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A Private Equity Firm’s Guide To Operational Improvement

Executive Summary:

This guide will examine different business models you can move to make improvements. (Such as using lean, six sigma, quality management, etc.) It will then discuss 4 steps your PE firm can take to get started, along with helpful tips you can apply to better any portfolio company.

You’ve finished the transaction acquiring your portfolio company and are now ready to look at ways to increase its value. There are plenty — from outsourcing non-core competencies to cutting costs at the supply chain and much more. Many of the changes you can enact to increase profit all come back to making operational improvements. In this guide, we’ll arm you with the different methods you can lean into along with helpful tips.

Why Does Operational Improvement Matter?

The overarching goal of any PE activity is to add value fast. That includes improving profits and accelerating growth to enhance the company’s value and investors’ returns.

Once you’re in the post-acquisition integration stage, operational improvement is the tool to help you achieve that. Making adjustments across everyday operations (like supply chain management, process optimizations, revenue enhancements, etc.) can add up and is ultimately a tangible way to achieve value creation.

Below we’ll further explore common models and methods that can support private equity operational improvement.

Operational Improvement Models & Methods

Going back to the basics, there are several business methods and models to choose from or mix and match as you work on improving operational efficiency. Below we’ll highlight some of the most commonly used ones.

• Lean Method – This is focused on increasing value by identifying and eliminating waste in any form.
• Six Sigma – This is focused on using quality control as a means of uncovering issues and improving operations to increase profitability.
• Total Quality Management – This is focused on involving all employees across the organization to better processes, products, and services with the end goal of customer satisfaction. 
• Agile Methodology – This is focused on moving quickly and staying flexible in creating and responding to change amidst uncertainties.
• Benchmarking – This is focused on comparing industry results against internal results to identify and then act on areas of improvement.
• Business Process Engineering – This is focused on studying operations and then developing new processes based on those observations. 
• Theory of Constraints – This is focused on pinpointing the key limiting factor standing in the way of a goal and then working to improve it until it’s no longer an obstacle.
• Total Productive Maintenance – This is focused on engaging everyone in the business to improve pieces of the ecosystem and maximize the effectiveness of production.

The right approach for your portfolio company may be a mix of methods, not just solely one. However, which ones are appropriate will become clearer as you take steps to assess your portfolio company and get started creating value.

Getting Started: Steps To Improve Operational Efficiency

1. Do Due Diligence & Assess Current Operations

Begin the process by doing your due diligence in running diagnostics to identify operational inefficiencies and look for gaps. Ideally, most of this should have been started during pre-close diligence. 

Steps you can take to do this can include:

• SWOT analysis
• Internal and external data benchmarking
• Value stream mapping 
• Customer feedback
• Employee feedback
• Internal auditing
• Data analysis and business intelligence (BI)
• Supply chain and cost analysis
• Technology and automation evaluations

As you do research, it’s not uncommon to find the following areas may benefit from support initially after you finish the acquisition.

Accounting Support

From setting up consistent reporting to fixing financial reporting issues or needing to standardize accounting practices, you may find you need to overhaul the accounting function for your portfolio company. Doing so can help ensure you have reliable data on a timely basis needed to make other important decisions to improve the company. 

HR Transformation

Achieving your goals starts with having the right talent. It’s key to make sure the HR team is set up for success as they will be a critical partner in securing and leveraging the right talent for the right projects to support the strategy you’re looking to implement.

CFO / Board Advisory

Whether you’re building a new board, replacing members, or need an acting CFO, you never know what will happen as the result of the sale. It’s not uncommon to see some team members leave as a result of the acquisition, but that doesn’t mean you have to scramble. An advisory partner can help you stabilize and fill in business acumen where it’s needed.

Risk Advisory

From ensuring that the cyber/IT setup of your new business is compliant and sound to working through other arms of the organization, making sure your risks are covered is important. It’s key to take time to get to know them with a new business and see if there are any immediate changes you need to make.

