Non-performing companies are of natural interest for Private Equity (PE) investors who seek to find fundamental sources of value and amplify them, whilst reducing waste and improving operations. This need not be a mode of operation reserved for Private Equity alone, all companies should consider their value and utilise the same techniques.
At present, companies that haven't been under-performing have nonetheless found themselves in a situation where it has become imperative to increase efficiencies, find new sources of income, and rapidly re-shape themselves in extreme circumstances. These companies can benefit from the the same focus on efficiency and value creation that PE investors require.
Private Equity companies look for new ways to add value and create plans that maximise the full potential of a business. A Value Creation Plan (VCP) works holistically across all aspects of the operation and quantifies the value to be created, the costs of doing so, and the timescales of milestones to be achieved. This plan, along with measurable progress towards objectives creates value and clearly explains the way the company produces value to potential acquiring entities.
Although a VCP is a strategic plan, it is also a pragmatic, honest and incremental plan that needs to first address the immediate challenges and opportunities of the company, before describing and elaborating the investment hypotheses required in the longer term. This can be used to great benefit in Digital Transformations.
Identifying sources of value
The VCP seeks to identify existing and new sources of value within a company. It requires honest appraisal of the organisation and its existing digital capabilities to determine the drivers of value. These include:
- Increased operational performance
- Cost savings
- Price competitiveness
- Access to previously unfeasible markets by building cost effective platforms, and operating models that enable new revenue streams.
- Adoption of product, platform and digital marketplace business models
- Adopting Lean principles to identify and reduce waste.
- Establishing flow, pace and delivery cadence.
- Improving the customer experience
- Ensuring customer relevance. Customers expect ease of engagement, across a range of digital and traditional channels. Customers have strong relationships with the companies they use most frequently, and those companies go to great lengths to understand what their customers need and make it very easy for them to get it. A seamless, convenient, meaningful relationship with customers enables retention, and allows a company to become the ‘go-to’ provider. This means delivering for customers the right way, every time.
- Customer knowledge and insights: Understanding what your customers want, what matters to them, and using that to engage and win repeat business.
Benefits of value creation planning
Value Creation Plans provide evidence and a framework for investment decisions, that helps a company understand the relative value of certain parts of the business. This informs how to allocate capital and resources to maximise overall value. It identifies areas that would benefit most from performance improvements as well the costs and approach to achieving those improvements.
It also describes the joint accountability and measurable goals of senior level stakeholders from board level down, and aligns priorities around a simple plan that describes success.
Identification of foundational capabilities
Its important for any business to create strong foundational capabilities that act as a platform for growth, and provide a sustainable competitive advantage that is difficult to replicate. Organisations must seek to understand existing organisational complexities challenges and opportunities, then define appropriate metrics to guide the delivery of value. This shows if the plan is working and can continue to yield value at an increasing rate given further investment.
Myth busting and truth seeking
The VCP confronts assumptions, asks difficult questions and dispels myths. This allows a sharp focus on what matters most. It also helps a company to understand latent value, versus vanity projects. It aligns strategy to what the company is best at, and hones the value proposition. The VCP is a long term plan that encourages critical analysis, thoughtful debate and honesty.
Bias for action
The VCP starts at day zero. The plan builds on immediate short term targets, with longer term targets that add increasing value.
A VCP is really nothing more than a solid, clearly documented strategy that helps us understand:
- Where are we?
- Where do we want to be?
- Can we actually get there?
- What should we aim for instead?
- What are the costs and benefits, and over what timescales?
- Is the plan working?
- Do we have a success trajectory?
A value building trajectory is the primary value driver for a company under PE looking for an eventual exit, but is clearly of equal importance to any organisation.
Current challenges in digital transformation
In the current economic headwinds presented by the Covid-19 pandemic, transformation programmes are being postponed or de-prioritised as businesses face big challenges to maintain cash flow and day to day operations. Contemplating such strategic plans may seem like a long term objective that is irrelevant in the prevailing circumstances.
However opportunities exist for those that have been able to rapidly transform the business in emergency circumstances and get themselves into a posture that is lean and cost effective, not encumbered by the inertia of non-digital companies, and underpins the rapid change required to be a digital leader in the future.
This means bold decisive change, and the VCP dictates exactly that. It does not have to be a three year venture of hit and miss transformation projects. Instead it can be formulated in the cold light of currently severe business conditions that will quickly establish viability. In this way the VCP can bring immediate value to a challenged business, and reward management with a no nonsense plan that stabilises first, then builds value.
In most cases activities that are required to survive at present are also the key factors in longer term strategy, and will be defined in the short term goals of a digital VCP:
- Managing and re-shaping supplier relationships
- Deciding the resourcing mix and the right ratio of in-house and third party workers
- Planning the organisational design, operating model and transition steps
- Re-thinking the product portfolio or establishing a SaaS type platform that drive recurring revenues.
- Re-thinking the technology architecture that will enable the business changes - What should be built, bought, rented, and what is the core digital IP?
- Finding technologies that allow us to build relevance and engagement with customers.
Digital transformation opportunities
A PE company will aim to realise short term benefits of eliminating low-value activities allowing a investment in the longer term value creation potential of the acquired company, increasing its profits and improving the performance of its capital investments. In this way they position the company for sale by putting in place the fundamental foundations for future growth and profitability. In a company that is not operating under PE, the benefits of a Digital Value Creation Plan are just as compelling.
"Cash is King" at present, and low value discretionary projects are being cancelled. Digital transformation initiatives should not fall into this category. If seen as a project, digital transformation will fail. Digital Transformation should not be seen as a "what good looks like some day" exercise, but as a realistic survival plan that starts now.
Digital Transformation needs to be approached as building a technology-enabled growth platform, and establishing the culture of ongoing value creation.
This provides the lens for evaluating all company activity, and establishing digital value by exploiting technology in ways that compliment strengths and bolster weaknesses.
The Value Creation Plan is a key component of any turnaround strategy, and should be the current highest priority for any company beginning its transformation in a challenging environment.