Driving operational change at a portfolio company requires laser focus. A manager needs to show sharp discernment in asset selection, deep sector expertise, heavy-duty operational skills and be proactively engaged, as well as pursue the value creation plan without relying on external market circumstances.
As managers strive to transform business operations, implementing commercial best practice, a critical lever in driving top-line growth, is central to creating value across the entire portfolio, say Nordic Capital operating partner Olof Faxander and operations director Peter Thorninger.
Some people still question the role of operating partners. What would you say to them?
Olof Faxander: If you don’t have strong engagement in operations then you are missing the opportunity to leverage your strength as a large, experienced firm and apply it across your whole portfolio. I was the chief executive officer at two large-cap companies for 10 years. In organisations that size you have a lot of resources and knowledge [at your disposal]. Many of Nordic Capital’s investments are in much smaller companies which may lack resources, expertise and knowledge about, for instance, commercial excellence. We can support them and share best practice consistently across the portfolio to help them get things done faster in their organisations.
You mentioned commercial excellence. Why is that important?
Peter Thorninger: If you look at value creation across our portfolio companies, half of that uplift comes from
top-line growth. To communicate to management teams what best practice looks like, we developed a ‘commercial excellence toolbox’ of eight levers. First is a go-to-market strategy. You need to access customers in the right markets with the right channels and the right approach. One of our portfolio companies, Vizrt, designs digital graphics for the broadcasting industry. They want to break into new areas. They can’t go directly to all of their customers – there are thousands of them – so they need to change their go-to-market approach and increasingly work with a channel-partner.
Another element is market mapping and the product offering. Bambora is a prime example of understanding where to sell the product (market mapping) and a relevant product offering (payments solution) to merchants including a smooth onboarding. To sell the offer, each company needs to equip its sales team with good tools to explain the value proposition. That was key at logistics company Unifeeder. On sales excellence, it’s classic stuff about training your sales people to push your message and developing a sales pipeline. Then, once you have won a customer you have to make sure they are satisfied. It is 10 times more costly to win a new customer than to keep an existing one. Another example of sales excellence is Handicare, a healthcare company offering mobility solutions for the disabled and elderly, where we ran a full sales excellence project supporting the company prior to its flotation on the stock exchange.
Pricing is not usually high on the [management’s] agenda, but you need to charge for the value you create. Then you create accountability through reporting and processes so that everyone understands what is expected. The last tool in the box is people and performance. Without good people, talent development and performance processes, your commercial organisation can’t improve.
After five years helping to steer Danish logistics company Unifeeder Group on a growth journey, in early August, Nordic Capital exited its investment. The firm sold the business, which transports containers from large liners at the final leg of their distribution and offers short sea services, to Dubai-based terminal operator DP World for €660 million. By then the company had completed two add-ons, of United Feeder Services in 2013 and Tschudi Logistics’ short sea services in 2015, and employed around 400 staff in 25 countries. Nordic Capital’s operations director Peter Thorninger explains the strategy.
Talk us through the commercial improvements at Unifeeder.
Two years ago, the CEO told me he that he felt the business was being pushed on price. He wanted the sales team to be more confident. In December 2016 we hosted a workshop to help them articulate the value proposition. Step-by-step we talked through six areas, including frequency of service and flexibility on weight. We realised there were several areas where the business offered better value [than its competitors] and Unifeeder should communicate that even more clearly. For instance, if the standard container weight is 14 tonnes and Unifeeder often transport heavy containers (above 14 tonnes), they provide better value and should charge for it. If a customer sends a container only one-way, Unifeeder needs to handle the empties and should as a minimum communicate the value we create and ideally charge for that too.
We drew up new standard terms to reflect where Unifeeder was as a company. We explained that to our customers, the shipping lines, which accepted them. If they didn’t meet the new terms Unifeeder would charge a little premium. The business started to talk more about being more frequent or flexible on weight and one-way traffic. Suddenly the customers recognised the value. This supported a volume growth to Unifeeder. The second thing we did with the commercial team was to address key accounts. Instead of spending most of their time talking to local teams on the harbours that book the cargo, they started to contact its client’s headquarters. That’s the level at which to talk about how Unifeeder is adding value.
