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Underused Value Levers: Part 1

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Our operating-oriented PE clients are always looking for value levers: areas where focused improvements can create large performance gains. Below we list six areas where we’ve recently been seeing lots of opportunities, and then we take a closer look at the first one, Pricing. In the coming weeks, we’ll have segments on each of the other levers.

Our operating-oriented PE clients are always looking for value levers: areas where focused improvements can create large performance gains. Below we list six areas where we’ve recently been seeing lots of opportunities, and then we take a closer look at the first one, Pricing. In the coming weeks, we’ll have segments on each of the other levers.

Notably, these are most applicable in healthy, growing businesses with good fundamentals and good management.

Value Lever Why It Works Recent Results
Pricing – Internal Forces t’s no secret that price increases are a great cash flow lever. Easier said than done. Most pricing work looks at external market forces. Internal forces deserve some attention as well. $3 million EBITDA gain
Sales & Operations Planning This structured approach to integrating demand and supply planning is especially powerful in dynamic markets-recessionary or strong growth. $1.5 million EBITDA gain and $5 million inventory reduction
Product Value Improvement For many products, 70% of costs are determined by their design. Our systematic approach increases the success of new product introductions and takes cost out of existing products. $3.2 million EBITDA gain
Asset Rationalization This is frequently used by troubled companies with falling sales. We look at ways that healthy, growing companies benefit from this restructuring. $3 million EBITDA gain
Supplier Development Many companies have gotten the low and medium-hanging fruit from China labor arbitrage and vendor consolidation. When a supply chain is performing very well, Supplier Development can be a profitable frontier. $3.4 million EBITDA gain
Lean Enterprise It’s hard to find manufacturing companies that don’t make some claim about being “Lean.” It’s equally hard to find companies that do it exceptionally well, across the whole enterprise. In that gap lie many good companies, and lots of opportunities. $3 million EBITDA gain
Pricing – Internal Forces

Most pricing work looks at external market forces. Internal forces deserve some attention as well. Many well-run businesses have such complexity that pricing is rarely optimized.
Some issues that we commonly see:

  • Actual pricing and terms decisions that are not in line with senior management’s views (and frighten them when they are discovered).
  • Policies that are stale and don’t reflect current conditions.
  • Authority over pricing decisions is not put in the right places.
  • Pricing decisions based more on costs and margin expectations than on customer value.
  • Lack of training, skills, proper incentives, or available information for price decision-makers.
  • Price increases are not optimally communicated to customers or sales force.
  • Management reports provide poor visibility to what’s really going on with pricing.
  • Customer-specific prices and terms evolve customer-by-customer, so variances emerge over time that aren’t tied to account profitability, value delivered, or competitive landscape.
  • Pricing exceptions become common and diminish the time the sales force spends selling.

Many middle market companies lack the bandwidth or expertise to undertake a pricing improvement initiative in a systematic way. We look at up to 31 key evaluation points to identify margin leaks and opportunities. Broadly, we categorize these issues as follows:

  • Marketing strategy
  • Policy and commercial terms
  • Pricing structures by product and customer segmentation
  • Processes
  • Systems, controls, and data
  • Organization (skills, incentives, authorities, culture and discipline)

For example, in the Organization analysis, we typically delve into areas such as:

  • Who has the authority to set prices and terms? Who has the discretion to make exceptions on price or terms for individual transactions?
  • Delegation of authority may be ad hoc or out of date, rather than well-documented and communicated.
  • Even on paper, authority is often lower in the organization than senior executives realize. Actual transactional discretion can be lower still.

What are the incentives of people who make pricing decisions?

  • Most sales compensation structures – even gross margin-based commission plans – are constructed such that the sales person is better off erring on the side of lower price to assure getting the order. There’s not much upside to push for higher price.
  • Some managers may indeed reap greater rewards from pushing on price to raise earnings, yet functional managers may be rewarded more for hitting volume targets than earnings improvement targets.

What are the skill levels of those making pricing decisions?

  • In companies with large sales forces, we see financial, negotiating, and selling skills vary widely. These have direct impact on pricing outcomes.

This process consistently yields specific opportunities to change decisions, prices, systems, policies, behaviors, and ultimately outcomes.

Where We See the Most Opportunities

Broad organizations, with lots of sales and marketing people involved in pricing-related processes

Organizations that delegate considerable authority

Mix of commodity and value-added products or services

Multiple sales channels High SKU count relative to total revenues

Competitive markets, with pricing frequently based on specific competitive situations

Companies that have integrated one or more significant acquisitions in the prior three years

Entrepreneur-led companies that have grown rapidly in recent years Company whose managers largely grew up within the business

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