OpEx Value Creation for Private Investors
Last week I attended a conference hosted by the Wharton School of Business for Private Equity and Venture Capital investors. At the conference, I attended a panel discussion on value creation. Each of the panelists had a great point of view on how to drive value at private companies. Private companies in private equity portfolios have unique aspects as they are under the governance of intelligent and demanding owners who have the flexibility to think in terms of either the short term or the long term as the opportunity presents. And their ability to drive returns that are shared with management allows them to attract the best to pull on the oars with them.
The panel discussed many different means by which theyd driven value in the past. They talked about providing their portfolio companies access to best practices in the recruiting and development of human capital, the implementation of IT systems, the development of strategies to capitalize on market opportunities and, although certainly not desirable, the ability to change leadership when the situation merits. I thought about these value creation strategies and what we could contribute to the discussion.
Undoubtedly, one of the most amazing accomplishments in our economy since the Great Recession has been corporations ability to drive continuous gains in productivity. This has been accomplished in many ways. Certainly, a great deal of the initial gains came by reducing headcount which isnt the way anyone want to drive productivity. But there was also the introduction of new technologies and innovation.
But along with all the above, one of the contributing factors has been constant process improvement and redesign. We have seen and helped in so much of this. We have a client, a distribution company, with whom we worked that posted 5% annual productivity improvements for five consecutive years. Another client decreased their expenses by 10% in 18 months before settling into 3% annual gains without resorting to layoffs. In many different industries, there are examples like this. And nearly all those companies have established OpEx programs as a standard management practice.
Imagine the value created when you are able to reduce your expenses by 5% annually for each of the last five years. Imagine the muscle tissue that company possesses which can then be applied to new products and/or services or integrating acquisitions. Imagine the stability and predictability in their execution. Take a look at my recent post on how strategy starts with operational excellence. Imagine the strategic alternatives created when you become a low cost provider or can quickly change your production line to produce custom products.
I think what we do can be a tremendous value driver for any ownership. I think the sort of long term capability we drive can be some of the most desirable value a company can establish. If you have any thoughts on this, please contact me.