2. Craft A Strategic Process Improvement Plan

Once you understand what areas are key to supporting value creation, it’s important to be specific about how you will improve them. Documenting your plan will help you advocate for resources and make it easier to share your vision with other stakeholders and stay focused.

To start creating a strategic process improvement plan, start by defining your primary goals and desired outcomes, along with which processes you’re focusing on. Ensure you document this all in clear terms, including KPIs you’ll use to measure progress and mark success. You can even create corrective action audit checklists as a part of your efforts here to further plan who is responsible for which improvements.

As you’re writing your plan, don’t forget to also incorporate the data you uncovered in your research to validate your strategy. Doing so will help teams within the portfolio company take a more objective approach to this process and help reduce some of the friction that comes with making changes.

3. Implement Changes

When you’re ready to start making operational improvements, HR in private equity becomes key. Seeing the company change can be difficult for some employees and bring added tension to the team.

However, following the 5 steps of change management can help. We recommend putting together a change management team that’s a mix of stakeholders and employees who can become champions and supporters of the improvements. This special team could include a key company leader, managers, and employees with influence.

Then, let this team hold mini-sessions with the departments most impacted by process shifts before, during, and after the improvements are made. Doing so will ensure there’s transparent communication about the big picture. It can also give those employees an avenue to provide feedback and feel involved in owning the process improvements too. 

Ultimately, this active approach to change management will keep your talent engaged and ensure you have the support you need from the team to advance.

4. Monitor & Redirect When Necessary

Set up ongoing evaluations in whatever way works best for your firm and the portfolio company, whether that’s monthly reporting, quarterly stakeholder meetings, or an alternative type of touch base on your KPIs. The key here is to create consistent feedback loops.

As you measure progress, you may find that what makes sense on paper may read differently in practice. Stay flexible to change if tactics aren’t working as predicted or if you uncover an alternate means of achieving your goal.

The strategy document you created early on shouldn’t be a rigid, limiting plan. It should be a living document that can evolve and accommodate your needs at any point in the improvement process.

Tips For The Private Equity Operational Improvement Process

While your journey to create value will look different for every company you purchase, here are some general operational improvement tips that can help in any circumstance. 

Always communicate your ‘why’ behind changes. Others will be more willing to participate and support change when they understand what they’re working toward. Doing this will help increase engagement and enhance trust. More employees will participate in continuous improvement if they understand the mission.

Make decisions based on data whenever possible. Doing so will have increased accuracy and objectivity, compared to ‘using your gut’ or guessing. Data will give you a solid foundation for root cause analysis which in turn can lead to better results as you work to make processes more efficient.

Activate company leaders as change management champions. If leadership doesn’t believe in the changes or actively support them, it will only set the tone for the rest of the company. Make sure they’re strategically aligned with your PE firm so they can be partners in driving buy-in and shifting culture.

Regularly celebrate and acknowledge key positive milestones. It can be easy to focus more on what went wrong or what didn’t work and overlook what went well. However, if you as a team take a moment to recognize your wins, it can go a long way in reinforcing the work you’re doing and motivating you all to keep going.

Advocate for the resources and support you need along the way. If you’re finding gaps in the specialties of your assembled team, don’t shy away from finding a partner who can provide expertise on demand. Doing so can bring an objective third party and provide insights you and your team might not have uncovered yet.

Looking for a partner to help you sort through the best operational improvements? Explore the ways we can support your PE firm.

Curtis Farrow

Partner | Private Equity & Venture Capital Practice Leader | CPA, ASA

Curtis is a Partner at Centri Business Consulting and the leader of the firm’s Private Equity & Venture Capital Practice. He has more than 11 years of experience and has supported many clients in achieving their growth initiatives in connection with M&A, capital raising, reorganizations, and carve-outs, as well as successful liquidity events for stakeholders via IPOs, de-SPACs, reverse mergers, and other M&A transactions. Curtis joined Centri in November 2019, where he combines his strong expertise in business and intangible valuation with his knowledge of accounting to identify, address, and resolve business issues for investors and entrepreneurs.. View Curtis Farrow's Full Bio