While looking for operational savings and synergies, leaders ought to meticulously assess their balance sheets to maximize liquidity and improve working capital. Working capital is bound-up cash that is not available for growth; managing it better can release a considerable amount of internal financing capacity.
Portcos have a variety of levers available to improve their working-capital positions. For example, high inventories often signal weak processes and lack of controls. Reducing inventory levels can be the first step toward tighter spend control and can produce near-term savings. High accounts receivables represent a similar threat. Reducing receivables can decrease the risk of bad-debt expenses and improve working capital. In addition, portcos can free up resources by outsourcing assets or operations, thereby (i) converting fixed expenses into variable ones, which enables the business to adapt more easily to fluctuations in cash requirements, and (ii) further improving working-capital management. Both immediately and in the long run, balance sheet restructuring can make a business less capital-intensive—which also can reduce the cost of organic growth when the economy turns around. Consider the many well-known examples of companies that have successfully shifted to cloud-based operating models like Adobe, Intuit, Netflix, and Spotify. Originally built with on-premises infrastructure, these companies “variabilized” key infrastructure costs, reduced capital expenditures, offloaded assets, improved working capital, and increased scalability, ultimately insulating their balance sheets from future market disruptions.
Investing in automation and other technological tools can be a viable solution for dealing with the costs and shortages that affect labor-intensive industries due to demographic changes and tight labor markets. But automation can do much more.
As robotic process automation, machine learning, and artificial intelligence (AI) capabilities expand, so does the potential for automation can reduce costs, enhance scalabilities, and increase revenues. For example, smart factories can change the economics of production and enable companies to reshore or redesign operations that shorten supply chains while reducing operating cost. AI-driven predictive maintenance strategies can use diagnostic data from connected devices to maximize equipment uptime in a wide variety of industrial and consumer markets. Machine learning and natural language processing-enabled customer service capabilities can help companies break the trade-off between highly responsive customer service and increased costs, as our colleagues Jason McDannold and Saurabh Singh point out in a Harvard Business Review article.
In addition to seeking efficiency through technology, PE-owned businesses—like all others—are making the shift from digitization (using digital to increase efficiency, cut costs, and automate) to digital transformation (using digital to fundamentally change how work is done, how customers are served, and how value is created). The AlixPartners Annual PE Leadership Survey shows that PE firms and portcos are putting growing emphasis on technology investments that support growth and margin expansion, such as real-time data and analysis for decision support. Based on the AlixPartners Disruption Index, substantial numbers of PE leaders are urging portcos to use technology to acquire more customers (35%), to devise new and higher-revenue business models (34%), and to increase customer intimacy (30%). It’s a shift from digital on the inside (operations and control) to digital on the outside (customer experience and revenue).
According to the 2022 AlixPartners Disruption Index, 52% of executives say supply chain disruption is more of a challenge for their companies than it was a year ago. Investing in a resilient supply chain supported by strong operational processes is critically important to containing cost, preventing stockouts, and avoiding resulting losses of sales—particularly in the current market environment.
Portcos should prepare their supply chain organizations for market shocks by having a readily deployable supply chain crisis management playbook to quickly resolve shortages, as well as an early-warning system based on robust key performance indicators, supplier surveys, commodity market monitoring, and tight alignment with inventory management. But supply chain excellence is not just a matter of availability; it is also about also price and margin. Once structural risks in the supply chain get addressed, portco leaders should leverage their supply chains for integrated margin management and inflation defense. Developing models for cost input mapping and customer profitability analysis can be helpful in identifying customers with whom undefendable margin exposure can be layered in by customer or product.
Developing a holistic portfolio of leading and lagging performance indicators, and taking a systemic approach to enterprise performance management can serve as an early warning system for market disruption and margin risk. As the adage goes, “You cannot manage what you cannot measure.”
Examples of leading operational indicators can include customer satisfaction metrics like net promoter score, and customer satisfaction score. Employee satisfaction indicators like employee attrition and engagement can also powerfully signal failure points across the enterprise.
As Simon Freakley and Lisa Donahue wrote in a recent Harvard Business Review article, robust financial indicators can identify potential risks and opportunities early on and enable leaders to take proactive measures that will mitigate risks and capture opportunities. And even though portco leaders are likely to be the first to spot operational issues such as slowing orders, growing inventory, or delayed collections, it is also important that they and their investors pay attention to other indicators, such as the cost of capital and changes in industry dynamics, which may reveal broader sets of opportunities and risks.
