Private equity firms should not delay pinpointing revenue growth opportunities and instigating change at their portfolio companies, warns Blue Ridge Partners co-founder and managing partner Jim Corey. Here he explains why.
Why has Blue Ridge honed in on revenue growth as a key driver of shareholder returns?
Revenue growth has been the focus of our firm since we were founded in 2002 – that’s all we’ve done – and we selected this scope of practice for two reasons.
One is that revenue growth is the largest single driver of value creation over a five-year holding period. The second is that many management teams we see need help accelerating revenue growth.
The recent survey we sent out to operating partners came back with an interesting statistic: they said only 24 percent of CEOs they worked with were highly capable and self-sufficient in accelerating growth. Frankly, it is a complicated topic. It’s a challenging set of issues CEOs have to deal with.
You say year one is crucial to value creation. Why?
Many of the meaningful changes that accelerate growth take multiple years to implement. It’s not like a cost-reduction initiative where maybe in 60-90 days you can see those costs eliminated.
Imagine the lead-time selecting a new go-to-market channel or to use a new set of channel partners – it takes time. If you start late, the benefits will be late and it might be outside the investment horizon of the GP.
Why is operating partner engagement with management tricky in this period?
Revenue growth is a delicate topic to raise. Typically, in year one the deal team is looking for safe ground to engage with the CEO and very often that does not include revenue growth. In many cases, it wasn’t included in the value creation plan, so it would be a left turn to talk about it.
Also, CEOs view revenue growth as their responsibility. They know the markets, products and the business better than the GP. All too often, unfortunately, we tend to be called in three or four years after closing when there has been some disappointment. We call those the lost years.
So, should you consider revenue growth in due diligence?
I would argue even earlier, in the pre-bid period, and here’s why. Asset prices are very high. Most companies are sold through a competitive bidding process. A lot of GPs need to stretch their valuations in order to win the deal. Historically, investment committees haven’t been willing to underwrite growth opportunities, and they don’t focus on them during this period. As a result, many firms are losing deals. We’re pretty active now in the pre-LOI [letter of intent] phase with a handful of private equity firms that recognise the importance of growth.
You're a 30-year veteran of the business. What has your experience taught you about what works and what doesn't?
It’s a matter of finding the right levers and in every company those are different. In general, getting sales and marketing organisations to change is difficult. Successful sales people have their own formula and are change-resistant. There are a lot of great ideas that never ring the cash register because companies can’t get change implemented in their sales organisation.
The second thing that I have learned is that most sales organisations are doing too many things at the same time and getting grades of Cs and Ds. I’ve found it works better to focus on a few things and get A-grades, then pick up the next set and then the next, in waves of change.
Most companies, surprisingly, are also missing insights about their markets and how they are changing. Most sales organisations are not highly analytical. If they did analyse the data, they would see things like the distribution of performance across the sales organisation, which would generate insights. And they don’t spend lots of time asking really hard questions of customers, like why do you buy from this competitor and not us?
What problems do companies encounter trying to accelerate revenue growth?
Most lie in two areas. Sales people have a tendency to spend a lot of time with existing happy customers. If they understood better where to focus their time in the market and what message they should deliver, they would be more successful.
The other is sales force effectiveness – the tools that the sales force is given, whether they get the right sort of coaching, whether they have the proper skills and motivation to be successful. Sometimes it’s just a skills problem.
Studies also show the vast majority of CEOs lack prior experience in leading sales organisations. Sometimes they fear if they change something in sales there might be unforeseen negative results.
Can you give us an example where you’ve navigated significant challenges?
We worked with a US-based construction equipment rental company that wasn’t growing while others in their industry were. In a diagnostic, we found three things were holding them back. They were too diffused over different products and geographies. They needed to pull back and focus their time and capital expenditure on fewer areas and refocus on their core.
They had also lost track of market pricing. We discovered that in 80 percent of their markets, they were the low-price bidder. They thought they were mid-pack. They raised their prices and that made a big difference.
Thirdly, a number of their sales people didn’t have the right skill sets or motivations. The company upgraded its talent pool. The valuation of that company tripled in 18 months.
Your operating partner survey asks firms to rate their operating team's ability to diagnose revenue growth and identify the proper levers. How is that best done?
It goes back to analysing data and getting market feedback. But study work is an invasive approach. If the CEO hasn’t accepted that they have a problem with revenue growth, it will be unwelcome. An alternative that shines a light on where there might be opportunities is our self-assessment tool.
We examined the 400 companies we have worked with to find out what made the difference regarding revenue growth and included those 60 factors in the assessment. Wherever we could, we quantified the benchmark.
The tool can make a big difference to the way that operating partners function. They might already have a checklist they review with the management team. The feedback we hear from them is that the checklist is nowhere near as comprehensive as our self-assessment tool.
How do you go about making changes based on the results of the self-assessment?
One UK-based GP is working through the self-assessment at each of its dozen or so portfolio companies. We will summarise what we’ve learned in a cross-portfolio leadership workshop and outline any consistent issues across the portfolio that might need investment.
One company highlighted that growth was constrained by the slow pace of new product roll-out. They were known as being pretty innovative in their industry but they hadn’t released any new products in quite some time.
Looking closer, the new product team had become very bureaucratic, wasn’t connected to the market, and worked in an isolated laboratory environment. When they did release new products they were at the wrong price point or had the wrong functionality. We discovered lots of different issues with product commercialisation.
The firm emphasises the 'non-invasive' nature of the self-assessment tool. Why?
CEOs are concerned that someone is going to come in and shine a big bright light on things they haven’t been doing well. They are naturally resistant to that invasiveness. This tool involves self-discovery. And it doesn’t take a lot of time.
How does the self-assessment tool work?
The questionnaire is a non-threatening way to engage with a portfolio company CEO on issues related to revenue growth. It’s not like an intrusive study with data requests and interviews. Rather the CEO is asked to reflect on some thoughtful questions to see where energy might be reallocated to accelerate growth.
The operating partner could sit down with the CEO and walk them through the self-assessment and discuss it. It’s also very informative for deal partners as a cheat sheet of questions they might ask the board. But the most common way is to have several people at the company and the operating partner fill it out and compare results.
We’ve organised 60 factors into nine areas that we call ‘the roots of growth’. Our back-end reporting shows how responses differ across those areas. Then you might see how the CEO is in a very different spot from the sales organisation and that may be worth talking about in a workshop facilitated by the operating partner.
The survey also asks about the potential impact of fixing these topics and how easy that would be. The key is to look for big impact changes that are relatively easy to implement.
Jim Corey chairs a panel on factoring revenue growth into the traditional value creation plan at PEI’s Operating Partners Forum in New York this month.
This article is sponsored by Blue Ridge Partners. It appeared in the Operational Excellence Special 2016 supplement published with Private Equity International in October 2016.