The complexity of middle market enterprises requires investors to play coach, designated hitter, free safety, GM, agent, and team mother.
While some investors have the time and expertise to provide strategic advice on operational issues; many seek out operating advisors to drive business improvement (Four out of 10 private equity firms have retained consultants or operating partners to help their portfolio companies according to latest Thompson Reuters research).
Moreover, it is becoming increasingly common for private equity groups and institutional investors to utilize operating partners for intellectual capital, functional expertise, and change management.
Operating advisors benefit companies by tying operational improvement (better margins and better daily results) to strategic opportunities being created by our new economy.
For example, the current reduction of small and mid-market businesses creates a sea of opportunity to acquire customer bases and top talent. Operating advisors bring proven practices and methodologies to acquiring, partnering, and changing existing enterprises to take advantage of the market changes. Businesses that clumsily attempt to change will end up making things worse and can potentially negatively impact customer service, frighten away ‘A’ players, have the potential to thoroughly de-motivate the entire organization.
While not the first thought, especially when a business is cash constrained, outside help is often required to combat root-cause issues that are multi-pronged across an organization. Without a holistic approach, trying to solve singular or functional issues can cause “slinky” problems elsewhere in the business.
Companies need holistic, strategic advice that is actionable and also granular hand-holding, change management, and tactical support.
Moreover, their are advisors that aren’t fee-driven that will put some of their own “chips on the table” (i.e. flexible fee structures). From ACG’s magazine Mergers and Acquisition” in the June article titled “The Consultant Dilemma”: many of these engagement “…cost $250,000 and return $1.5 or $2 million.”
Common Value Creation Levers Initiated by Operating Advisors:
1. Applying Matching Principle (Resizing Customer Acquisition, Service, or Operating Costs to New Economy)
2. Targeting, Productization, and Brand Equities Improvement
3. Operational Improvements that improve margins and generate EBITDA improvement (optimization and maximization strategy and tactics)
4. Analytics Driven Decision-Making (Augment decision making with reporting, dashboards, primary market research and competitive intelligence)
5. Create Value-Added Alliances, Joint Ventures, and Partnerships
6. Create a Pipeline of Acquisition potentials based on organizational and strategic fit
7. Alternative Distribution Creation
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