Building value with less sweat and blood: the role of catalytic intervention
1. Doing it the hard way
Some months ago, I argued that formal value creation methodologies – created to address the problems of a less favourable investing environment – could be self-defeating unless balanced by greater attention to how teams and organisations build value in practice (which Catalysis refers to as value enablement).
A related issue is that while investors have become more sophisticated in their processes, they have arguably narrowed focus to reduce risk to the frequent exclusion of easier ways of making money. So, financial models get more complex, due diligence outputs get fatter, 100 day plans more meticulous, and board KPIs more numerous: a big escalation in analytical and control mechanisms. What those mechanisms bring with them, however, are implicit assumptions which tend to the mechanistic and incremental which is a disadvantage in a subdued economic environment.
The opportunity cost of that more controlling environment is room for fresh thinking. For example, useful strategy thinking typically includes a phase of divergent thinking (brainstorming, open questions etc. all seeking better options for the future) followed by a convergent phase where weaker ideas are removed, and remaining ones are synthesised into an agenda of priorities. However, in the circumstances where an IM has been produced by advisers incentivised to achieve a smooth sale, and a deal team needs to justify a financial model to investment committee to get a green light to proceed, there is little room pre-deal to play with business assumptions. Post-deal, it is difficult to deviate from the financial model and forecasts so the ‘strategy process’ risks becoming more a tidying up and planning process as investors focus management on hitting year 1 targets.
That squeezing out of creative thinking matter less if the investee business model is relatively simple and/or mature, and the management team have thrashed out their growth options thoroughly before a deal process. But in the small cap and mid-market space, business models are often still emerging, and teams have often been successful executing on yesterday’s ideas well rather than generating tomorrow’s breakthroughs.
This pattern creates several risks:
The post-deal period can become a grim process of ‘grinding it out’ rather than an energised partnership between entrepreneurial managers and wise non-executives.
The reliance on conventional management models, and especially an over-dependence on time-poor executives becomes the limiting factor on scaling.
Space for thinking about better options to create stronger results with lower cost (in bandwidth) is severely curtailed.
The rest of this article offers glimpses of the low hanging fruit which may be available if we look beyond the monthly board pack and ask ourselves more interesting questions
2. Bigger results, smaller efforts
When we consider how to improve outcomes, we can separate the impact we are seeking (results) from the cost, time and energy involved in producing them (effort).
The diagram on the left provides an overview of different kinds of actions which those dimensions define.
Let’s consider examples of increasing results and decreasing costs before moving to the most intriguing category: catalytic interventions.
a. Boosting results
The Pareto principle argues that, in very many contexts, a small number of inputs can generate disproportionate outputs, while the remainder of inputs have much lower benefits. That is often referred to as the 80:20 law but the precise numbers are less important than the observation that some causes are simply many times more powerful than others.
Let’s consider three different examples:
One of our tech company clients pursued an acquisition which not only grew their scale and geographical footprint, but also brought with it a very complementary offering (which would have taken years to build organically) and managers who brought skills lacking in the acquiring business. There may have been minor cost savings, but the main payoffs were revenue, reputation, and capability synergies. This shows the pay-off from an unusually well-tailored deal.
Years ago, I was involved in a roll-up strategy in the cable television sector in Romania. Each acquisition, on average, was more profitable than the previous one partly because inefficient local back offices were merged into central teams. But there were also benefits in negotiations with content providers who reduced prices for greater coverage, and from banks who offered better credit terms. Customers benefitted from superior technical quality and channel diversity. Staff were better paid and trained. Shareholders enjoyed higher profitability and earnings multiple. All in all, there was a virtuous cycle of increasing returns for at least a decade.
There is a whole world of interventions available to transform business models and tired strategies. Those range from ‘Blue Ocean Strategy’ (with its focus on value innovation), ‘Demand innovation’ (presented in Slywotzky’s ‘How to Grow When Markets Don’t’) to more punctual exercises like strategic pricing and procurement strategies.
The pursuit of results is already the focus of PE value creation methods so these three examples should be familiar in principle even if, in practice, exploration of creative options may be stunted by the tendency to play things safe.
b. Reducing bandwidth costs
Top team time and energy are generally the scarcest resources in growth companies and, consequently, depending too much on a few individuals to drive the strategy can become a major constraint. By contrast, anything which can substitute for executives is likely both to help the team become more effective and accelerate the growth plan. There are at least three options for that substitution:
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• Fifteen years ago, during a DD process, the FD of a pump manufacturer wasn’t available for his interview slot because it was his allotted time to answer the reception telephone – because the owner didn’t want the cost of a receptionist. That is an extreme case but illustrates how senior managers may be diverted to tasks better handled by less expensive staff.
• A toy design company was known for exciting blockbuster innovations which, however, had unpredictable performance. That uncertainty was balanced by ‘steady eddy’ products sold through third parties. But that less exciting activity was under-developed for lack of dedicated resource and distracted the senior creatives who half-heartedly managed it. The appointment of a commercial manager alleviated both issues and paid for itself.
