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Memo to public company CFOs: Private equity can show you how it's done - McKinsey

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Inflation, low or negative growth, geopolitical tensions—what’s next? As the Cheshire cat in Lewis Carroll’s Alice in Wonderland answered: “That depends a good deal on where you want to get to.”

For years, our colleagues have explored lessons from private equity (PE)–held companies, particularly the clear direction that these companies take toward value creation. 1 1. See Andreas Beroutsos, Andrew Freeman, and Conor F. Kehoe, “What public companies can learn from private equity,” January 1, 2007; Viral Acharya, Conor Kehoe, and Michael Reyner, “The voice of experience: Public versus private equity,” December 1, 2008; Conor Kehoe and Tim Koller, “Climbing the private-equity learning curve,” May 26, 2021; and Matt Fitzpatrick, Karl Kellner, and Ron Williams, “What private-equity strategy planners can teach public companies,” October 4, 2016. The lessons are evergreen. In fact, for public company CFOs confronting today’s raft of uncertainty, a proactive approach to value creation is essential. PE-backed companies don’t play wait and see. They have a clear investment thesis, with hard milestones and accelerated timetables (that are not geared to quarterly earnings), and are actively engaged in realizing value-creating opportunities. Their CFOs are indispensable leaders, called on to understand the business in granular detail, lift performance management to a much higher level, and build a talent factory. The actions are bold precisely because the stakes are enormous.

As the CFO of a public company, you operate under unique pressure. You may feel that a call for bold action bears little resemblance to what you are practically called upon to do: meeting financial reporting requirements, maintaining a modern finance function, and stewarding your immediate and larger teams. There is a lot to manage, even when economic and other exogenous conditions are (relatively) calm. Is this really the time to ramp up expectations?

Yes—and now more than ever. In good times and challenging ones, CFOs must take a decisive, proactive approach. PE-backed companies offer invaluable insights that CFOs can draw from to raise their game. Here are five of the most important lessons.

Focus relentlessly on value creation

From the moment a PE fund acquires a company, that company is on the clock. It’s not the same clock that public company CFOs come to know (and often dread)—the quarterly cadence of earnings reports culminating in an annual report. It is, instead, a typically five-year, “here to there” sprint and marathon, during which the senior leaders forge a lean, value-creating, and value-sustaining operation.

To jump-start the process, PE-backed companies typically develop a 100-day plan that outlines the key drivers to achieve the investment thesis and provides a road map to ensure the alignment of priorities and resources in the short term. It also sets the pace (or metabolic rate) for the organization. Their CFO typically develops and implements the 100-day plan—an undertaking that is both supremely strategic and rigorously tactical. The notion that a PE-backed CFO would be cast as a mere accountant, or reporter of results for the organization, would be absurd. It’s an unfortunate contrast to the lack of direction that some CFOs endure at public companies, where, in the most egregious cases, they may not even be invited to strategy planning. Too often, public company CFOs pull back and see their primary job as risk avoidance.

Yet “risk” is broader than it may appear. In the PE context, CFOs live daily with the risk of falling short on achieving double-digit returns. That perspective compels CFOs to scrupulously mind ROIs and understand that the resource spigot should be zealously monitored for every function. One PE-acquired company, for example, had historically set marketing budgets using prior year amounts plus some assigned, additional amount. As a consequence, marketing’s spending as a proportion of revenues stayed relatively constant—and unnoticed. But the new CFO dug in on the details and noticed a significant funding shift over the years from working categories (what customers see and experience) to nonworking categories (for example, campaign development, creative, and strategy). In addition, the marketing function had planned on expanding its in-house capabilities, but it continued to rely on third-party support even after the in-house group was up and running. What appeared, from a superficial review, to be a case of “nothing to see here” was actually, on closer analysis, a troubling trend of less money being put to work.

Proceeding from an informed perspective, the CFO and CMO codified and prioritized various marketing projects based on effectiveness. They shifted more funds to working categories, sought to “sweat the marketing assets,” and built more modular marketing campaigns to minimize the need for a complete redesign. Ultimately, the CFO reallocated more than 40 percent of the marketing budget, increased ROI, developed a common language (using financial metrics) for operational decisions, and instilled an investor’s mindset, breathing life back to the marketing group.

This approach can certainly apply to public companies. Effective CFOs are instrumental in developing a value creation strategy tied to the most impactful levers—growth, margin expansion, and capital structure. In fact, other than the CEO, it’s frequently the case that no one is better suited to build consensus with the organization’s senior leaders and to bring competitive advantages into long-term strategy and annual operating plans. They’re also prepared to radically reallocate resources and keep their portfolio on the move.

