Are operational improvements back in vogue? Depending on what you read, anywhere between 30-50% of Private Equity returns over the last decade can thank some form of financial engineering. A lot more people with a lot more money chasing relatively few quality deals with has made it more common sell a company for more times earnings than you paid for it, even if actual EBITDA has gone down. Multiple arbitrage. Or in other words, more for less.
Not anymore.
Costlier capital for the next 5-10 years means those tailwinds will drop for everyone. Margin improvements are firmly back in fashion, and it's the companies that have gone broadest and deepest with operational transformations that will be giving their investors the outside returns in future.
The Problem with Standard Operating Partner Playbooks
This should be basic bread-and-butter for Private Equity firms. Any Operating Partner can offer a laundry list of to-dos which transform margins. Squeeze working capital. Expand the product mix. Upgrade product supply. The list goes on, and includes pretty much anything that cuts cost, speeds up decisions and contributes to faster growth.
But when asked, many CEOs who are feeling the heat say they see it differently. One pointed out that in her case, components of the investment thesis that contradicted each other had created more than a few headaches. Yes, presenting outsize top-line opportunities alongside juicy cost reductions will always make the numbers look good enough to get a deal across the line. But if massive market growth needs to happen at the same time as paring back the sales force, the company pulls in different directions creating turmoil and shaky execution.
If management doesn't think the plan is sensible and can't see coherence in the path to growth, it is unlikely to simply get with the program and transform the Company overnight. And when impatience starts to show, this kind of roadblock can cause months of tension and delay that seep into an organization, test managerial solidarity and snarl-up the path to growth. It's an expensive problem.
Strategy First, Agility Never
In reality, most value creation plans are fully formed somewhere between pre-close and the first 100 days. They don't change much after that. 'Agility' belongs in product development not strategy, and the longer it lurks in the Executive Office, the more it starts to look like panic.
So instead, the sound approach to execution begins with strategic clarity, then moves through an understanding how the Company must be led and finishes with individual managers knowing how their own style and make-up can deliver what is expected. This combination of strategy and psychology for high-performance execution is what Morg&Co is known for.
All companies aim to grow, execute efficiently, innovate, be sustainable, and take care of talent. None of these activities behind these plans exists alone. Each manager must share the same coherent understanding of how the whole plan connects with all contradictions resolved – and what stays on the cutting room floor. For example, the best use of this dollar is in recruitment and training that strengthens the inbound marketing teams which will convert greater numbers of eligible customers that happen after the launch of the next app and product with the Superbowl advert and accelerates growth rates beyond the competition so that we can control the direction of the technology. Telling the story shows up all the links in the chain. If managers have doubts about the overall story, then the whole team's ability to collaborate and lead the organization is weaker and slower.
The Human Factor in Execution
Executing change in an organization has not changed much despite enhancements in communications and technology. Humans still respond in familiar ways. Management teams still need to build relationships, create alignment, communicate, manage change, anticipate and respond to events and drive performance. Execution is simple when challenges are clear. If executives take time to think through exactly how they will approach goals, then they can neatly coordinate accountabilities and outcomes.
So, what of the 'who'? Psychological assessments helpfully tell you who not to recruit, but research (see other article) suggests that teams kept together for longer produce higher future multiples. Changes should be made only after clever consideration, because existing managers can post outsize performances if they approach their tasks like athletes. Preparing for upcoming challenges like a well-analysed endurance race gives a good start to a gruelling six-year holding period. If they are completely clear on the details of how they think a set of objectives should be accomplished, then they can specifically focus their own experiences, skills and strengths to achieve them. Done properly, this preparation does not take long.
Side bar about many managers: they want to succeed. They are hopefully autonomous and self-driven. They want to make an impact. They want their teams to grow. They want to survive and go the distance. They want to make life changing amounts of money, and line themselves up for their next role. They do not want to be assessed for hours and coached for months, and frankly there isn't time for this to be done well and to be effective.
Morg&Co works with management team members individually and as a team to clarify the plan, how goals link together, what specific jobs each person will need to do to create a successful team result, then uses focused one-on-one to create specific awareness about how they are likely to thrive or struggle against each specific accountability and relationship. Unlike traditional psychological assessment & coaching work, the Morg&Co approach to execution is engaged, aligned, totally wound into the strategy and objectives, and absolutely focused on helping the executive team give their best performance to bring goals to life.
Now, about that multiple…
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