items that drive bottom line improvements happens. The Technology aid gets you to consider cost optimized model sooner.? This area usually does not rise to the more exciting areas ?of value creation to dive into, but they can be substantial in results for portco CXOs. Also, it allows the Operating Partners to show alignment and value according to the priorities of the portfolio company CXO team.? The Operating Partner assist will be more welcome, easier to build rapport and the results can drive other Growth paths to value creation.

Quick wins for Value Creation are not always where you think they are

Areas of top line growth, FP&A module upgrades and building complex data lakes for future ERP changes are areas always needing attention.? They are also areas that represent the DNA of the acquired firm and to go after these too early could be too risky to touch.? Changing sales reporting, changing sales KPIs and compensation and driving new financial reports could get sidetracked and results could come slower than expected.? Before embarking on these area, the use of Tech Enabled Services and SaaS tools could provide quicker results in attacking P&L variable cost drivers.? For a PE firm to watch how an incumbent management team uses, interprets and acts on new data tools will be very insightful. It may also represent a good use case in larger human capital transformations like changing multiple elements of the CXO suite.

Use Case – The Operating Model and Supply Chain Transformation

Supply Chain transformation offers a significant use case for Tech Enabled Service implementation. ?Supply chain touches so many core drivers to high growth, value creation measurement and long-term success in areas including:

·?????? Sourcing assets required on time that will drive the new product and service development roadmap.? This is critical to high growth in Commercial Transformation.

·?????? Cost optimizing the inputs and having them in the right place at the right time is how to introduce product and service and deliver at scale to drive net new logo sales.

·?????? Control of shipping, parcel, inter modal transportation cost as top line grows is vital to value creation. Top line growth is great but keeping more of the net income that drops to bottom line is better. High growth companies have the characteristic of having products and services that have an E-comm component requiring attention and deep business intelligence in their supply chain and shipping strategy.

·?????? Assessing the current and possible better future data needed to develop the cost optimized operating model. Leadership at a portfolio company has to understand if they are measuring the right thing, tracking the right thing and if they reporting on backwards looking data or managing with predictive models for the future.

·?????? Supply Chain efficiency and effectiveness has impact on client delivery impacting both customer experience (CX), client life time value and how that impacts cash conversion and working capital through growth.

?These represent a resetting of the relationship with carriers, assessing contractual options and obligations, future growth looking and being able to manage the function and create excellence with the need to scale up internal needs. The use case of developing and executing against a cost optimized operating model using Tech Enabled Services for Growth and Value Creation is foundational to EBITDA expansion strategy.

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John Bova is a Transformation, Commercial Excellence and Value Creation Leader in Private Equity Firms and Portfolio Companies. John is currently the Chief Strategy Officer of ShipSigma(www.shipsigma.com ) a PE backed Tech Enabled Services company serving high volume small parcel shippers with cost optimized strategies and supply chain excellence solutions. John has played various roles with private business owners and private capital for over 30 years. His experience spans the areas of senior executive to fast growing middle market companies, Independent Sponsor, PE and Family Office Advisor and Consulting Practice Leader driving value creation through technology and transformation. https://www.dhirubhai.net/in/johnabova/