Define and incent ambitious but achievable targets

About a decade ago, the new coach of a losing American football team was asked how he planned to create a winner. His response? “Just get better.” Not surprisingly, the team then proceeded to lose more than 75 percent of its games, with a losing record in every season. Four years later—following its worst season of all—the coach was fired.

“Just get better” wouldn’t last a day in a PE-backed company. Instead, senior leaders, including the board and the CFO, invest enormous time and effort in establishing real, achievable targets that stretch performance targets but never bend credulity. The idea is to shake the organization out of its business-as-usual approach and to make dramatic, step-change improvements. These targets typically cover top-line revenues, margin expansion, and inorganic growth. Setting the right balance between ambitious but achievable targets is case-specific: go too aggressive and employees won’t believe the targets are achievable; err too much toward achievable and organizations will foreclose upside. But while the process involves a mix of art and science, the targets themselves are absolutely concrete and clearly defined.

For example, at one PE-backed company, the CFO recognized that revenues were growing as profits declined. The analysis revealed that sales had shifted significantly from high-margin branded products to lower-margin items. Meanwhile, private-label business had expanded substantially—primarily to the detriment of the company’s branded business. In meeting with the sales leads, the CFO recognized the function was gauging progress based on sales growth rather than considering gross margin or other measures of profitability. Moreover, the incentives for sales reps were tied to revenue alone rather than margins as well.

Among other actions, the CFO led an all-day workshop with the head of sales to drive the imperative for change. The CFO also partnered with the head of sales and the CHRO to redesign targets and incentives for the sales teams, in hard numbers, and provide training to ensure all the sales reps not only understood the new metrics but also how revenues and margins contribute to value. This transparency helped enable the company to achieve the right mix of revenue and margin and maximize value creation over a multiyear horizon.

The process can work just as well in a public company. Once public company CFOs set the right stretch targets, they can help link performance to incentives and clearly communicate the milestones. It’s frequently the case that targets should be accompanied by incentives that align the managers’ rewards with their teams’ success. In other words, everyone wins or loses. Performance means achieving actual results. As in PE, incentives should be disproportionately weighted toward tangible, demonstrated outperformance.

By clearly defining targets and meaningfully incenting distinctive performance, CFOs can break out of a vague or incremental “just get better” default. Average value creation may be cause for celebration at some public companies, but the reality is that in many cases, these companies could be achieving much more—and in every case they should be aspiring to do so. The CHRO can be a valuable partner, collaborating to review targets, incentives, and payouts. But the CFO should fully share leadership. The goal is value creation, which is directly in the CFO’s purview.

Become an authority on every facet of the business

In PE-backed companies, the CFO is expected to have a granular understanding of all elements of the business. Which customers are the most profitable? Which product lines or markets generate the highest growth rates? What potential risks or disruptions could occur? What are competitors doing better or different? This knowledge is crucial to making informed decisions on strategy and resource allocation. It also makes the CFO an invaluable team member—the key person with informed, bottom-up insight about business performance. 2 2. See Mike Emsley, Matthew Maloney, Michael Parrott, and Abhishek Shirali, “Do you know where your budget is?” June 30, 2019.   Being a font of knowledge helps ensure that other senior leaders will want the CFO to be involved in mission-critical decisions.

For example, during a time of a near liquidity crisis, the CFO of one PE-backed company recognized that too much money was allocated to processes that were not leading to strategic insights. He undertook a radical redesign of the monthly business review and forecasting process, tasking the head of financial planning and analysis (FP&A) to build a bottom-up model for the key drivers for each line in the P&L, company-wide and by business unit. The analyses and conclusions were then spelled out in a clear, actionable report for leadership, which described how each KPI was measured and simplified access to the data. The result: forecasting was slashed from one and a half to two weeks each month to one to two days.

It’s tempting for CFOs at public companies to question whether they can achieve that level of mastery, and change, in large, multibusiness, multinational corporations. But they can—and being value-focused is the key to that success. Optimizing capital allocation for long-term value creation necessarily forces CFOs to understand critical value drivers, key business levers, and consolidating details. CFOs understand the company as no one else can. The CEO of one multinational consumer company goes so far as to call his CFO a “walking encyclopedia.” That’s a tribute to the CFO, of course, but also a tell that the CFO is paying attention to the right things.

Solving for value creation forces a CFO to not play favorites among the businesses. They follow the data. With an informed view, CFOs are well positioned to advise on where and to what extent businesses may be affected by broader competitive dynamics. Public company CFOs, if they take a proactive approach, can be a natural thought partner for business leaders—playing devil’s advocate, asking probing “what if?” questions, and exploring a broad range of scenarios.

