PE Firms Tend to Leave 30% of Their Value Creation Opportunity on the Table

The moment the ink dries on a new portfolio acquisition, Private Equity firms start working to generate value, and fast.

Given that top-line growth is the leading indicator of value companies can expect to create over a typical three- to five-year holding period, generating that growth in the first 12 to 18 months is critical. If companies cannot make gains in this initial timeframe, it’s difficult, if not impossible, to make up for it later.

That’s why many experts advocate spending those first critical months focused primarily on growth activities such as quickly opening new channels, penetrating new geographies, improving salesforce effectiveness, and creating innovative new products. Because PE firms have only so many calories to burn, it’s best to put them where they’ll deliver the biggest bang for the buck.

We agree with the importance of prioritizing top-line growth, but we also believe this cannot be done in a vacuum. In other words, it’s not a question of growth creation OR cost cutting. Companies need to find ways to do both.

The reality is, an undeniable connection exists between top-line growth and operational speed.

When companies fail to make that connection in the first year—when they focus on growth at the expense of operational improvements or without understanding how operations drive growth—they cannot realize their full value creation opportunity.

Operational improvements that enable your growth goals.

Based on our experience helping middle market private equity firms across the globe with their operational due diligence and PE value creation efforts, we’ve identified several key operational levers that go hand-in-hand with critical growth activities. As you pursue these four growth goals, effectively using the accompanying operational best practices can help maximize your returns:

1. Quickly respond to opportunities to open new channels.

Companies that get to market first have a significant advantage over the laggards. To be smart and fast at the same time, you have to have the right business processes in place to enable agility and responsiveness while controlling your cost-to-serve. This includes:

• Robust research and analytics on potential customers and their preferences to help effectively select markets with the most potential.
• A formalized demand planning process to create realistic forecasts along with pricing strategies so you can control the level of demand from the new channel.
• Developing “what-if” planning scenarios so you can optimize inventory and be prepared to respond to demand that is either greater or less than expected.

2. Rapidly penetrate new geographies.

Serving new locations means more potential customers and more sales. To do this cost effectively, you need process rigor in place to enable smarter decision making on both the operations and supply chain sides of the business. By producing the right products, in the right quantities, at the right cost, and in the right location, you can lower your cost to serve. Some keys to getting this right include:

• The ability to make operational decisions to manufacture things yourself or to use third party providers.
• Comprehensive analytics to inform network decisions such as, what is the best footprint, flow, and location for your facilities to cost-effectively support customer delivery requirements?
• Network optimization processes that optimize low-cost, high-skill locations through consolidation, centralization, and economies of scale.

3. Leverage your team’s sales effectiveness.

For sales people to make the greatest impact on your top line growth, they need supportive processes and technologies that free up more time to sell. And they need tools that can point them toward the most profitable customers. Operational-side improvements that can facilitate this include:

• Aligning S&OP processes with the promotional activities of the sales and service organization.
• Robust customer segmentation to guide sales force targeting and improve margins.
• Use of new technologies that streamline processes and enable greater efficiencies among the sale team, call center associates, and other customer-facing employees.

4. Drastically reduce time from new product concepts to commercialization.

Being first to market is a surefire way to command price premiums, capture share, and drive top line growth. Being good at commercialization requires highly disciplined processes and systems that can help your organization bring the right and most profitable products to market faster. These processes may include: 

• Setting aggressive, measurable goals for all phases of the commercialization process, translating these goals to all levels of the organization, and ensuring they are prioritized from the top down.
• Cutting product development cost and time as much as possible by identifying and capitalizing on efficiencies while pinpointing and removing roadblocks to the process.
• Developing cross-functional skills and organizing work around products or markets as opposed to functional area.

Don’t overlook the opportunity for organic growth.

Even as companies are focused on new customers and offerings, there is much that can be done in short order to optimize the capacity that already exists within the business. Making process changes that improve your efficiency and responsiveness not only lowers your cost to serve; it frees up capacity to expand service to existing customers with no need to invest in new facilities or equipment. By optimizing your existing network, you can capture new business, and this is almost always your most cost-effective route to driving growth.

Without a solid operational backbone, all growth efforts will eventually plateau.

The bottom line? While the top line has the highest correlation with value creation in private equity, feeding the growth engine is dependent on operational capability. To that end, when firms focus on the specific operational capabilities that support growth goals, they can more quickly generate results and realize the full potential of the private equity value creation opportunity.