Six reasons to carry out a value creation plan (VCP) – even if you’re not facing a PE buyout

When a private equity (PE) firm comes into a business and interrogates the data and your team to make a value creation plan, it can “feel like open-heart surgery while trying to run a marathon.” So says Mike Hawthorne, an executive advisor and former CEO of PE portfolio companies. But a VCP doesn’t have to be painful – and it doesn’t have to be done only when faced with a buyout. 

In fact, carrying out a VCP at any time – even if you think you’re already in good shape – can radically improve a business, helping it become leaner, more competitive and more attractive to investors (PE or otherwise).

Typically, a VCP is an organisation-wide examination that aims to uncover how value is generated and where potential lies for more along with the elimination of non value-adding activities. 

“It’s an intensive, six-week process carried out at a very senior level,” says Mike. “However,  a CEO/MD  just doesn’t have the bandwidth to do it alone. What usually happens during a buyout is that a consultancy firm will be appointed to do it, for a hefty fee. 

“I believe you don’t need the ‘big brand’ and you shouldn’t wait until a buyout process. You can do it any time with a handful of independent experts, working directly with your people. As long as they have carte blanche access and the freedom to be brutally honest.”

So what are the advantages of a VCP, even if you’re not facing a buyout? Mike says there are six reasons: 

1. It will help you clarify a defined strategy

“Strategy is your sustainable competitive advantage. First you must define what position and company characteristics will allow you to make superior returns to your competitors. This introspection is less onerous than much of the self-criticism of the operational elements of a VCP but it is also the hardest. The strategy review must be done by the elected board to inform the plan for value-creation.”

2. It will streamline your organisation

“This is a review of what is simplistically called ‘spans and layers’. How many layers of management have you got and how many people report into them? A good rule of thumb is that there should be three levels of management between the CEO and the frontline and each layer should earn double the layer below. (This is for a company of 800 – 4,000 people)

“Through time companies end up with too many half-layers – too many managers who shouldn’t be there because they cannot add value to the work of their team.  It’s easy to shy away from cutting layers, but working it out isn’t hard and it always really energizes the whole company.”

3. It will improve your product margins.

“A VCP will insist that you know the ‘fully allocated cost’ net margin on each batch of each product you sell to every customer. That’s a lot of data points that you probably don’t have time to find because your current reporting isn’t set up this way.

“The usual way to work out product margin is revenue minus ‘standard cost’. This is insufficient for VCP. Margin per product, per customer must consider every factor: labour cost, batch-level waste, set-up times, energy use, actual delivery cost etc. This is when you realise that customers you thought were vital suddenly aren’t so important

“Ask yourself: What could happen if we just discontinued a product line or stopped serving a particular marginally-profitable customer? Too often there is a blinkered focus on revenue. However, dropping sales by 10% to remove the complexity around ‘special demands’ that cause diseconomies of scale should increase profit.”

4. It will create a more cost-effective supply chain.

“Businesses get emotionally attached to their suppliers, but a VCP will ask you: Were your suppliers appointed through a comprehensive, competitive tender in the last three years? If not, then tender it.

The tender needs to ask for value creation and resetting the relationship to remove frictional costs along the value chain. Ask how you can change to help your suppliers

“The only opt-out should be for ‘strategic partners’ – where you are equally strategic to them as they are to you. This is typically 1 in 100 vendors”.

5. It will help you eliminate waste.  

“Go through the business with a lean expert and identify the ‘7 types of waste’ in both shop-floor and administrative functions. Ask your teams to list activities that should be stopped.  Form teams to eliminate 90%+ of the cost of selected processes. Embrace the philosophy of operational excellence.

“You can make step-change improvements in effectiveness and build employee engagement at a deeper level through these projects than anything funded by the employee engagement budget.”

6. You’ll be in better shape for the future.

“Firms tend not to do this introspective review until it is forced upon them as it upsets the senior teams’ self-view. But by creating a “brutal” VCP now, you’ll be able to reset your company for growth. Plus, if that PE-backed opportunity presents itself one day, you’ll have the battle scars from knowing the depth of challenge that a thorough VCP brings. and can avoid a much more painful, more expensive process.”