By Junaid Samnani
The covid recession will be a U-shaped recovery curve. No, it will be V-shaped. Actually, there will be no archetype; recovery will be industry-specific, and sometimes even sub-industry specific. Some say we are just at the beginning of a major economic contraction. Others insist we’re more toward the middle.
Experts – be they economists, pundits, legislators – clearly disagree.
But there is one shared universal sentiment: While market disruption has made select, healthy companies greener (think: telemedicine, at-home fitness) it has created a sharply depressed performance outlook for many more organizations. As a result, there are many once thriving companies now at-risk. We call them the “yellows.”
Here’s the bad news: For sponsors, these yellows will have an outsized impact on fund performance, such that when a couple of yellows go dark, or fall to red, they will diminish fund returns and associated carry (and follow-on fundraising efforts).
Here’s the good news: There’s treasure buried in those yellows. While GPs will spend a substantial amount of time growing their greens and restructuring their reds, it will be the yellows to which they should yield unprecedented time and focus.
And here is the even better news: sponsors can expect significant return from that yellow investment if sponsors make real, substantive investment in portfolio company finance transformation. The “if” is a big one, the critical caveat being that we’re not talking about operating partners simply leaning into portfolio management.
It sounds like a nebulous term, but it’s one with real teeth and real return opportunity. The finance transformation process establishes a vision for the finance function. The process identifies function-related performance gaps and develops a series of programs to enable finance to unlock ROI and deliver more, sustainable value to the organization.
In general, a holistic transformation project executes against seven critical, functional areas:
Organization: Assessing the role and reporting relationships of finance within the enterprise, as well as the leadership, talent, governance and culture of the finance organization.
Delivery: Examining the ownership and location from where the finance activities are delivered effectively.
Process: Looking at the design, deployment and ongoing management of leading practice finance processes.
Controls: Ensuring sufficient structures to provide quality, accuracy and confidence in financial reporting.
Technology: Analyzing the integration and management of innovative, cost effective, standardized applications and platforms; and exploring digital transformation opportunities.
Data: Assessing real-time access to accurate data and data structures necessary to enable reporting, analysis and predictive analytics.
Business analytics: Looking at finance’s ability to generate meaningful business insights to support decision making and continuous improvement.
And, the process has clear, compelling benefits. The outcome of a (successful) transformation process enables finance to move from scorekeeper to forward-looking business partner, to embrace disruptive technologies and enterprise data in order to drive competitive advantage, and to contribute to EBITDA improvement while maintaining quality controls.
Transformation in the covid economy
While transformation projects existed pre-covid, their purpose post-covid, particularly in yellow-company scenarios, has been more explicit: control/reduce costs.
Cost reduction has an operational component to it, and the outcome of the transformation assessment frequently has CFOs revisiting their model: moving to a shared service or business process outsourcing (BPO) model in order to reduce full-time employees in the organization.
But, controlling costs can also often have an investment component to it, that may (initially) seem counter-intuitive to many yellow CFOs and their sponsors. Investing in technology can actually serve to reduce spend by leveraging intelligent automation to replace headcount. Of course, investing in technology also serves to create value beyond cost reduction in terms of building a platform to support scale, facilitating common standards to streamline processes, optimizing data governance and unlocking information through analytics and big data.
Avoiding the pitfalls:
Given pressure to reduce costs, combined with longer hold periods, sponsors are increasingly investing in finance transformation initiatives. But, as with all major undertakings, they’re not always successful. In fact, according to a Gartner survey, they fail often. But they don’t have to. These are the keys to avoiding failure, and reaping the benefits of a transformation:
- Creating a dedicated transformation program office
- Developing a business case for change and a clear vision for the future
- Identifying effective change champions
- Communicating and managing business partner expectations
- Getting stakeholder buy-in and visible executive support
- Demonstrating and celebrating early wins
Investing in the yellow:
Finance transformation programs, when successfully navigated, can have a myriad of benefits beyond cost containment and EBITDA enhancement. Transformation initiatives that seek to optimize those yellow company operations, through cost mitigation and technology enhancement, are not only particularly critical now, but come with the promise of real (needed) ROI.
Junaid Samnani is a managing director at Accordion, the private equity-focused financial consulting and technology firm.