PE Value Creation: The New Playbook That Delivers

Authored by:  Samir Sheth

There are significant value-creation opportunities beyond the conventional methods often employed by private equity (PE) investors. To build the most effective strategies, a comprehensive and innovative approach is crucial. During the due diligence phase, PE investors should focus on developing robust value creation strategies, refining them between the signing and closing of the deal, and prioritising their execution immediately after the deal is finalised.

An important factor in realising these strategies is developing a clear 100-day business plan after acquisition. Firm management often misses great opportunities by focusing on risk control and organisation stability instead of creating greater value. Missing the opportunity to grow top-line and expand margins in the periods immediately following the closing may prove costly as some opportunities may take longer to unlock.

The most critical value-creation activities for PE investors are the transformative cost initiatives which drive sustainable efficiencies beyond traditional cost-cutting measures and the data-driven growth strategy, which utilises data analytics in decision-making and growth strategies. By concentrating on these areas, PE firms can realise greater value creation, which is sustainable in the long run.

TRANSFORMATIVE COST STRATEGIES

Relying heavily on traditional cost-cutting measures can undermine long-term business health. A more effective approach is cost transformation, which involves fundamental operational changes to drive lasting efficiencies without sacrificing future growth.

Key strategies for successful cost transformation include:

1. Service Delivery Model: Enhancing the efficiency of support services through centralised operations or specialised hubs can lead to significant savings. Streamlining service delivery, using automation for routine tasks, and employing advanced performance management tools can achieve reductions of 15% to 25% in labour costs.

2. Strategic Workforce Design: Instead of cutting staff, reconfiguring the organisational structure to streamline reporting and reduce management layers can create additional value. This approach improves efficiency and aligns the workforce with strategic objectives.

3. Process Optimisation and Automation: There is enormous potential to reduce expenses through efficiency and automation of critical business activities. Tools like robotic process automation and analytics improve basic processes and help in complex decision-making.

4. Efficient Resource Allocation: Eliminating waste and implementing flexible solutions like cloud-based IT services are likely to result in substantial savings. Strategies like Zero Based Budgeting (ZBB) make it easier to understand cost structures and respond to the requirements of changing business environments.

5. External Spend Management: If companies review and rebid their buying habits, reduce suppliers, and negotiate for better prices, they can gain more affordable prices. Using analytics, visualisation techniques and cognitive tools in spending can help find volume discounts and better price schedules.

The adoption of these transformative strategies results in sustainable and significant value creation as compared to the conventional ideas of cost reduction.

DATA-DRIVEN GROWTH

The value creation methods under this category focus on leveraging comprehensive data to achieve sustainable revenue growth. Access to new data sets and advanced analytics is essential for refining strategic decisions and exploring innovative customer engagement opportunities. Utilising big data enables organisations to swiftly identify and seize new market prospects, especially through digital channels.

1. Increasing Customer Engagement Digitally: Customers expect a seamless, data-driven experience beyond a single transaction. Digital customer engagement is about targeting customers through the omni-channel strategy and driving continuous engagement through online reviews and social media. Such customer experience is key to acquiring and retaining customers.

2. Leveraging Market Insights Through Data: The integration of real-time data with conventional business knowledge is critical when making strategic decisions. This approach can be used by businesses to understand customer segments, the efficiency of the set prices and the overall performance of the market. For instance, when dissecting customer behaviours, new business opportunities in the market, and better strategies to minimise churn could be discovered. This is because, by consolidating data regarding customers across multiple portfolio companies, PE firms can come up with a wider and deeper understanding of the customer base, increase penetration into the market and improve overall customer experience. This data-oriented approach, geared by real-life applications and business value perspectives, will open up growth and expansion prospects.

CONCLUSION
Digital technologies remain instrumental in the continuance and development of cost transformation and the use of data-driven growth initiatives. Established applications including robotics and cloud computing result in cost advantages, while new technologies such as cognitive analytics, machine learning and AI generate timely insights that fine-tune the revenue model and customer satisfaction. 

A significant proportion of the PE portfolios has not optimally adapted to these innovations. Through the application of fully digital solutions that enhance cost efficiencies and leverage disaggregated data, PE firms can increase investor earnings and deliver highly sustainable and saleable propositions. This changing market proves that it is prudent to harness these technologies to foster permanent continuity and manage future pressures efficiently.