Another fundamental part of the CFO’s role is to standardize data so that executives and managers speak the same language. Clear numbers cut through bureaucratic fuzziness, accelerate the pace of decisions and actions, and empower others to manage and deliver results. CFOs are uniquely positioned to identify and elevate the KPIs that matter most and bring consistency and discipline to capital allocation.

Embrace an investor mindset

One reason that CFOs at PE-backed companies are so proactive is that they often have a once-in-a-lifetime opportunity for financial reward—if they can deliver on the investment thesis. They feel with immediacy what pension funds and long-horizon investors understand viscerally: long-term value maximization matters, a lot. This stark realization jolts CFOs from a mentality of passively minding year-over-year performance to a much more engaged approach. PE-backed CFOs consciously adopt an investor’s mindset. They are more vigilant in asking hard questions, shaping strategy, and redeploying resources. 3 3. See Ronald Falcon, Kyle Hawke, Matthew Maloney, and Mita Sen, “How absolute zero (-based budgeting) can heat up growth,” January 11, 2018. They also look across all functions to ensure that the entire organization is hitting its targets with a mix of short-, medium- and long-term initiatives.

To borrow from an old quip, everyone talks about value creation, but no one does anything about it. But PE-backed CFOs actually can do something about it. That starts with asking, “If the company makes no changes, what would financial results likely be?” For example, one CFO identified unprofitable businesses that had been overlooked due to opaque and complex intercompany cost accounting. The CFO also discovered that no one person was responsible for profitability across the product portfolio. When accounting for marketing spending, sales discounts during parts of the year, and the cost of shipping from operations (often not considered part of profitability), some SKUs were actually contributing to negative margins on a large portion of the business. The CFO partnered with both the product and sales groups to rationalize the portfolio and redirect sales from low-profit products to similar ones with higher margins.

Taking ownership of the outcomes helps CFOs become more proactive and engaged. The role cannot be passive, whether the company is private or public. Effective public company CFOs are always prepared to be challengers—asking the tough questions, assessing end-to-end profitability (rather than looking only at functions or business units), championing bold capital reallocation, and fulfilling their duties to the company and its shareholders—which includes, as a necessary element of achieving long-term value, considering the effects that decisions have on a wide range of stakeholders. Although this proactive approach can feel uncomfortable, at least initially, it’s impossible to be an effective CFO by simply keeping one’s head down.

Establish finance as a talent factory

Because CFOs at PE-backed companies take a company-wide perspective, they seek out talent with world-class potential, people who want to gain a bird’s-eye view of overall strategy, hone their expertise in data analytics, and build tactical expertise in performance management. These individuals are “all-around athletes.” By being in the finance function—the center of the action—they become immensely valuable to an organization, with a fast-track to senior roles across other parts of the company, including those with P&L responsibility and major initiatives across a variety of functions.

CFOs at PE-backed companies are uniquely positioned to build a talent factory. Their role has such a high profile that they are magnets for the most motivated and skilled candidates. But their remit is broad enough to allow flexibility in choosing people whose experience does not yet match their potential. For example, while the CFO of one PE-owned company recognized the need to bring in more new talent, other functions traditionally required candidates to have deep tactical knowledge, built over years in the business. To broaden the pool of talent, the CFO partnered with the CHRO and went against the grain, hiring generalists to work with the FP&A team and to bring a fresh set of eyes to identify new opportunities, collaborate with leaders across business lines to solve high-priority problems, set priorities for value capture, and mobilize cross-functional teams to pursue substantial opportunities.

Over time, these employees were able to rotate to different functions and business units—cross-pollinating finance and strategy throughout the enterprise while teaching the language of finance and strategy through the lens of an investor. These all-around athletes were uniquely well equipped for success in other business areas. And, on a personal level, they could recognize career advancement paths not just within a department but across the organization.

Today, as broader perspectives are increasingly needed to respond to a crosscurrent of major (and sometimes existential) challenges, public company CFOs can also adopt this approach. Of course, doing so requires collaboration with the CHRO. But the CFO must lean in; the value proposition is too great to ignore. The finance function can be an ideal launching pad for promising employees who want to apply their foundational knowledge in other roles and get on the fast track to leadership. A high-performing CFO makes that happen.


Private equity offers important lessons for public company CFOs: extraordinary challenges require focus, initiative—and leadership. Now more than ever, CFOs can take a proactive approach to value creation.

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