Driving an Enterprise Transformation

The importance of defining Value Creation

How the Commercial Excellence Journey asks core questions and guides Value Creation work streams?

A new start for a business (carveout, PE change in control, new partners) provides a wellspring of enthusiasm for change and charting a new path.?Leading transformation is a process that is ongoing.?Executives that have driven finance excellence journeys or sales culture changes have usually done so in a defined workstream with beginning and end points.?When an enterprise-wide change is embarked upon however, it changes the measures and the timelines.?Managing through change internally while the outside requires addressing other situations makes the whole process more difficult.?Executive teams in tandem who have led specific streams can create a super-team of experienced people who have led through change. It requires definition, laser focus and ongoing revisions as needed.

The issue that creates complication is the question of; how do you quantify success in a transformation when value creation is the real goal? The area of value creation has been opined on but rarely well defined. There are two ways to consider the definition.

1.????Your return on invested capital put into the transformation must exceed the cost of the capital.?

2.????The core drivers that operate in isolation but need more integration include:?

·??????Growth – both organic as well as defining and quantifying the net effect of potential further growth by acquisition

·??????Finance – How effective and strategic is the Finance function

·??????Operations(Tech Stack) – How effective and strategic is the Operating Function and how well is it supported by technology and how does that support integrate to Finance and Growth

·??????All the drivers are strengthened through Human Capital Strategy

?Why do value creation initiatives fail?

Often they are framed as enterprise-wide transformation initiatives with ill-defined objectives and too many goals. Those poor definitions of stakeholder leadership and KPIs/measures do not adequately capture the needs. Some remedy??Each of the three core levers can transform as individual streams with human capital goals, unique KPIs and time lines.

However there needs to be integrating interconnects of the three with a human capital upgrading view.?Attempting to put all under one transformation initiative dilutes the effort and individuals and teams end up on too many committees.?The result is fatigue while doing probably a substantial day job in middle and upper-level executive management. Allowing the streams to run in parallel with a governing enterprise stream can create the ability for deadlines and hence reduce fatigue.?You need the executives to be engaged, they must evangelize the firm and be able to demonstrate how transformation leads to the value creation.

?How to interconnect?

Team design for enterprise level results and outcomes are a critical program management step. Enterprise level transformation can fall into a category of a certain end market plan for dominance, culture change so to attract a new type of executive leadership, a new set of financial KPIs aligning to equity value creation.?

If we consider equity value creation there are the three classic streams plus human capital.?The streams will have levers to attain goals and KPIs with defined time lines and success values.?The measures need to begin with the method and consistency of the measurement of T0 (Time Period 0 -Start) ?point and then the value and modeling T1 (Time Year 1) through a defined end point. ?Within each stream the priorities need to be set and the cadence of initiative and efforts within.?For example, with a finance stream in value creation the CFO may choose to drive cash-conversion-cycle and inventory levels down by 20%.?That starting point could be review of the data governance/management that produces current reports, it could be a process change, it could be FP&A software added on for enterprise needs, etc.?The method would be to assess where the impact is highest with the least resource (human-tech-capital) requirement.?This begins to provide greater definition of using this criteria to move the levers within T0 to T1 or T1 to T2 that contributes to the value creation.?That same stream leader (CFO as key stakeholder) could contribute greatly on the enterprise transformation team especially if external communication of new financial KPIs is part of that initiative.

Each stakeholder and stream transformation leader within value creation could play a role and participate in the enterprise team transformation initiative.?In fact, each would have much to contribute. They are however two different and distinct roles.?One with a goal to contribute to the equity value creation and the other on a more interconnected enterprise transformation.

Another area of interconnection where intentional planning and review is beneficial is better weaving of Finance + (Tech) Operations.?In driving value creation, a first foundation step would be to review documented processes.?From a Finance perspective the classic areas of book-to-bill, sale-to-cash mapping would provide outlines to see where efficiency can be driven, changes to core personnel in the stream and driving profitable growth can be identified.?Such review contribute to areas noted before like how to drive improvements in cash-conversion and inventory.?From a process review a technology lens can be considered to answer; does our current tech stack support the value creation growth calculated and to be measured on an ongoing basis.

Growth ?or Commercial Excellence has to answer the question of are we as a firm knowledgeable about our client’s business and how they create value in their respective business and are we charging enough for product-service-advise.?OR is the firm underpricing the offering or over pricing and not considering the business the client needs to excel in.

Growth is perhaps the most easily measurable value creation lever.?Did you grow 10% this year or not organically or did we accurately measure synergy capture and top line capture of an add on acquisition??Driving inventory improvements and cash conversion cycle are easily calculated and the savings can be determined that drops to EBITDA, but did you gain or lose clients in the process (intentionally or not) to get there? Value creation simply has more hard math to quantify the initiatives and results than an enterprise transformation.

Combining and interconnecting the value creation streams ?of Growth to the interconnect of Finance and Operations (Tech) makes the value creation math calculated real.?What was the cost of the Fin and Ops initiatives and was it paid by making the growth more profitable; either by current or net new logo clients??OR was it via new products versus current “A” products sold to the “A” customers.

Transformations start with generally desperate needs to become a “rule maker” or take an advantage of disruptor characteristics in an enterprises offerings. This journey is difficult with much of the enterprises leadership unable to make the request contributions.?The core reason is that many times; companies that undertake grand scale changes and transformation are silo area skilled in driving a narrow value creation or tactical initiative.?They can work with KPIs and be happy to be measured under them.?When asked to participate or lead transformation there is a problem.?A solution path is to help transformation initiatives teams remember (like in value creation) that time stamped defined deadlines to message the results are needed.?The troops simply have to be marched into the light at some point.?Leveraging the value creation skills will help but the focus on the interconnects of the core areas is where an executive leader can pivot their work between the two distinct worlds.?Early on small workshops of how to take the best of value creation execution and defining the core elements for a more holistic culture and business re-engineering centric transformation could aid.

John Bova ?is a Transformation and Operational Excellence Leader in Private Equity Firms and Portfolio Companies. John has played many roles in the private capital space over 30 years Including senior executive to fast growing middle market companies, Independent Sponsor, PE and Family Office Advisor and Consulting Practice Leader. John has a BA in Economics from Fairfield University and an MBA from Pace University.

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