How receptive was management?
From a small push at the beginning, Unifeeder started to get that pull from the organisation. Now they are in the final rounds of hiring a commercial director who will drive commercial initiatives forward as we step out.
Of these eight elements, which is most important to grow the top line?
PT: It varies vastly across our portfolio. We have used all of them for all our investee companies. A payments company like Trustly has a good sales excellence set-up and reporting, but they are working on their go-to-market strategy and how to attack new verticals. If you try to push an old direct sales model in a new market you can invest a lot of resources and not really move the needle.
What results have you seen?
PT: Focusing on sales excellence alone we’ve seen top line uplift of 10-15 percent. At Virzt we have worked extensively on the product strategy, defining what we’re selling and the value proposition. In some countries where Virzt has a presence, we’ve seen a revenue uplift of 10 percent plus over the last year.
What challenges arise instigating change in a commercial organisation?
PT: We use a framework to assess the maturity of an organisation across these eight elements. Inside a single commercial team these can differ vastly. Where you see different maturity levels you always go for the one where you can have the most impact. That’s a dialogue you have with management. Management is typically very open to receiving support for their product strategy, developing new sales tools, improving sales excellence, and making sure they have the right reporting. On pricing, less so. We continue to push on pricing. Price is always more sensitive – it is very close to a sales person’s heart. But there is a lot of value there.
How involved does an operations team need to be?
PT: You don’t go in and magic occurs. You need to be there to offer support and ensure structures stick. If you implement a dashboard for your CRM you need to ensure sales reps are trained and understand the value of transparency in their sales pipeline; that it’s for their benefit. They can show what they are doing and can ask their manager for support where necessary. Success doesn’t happen overnight. It might take three, four or five iterations to get it right.
It’s important you create pull, that you plant the idea with management so they want to do it themselves. We work individually with companies and then every six months we host a sales network event for portfolio company sales leaders. We share our own experience and try to inspire them. But it’s also important that we come with a bit of a push.
There is as much focus pre-deal as post-deal on ownership excellence, says operating partner Olof Faxander (pictured)
Nordic Capital highlights ‘ownership excellence’. What do you mean by that?
Within Nordic Capital, we’ve made a significant investment into this function with the purpose of helping support management drive value creation. We’ve added resources – there are six of us on the operations team now and we also have industrial advisors and further specialist consultants’ resources– we’ve worked a lot with processes, and now we have a very extensive engagement with our portfolio companies. We believe this increased focus has contributed very positively to the financial performance of the portfolio.
What is your goal as a GP?
We are there to help the management team succeed and achieve their target. Nordic Capital is very good at delivering the money multiple. In today’s world investors are increasingly measuring the speed at which we are generating that return, and we have therefore set the aim at achieving similarly good money multiples as in the past, but accelerated by 12 months.
What is your role?
I head the operations team and chair the Portfolio Development Board, which follows the deal teams and the portfolio companies throughout the fund’s ownership. We have a continuous set of reviews and meetings with the company. The frequency depends on where we need to focus the most energy.
In the due diligence phase, our four operations directors and strategic HR professional are selectively involved where they can add value. There is as much work pre-deal as post-deal to evaluate the strength of the management team. However, they spend 80 percent of their time or more on the existing portfolio and post-deal support. We also bring in industrial advisors, some we call operating chairman, which we work closely with and they can be chairmen/sit on several portfolio company boards.
How important are people to the success of the value creation plan?
We are continuously building our network of advisors. We support the deal team to appoint the board and company CEOs build their management teams. Typically, when a private equity firm buys a company its ambition level increases and that needs to be reflected in the management team. The alignment between Nordic Capital – as owners – and management is very important.
This article was sponsored by Nordic Capital and first appeared in the Operational Excellence supplement that accompanied the October 2018 issue of Private Equity International.