• A Dutch tech business found certain key individuals overwhelmed by accountabilities representing more than twice their normal hours – until a quarterly capacity planning process forced greater prioritisation and great delegation.
• A mid-market PE investor has a habit of appointing a temporary chief of staff to provide a boost in capacity for CEOs post-deal, especially in dealing with 100-day planning, strategic initiatives, reporting preparation etc. The same can be achieved in key functional areas through the appointment of fractional executives.
• Catalysis has worked with teams to help make role portfolios more manageable through a process we call ‘role peeling’ whereby non-core activities are swapped, delegated, eliminated etc.
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Back in the 1990s an inspired adviser/facilitator, Sid Joynson, claimed that if he spent two days with a workforce, he could raise productivity by 25% or cut waste by 50%. See him in action in a low profitability shoe factory here: https://www.youtube.com/watch?v=Uh2bnyNIcwI.
The video might seem quaint but plenty of research and cases show how empowered workforces can build growth and profitability if given guidance, performance data, and a relaxation of top-down control habits.
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In 2000, a gold mining company (Goldcorp) wanted to accelerate its identification of worthwhile seams to explore because internal teams didn’t have the capacity to make sense of the massive amounts of data available. Rather than hire more people, Goldcorp took the radical step of publishing all its data on a dedicated website and offered prizes to anyone whose analysis could guide them to the most promising areas. More than 110 locations were identified and more than 80 per cent yielded significant gold reserves.
This use of open-source brainpower and co-creation has since been deployed in many contexts with clients, employees, suppliers, end-users, outside thinkers/academics, and retirees finding performance shortcuts to avoid ‘reinventing the wheel’.
3. Truly catalytic
The Holy Grail of improving results is, of course, improving benefits while simultaneously decreasing costs. Happily, there are several places to find such interventions which can spark virtuous cycles.
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Research suggests that both customers and employees care more about eliminating annoyances than gaining positive benefits. So, although planning for greater positives remains important, quick wins might be more easily achieved by periodically seeking out internal blockers and external irritants. Those are often obvious when the question is asked but then, as Jeffrey Pfeffer of Stanford notes, ‘great leaders and teams are masters of the obvious and it is a rare talent’.
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There are often big variations in results within teams, between teams and across geographies. Learning why some approaches work better than others can lead to the transmission of better ideas and higher productivity. In one manufacturing business we worked with, managers from one site would visit another to learn where they were more successful in certain activities (to take home) but would also suggest areas where their home site might have an advantage. Typically, both sides would make gains at limited cost, and without the need for the Operations Director to handle the thinking.
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When time cost is allocated out of overheads to clients, activities, and geographies, it usually emerges that some things are loss-making. That might imply changes in pricing or approach or might lead to stopping certain things. Sack some clients and gain the benefit of lower complexity and higher profitability. As a thoughtful observer of scaling (Robert Sutton) notes, it requires not just addition to activities but also subtraction.
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Solving problems across functions and geographies can be fiddly and time-consuming. An excellent way to address those can be creating one-off teams of junior managers and giving them the mandate (and a little guidance) to analyse and propose solutions to such issues. Such groups can deliver multiple benefits: better solutions than overloaded top teams can generate; less clunky execution when signed off; a sense of empowerment and development for those involved; the strengthening of internal channels of communication; savings in top team time.
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• When hiring expensive new people, there are various ways of trying to improve the odds of getting decisions right. But it is easy to demonstrate that getting the role specification crystal clear for all stakeholders is a more effective, and much less costly, way to make the right decision than heavy duty assessment late in the recruitment process.
• In strategy processes, allowing a little more time to talk about non-standard options for building results is likely to yield more than ever more detailed financial analysis.
• When considering new initiatives, carrying out a quick ‘pre-mortem’ of why the decision is likely to succeed or mess-up may expose more useful issues to examine than long position papers.
4. Accessing catalytic options
As the approaches and examples above suggest, opportunities to find benefit and to do so with lower management time cost, can be found in all sorts of areas. Where, then, to look when everyone is busy, and the core plan seems all-consuming?
The good news is that identifying these high impact, low-cost actions doesn’t require lots of new work, but rather harnessing a curious mind-set by asking questions which stimulate entrepreneurial and creative thinking. What could we stop doing to create space for newer, better things? If we don’t have the time, who might we ask for help from? Which catalytic ideas might we apply from elsewhere?
When annual strategy reviews take place, how can space be left for divergent as well as convergent thinking? That might be helped if participants take time to confer with junior colleagues (or suppliers, or industry experts) before sessions.
Run limited tests for ideas which might (or might not be) significantly better.
Empower a working group (perhaps with initial help from the Chair or a facilitator) to chew on a knotty issue and see what emerges.
Focus attention temporarily on an area which is usually left in the shadows and has few KPIs and see what low hanging fruit may be found.
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