IN BUSINESS TRANSFORMATIONS, IT IS ALWAYS ABOUT THE TOP LINE
In the run-up to the 1992 United States presidential election, an advisor to then-candidate Bill Clinton was quoted as saying “its all about the economy stupid!”. The quote of the soon-forgotten James Carville was intended to remind the candidate that of all the factors instrumental in running for office, the most important to keep in mind was the condition of the economy. Other factors mattered, of course, but nothing like the impact of the economy.
As private equity firms evaluate the factors that are challenging a particular investment, our experience suggests that “it’s all about the revenue” as we refrain from adding the descriptive that Carville utilized!
In our evaluation of turnaround challenges, the principal challenge that we run into is that the top line is not growing at a rate consistent with the market or, at times, consistent with the expectations of the private equity firm in its underwriting of the investment. The former is one that we will characterize as an “underperformance” challenge, meaning that the go-to-market strategy is not keeping pace with market. The latter – not meeting underwriting expectations – is more of an internal challenge that might be resulting in a disconnect between revenues and operating expense growth. Of the two challenges, the first is more damning as it means that the company is not keeping pace with the competition.
In either case, there are multiple challenges that RDC Advisors observes in turnaround or performance improvement situations. The following are a few of the key challenges:
Not understanding how competition has changed the playing field.
It is trite for management to discuss the strength of an offering from a technical or pricing standpoint, but we find far too often that middle market companies do not spend sufficient time understanding the true nature of competitive offerings. When management teams do not understand the nature of the competition, this leads to multiple problems including the inability to win bids, losing existing customers to competition, and reduced margins as competitors eat away at pricing differentiation. The best organizations are constantly, thoroughly evaluating competitive offerings and responding accordingly.
Company does not have a fully coordinated Go-To-Market strategy.
A challenge facing many middle market companies is that management is able to effectively manage one or two channels but does not have a fully coordinated multi-channel strategy. This typically occurs because the company was built on the original channels but a lack of sophistication in management has not widened the horizon for the additional channels required to grow the business effectively. A fully coordinated Go-To-Market strategy meshes the different pieces required to go after customers through multiple channels.
Owner/founder personal relationships have stalled out.
For many middle market companies, the history of revenue generation rested in the work done by the founders/owners of the entities. Their relationships drove business. The reality of founder revenue generation worked effectively until the company reached a certain size threshold. It is almost impossible for companies to continue to grow effectively with this model, however, as the requirements for sophisticated sales efforts go far beyond the ability of one or two individuals. While this might be the reality for companies with revenues greater than $40MM-$50MM, it is a paramount challenge for smaller middle market companies.
Inability to articulate the company’s value proposition
We have experienced in technology centric companies, an inability of the entity to articulate with clarity the true value proposition associated with the product, thus stalling sales as the market is unable to assess the value of the product or service. This is a challenge of heightened importance in the technology sector of the economy.
Insufficient or inadequate measurement of channel effectiveness
As companies embark on new channel development, especially channels related to digital marketing, it is critical that management understands the performance metrics that drive each of these channels. Measuring sales force effectiveness is relatively straightforward; measuring the success, or lack thereof of your SEO campaign, is a quite different challenge.
Attempting the wrong channels
In this age of multi-channel marketing and sales, it is sometimes easy to “throw everything but the kitchen sink” at sales channels, but the reality is tailor-making a GTM strategy around the correct distribution vehicles is the most effective – and efficient – way of generating sales. Digital marketing, for instance, may not be effective in a large scale, highly sophisticated business-to-business sales environment. The best organizations recognize what is appropriate for the customer base that is being targeted.
Overestimating merger synergies
Most experts suggest that approximately 50% of mergers and acquisitions are deemed to have created positive shareholder value. A basic flip of the coin. While in-depth analysis of failed M&A transactions would be required to provide the best insight, we would argue that insufficient revenue synergy is one of the main causes of failed M&A. How many times have we all heard that if we combine entities there will be significant revenue synergy? Far too often we have heard it and far too often the bark exceeds the bite.
Every private equity firm has its ugly duckling investment that is not making the grade from a growth standpoint. The ability to hit on every investment is simply infeasible in today’s highly competitive marketplace. Furthermore, because of the increase in pricing that has occurred in the low-interest, highly competitive marketplace, even investments that appear to be working might be held back by a lack of a highly coordinated, sophisticated sales and marketing program.
Performance improvement of the top-line is eminently feasible in today’s climate with focused attention on the challenges discussed in this thought leadership piece. Knowing what the problems are is the first challenge – doing something about them is the next and most important step for private equity firms to do.
ABOUT THE AUTHOR
James Still is an operating executive and Board of Directors member with extensive experience in the middle market. His sector experience includes business services, education, training, health care services, and financial services. Formerly the CEO of five privately held companies, he has a passion for leadership. This is one of a series of thought leadership articles centered around best practices for interim senior management, Boards of Directors, private equity owners and operating management.