My article on private equity value creation in the Mergers & Acquisition Magazine - November 2009

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COMMUNITY COMMENTARY
Rethinking Value Creation
Studies show how top-performing companies maximize
enterprise value
By Tamas Hevizi
he reduction of access to capital has caused private company can optimize performance with the right opera-
T equity firms to rethink their value-creation strate-
gies. As significant efficiencies can be achieved
through operational improvement, more firms are focus-
tional initiatives, showing that private companies tend to
achieve the same operational performance as their pub-
lic peers but with more effective use of working capital
ing on business process optimization to improve their own and balance-sheet management.
as well as their portfolio companies’ internal rate of return A common pitfall for companies focused on maximum
(IRR). value creation is that they often focus on improving busi-
The SAP Private Equity Performance Improvement ness processes that they have already mastered, simply be-
Team, a group that helps maximize enterprise value and cause they have significant expertise in these areas. In-
portfolio synergies, analyzed data from more than 2,000 stead, to derive maximum value from the smallest set of
“
companies in an effort to identify a road map for operational initiatives, these companies should focus on identifying
value creation. The information accumulated sheds light high-yield value strategies by assessing which business
on the critical question: How do best-performing compa- process improvements will have the largest positive impact
nies maximize business value? on the company’s operations. Maximum
SAP’s investigation uncovered Performance benchmarking is value can be
three guiding principles to maximiz- a key tool to identify which busi-
ing business value. The first princi- ness areas have the highest value
derived from a
ple calls for investors to understand potential. It can point to the parts of small set of
the highest value-potential through a company that would benefit the initiatives.
performance benchmarking. The most from new management prac-
second requires sponsors to iden- tices, or the departments where IT-
tify high-yield strategies that max-
imize value creation. The third prin-
ciple guides investors to implement
governance for continuous business
value creation.
Maximum value can be derived
driven process improvement and
technology automation will provide
maximum value-add.
Many organizations tend to
over-emphasize pursuit of either
new management practices or IT-
”
from a small set of initiatives. In to- driven process improvement. But
day’s economy, companies must fact-based data analysis shows that
strive for optimal use of working it is a combination of these ap-
capital, focusing on select, high-im- Tamas Hevizi proaches that leads to maximum
pact initiatives that drive maximum results, stressing the importance of
business value. targeted identification of high-yield value areas.
SAP’s research shows that regardless of whether com- The SAP Private Equity Performance Improvement
panies are public or private, high-growth or distressed, Team helps PE groups and their portfolio companies max-
outperformers adopt consistent, high-impact strategies imize enterprise value and portfolio synergies by leverag-
that spur better performance. These high-yield value strate- ing SAP’s industry and process benchmarking, high yield
gies provide 80% of the value creation from 20% of the ini- value strategies and rapid implementation solutions.
tiatives. The benchmark studies support the notion that a VALUE CREATION continued on page 60
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COMMUNITY COMMENTARY
VALUE CREATION continued from page 58 rework multiple touch points; simplifying and automating work efforts
for compliance; reducing manual entries with simplification and automa-
The 4,000 SAP customers that participated in our benchmarking stud- tion; and leveraging self service for employees, managers, suppliers.
ies identified a few of the most common high-yield strategies that pro- End-to-end process view is critical to maximize value. Along with
vide maximum value creation. identifying high-yield strategies, SAP research also reveals that top-per-
SAP has outlined some of the potential key high-yield strategies for forming companies take an end-to-end process view of the examined
procurement, supply chain, and general and administrative expense (G&A) business operation.
- three areas with cross industry relevance. Many companies try to improve accounts receivable activity through
Of the companies we surveyed, top-performers have 95% of direct better collections and credit management - two processes that are part
spend under contract, as opposed to average performers, which have of the same department. However, often the best way to improve ac-
only 71% under contract. counts receivable efficiency is to focus on processes that are part of oth-
Similarly, we found that unplanned indirect purchases at top-per- er departments yet still affect accounts receivable, such as higher order
forming companies occur less than 3% of the time, compared with 14% fill rates, product quality and improved transportation planning.
at average companies. Also, to achieve sustainable value creation and management, it is
Key strategies identified by our group to improve procurement through critical for companies to establish a framework that pulls data and input
extended spend management include driving negotiated pricing to non- from a diverse range of sources. This helps ensure more accurate identi-
managed categories; strengthening spend controls and enforce compli- fication of the high-yield value areas.
ance; simplifying the employee purchasing process with direct ordering Today, many leading companies establish value management offices
and extended coverage; and improving regional contract terms for local to provide a governance structure for value creation. Ideally, a combina-
performance and compliance. tion of benchmarking, business case-based governance, value realiza-
With regards to the supply chain, top performing companies inte- tion processes, and value creation measurement should be employed.
grate their planning processes across supply, distribution and production The pursuit of high-yield value strategies leads to competitive ad-
areas to drive execution performance. While leading organizations achieve vantages. With a critical eye on operations and a road map to identify-
on-time delivery 98% of the time, average organizations have an 87% ing high-yield value areas such as those outlined above, private equity com-
on-time delivery performance. panies can improve the management of their assets to meet today’s
We identified a number of key strategies to improve supply chain increasing market and shareholder pressures. Teaming up with a partner
performance through integrated planning processes. For instance, com- such as SAP’s Private Equity Performance Improvement Team can help
panies should ensure supply, distribution and production plans are con- with the identification and pursuit of high-yield value strategies, allow-
sistent in the short-term; gain cross-functional, executive alignment on mid- ing private equity companies obtain better exit values from the capital they
term operating plans; keep plans up to date with feedback from execution invest while providing a competitive advantage that will foster long-term
systems; and provide visibility of availability to customers. success.
As it relates to G&A or support functions, simplification, standardi-
zation and automation of business processes have significant impact on Tamas Hevizi is SVP of Private Equity Performance Improvement at SAP.
support function costs. SAP research shows that leading organizations Tamas has over 20 years experience in business transformation in Asia,
spend 1.4% of revenue on support functions such as finance, HR, pro- Europe and North America. He was Vice President at Deloitte & Touche’s
curement and IT, whereas the average organization spends almost three SAP business, National Partner in Ernst & Young’s Performance Improve-
times as much - 3.9% of revenue. ment practice and recently spent 7 years as a leader at SAP’s Value Engi-
Key strategies to improve support function include driving end-to- neering organization focusing on value creation strategies in consumer
end process workflows across organizational boundaries to reduce and products, technology and manufacturing.
OUTSOURCING continued from page 59 in search of opportunities for market growth and consolidation.
hance penetration in particularly attractive industry segments, such as Tye, Hamilton and Walker lead the Business Services practice at Edgeview,
healthcare. Also, a weakening US dollar may attract foreign strategics look- a Charlotte-based middle-market investment bank. This article is based
ing to benefit from favorable exchange rates and put cash reserves to on essays that appeared in recent editions of Edgeview’s Business Ser-
work in the United States. Thawing of the credit markets for leveraged vices Industry Insights newsletter. Please write to business-
buyouts is also likely to bring financial sponsors back to the BPO space services@edgeview.com if you would like to be added to the subscriber list.
60 ACG > MERGERS & ACQUISITIONS November 2009