Most private equity firms give at least lip service to some version of a 100 Day Plan when closing the investment transaction in a new portfolio company. Given the long list of post-closing action items, the effort makes sense. Still, does the 100-Day Plan really create value? Not likely. However, the 100-Day Plan does mitigate risk, so chalk this up to good defense.
While the defense can keep teams from losing the game, the offense scores the game-winning points. This reality should shift the focus of leadership towards strategic planning. But wait a minute! Does the investment thesis not cover the strategy? Sure, but the investment thesis does not “operationalize” the strategy. The strategy is only claimed when it results in accelerated growth in earnings before interest, taxes, depreciation and amortization (EBITDA). The “operationalization” strategy (the investment thesis) is tactical and should be owned by the portfolio company’s leadership team. Middle Market Methods suggests a planning session for the benefit of the portfolio company’s leadership team, not the private equity firm’s deal team. Using a different nickname for the effort also avoids confusion. How about calling it a “Value Creation Roadmap”?
What should the value creation roadmap achieve? The first objective is to introduce key business model process owners to the investment thesis. Depending on who brokered the deal for the portfolio company, these leaders and their subordinates may still be reeling from the change of ownership, let alone their expectations for EBITDA growth. When business model process owners are initially faced with the typical “3X in 3” investment thesis, they often reflect excitement followed by awkward moments to regain composure. This reaction, however, may be the best due diligence the private equity firm’s deal team can find. This is the second objective of the value creation roadmap: to identify what the leadership team knows that investors do not know about the scalability of the business model. By involving those who actually execute the core business processes, valuable insights are gained, including (i) due diligence substantiated, (ii) due diligence clarified, (iii) due diligence invalidated, and (iv) due diligence missed.
Alright. Now what? Given a finite pool of resources, leadership teams must prioritize initiatives that, in colloquial terms, achieve “the most with the least” (sic). This is the third objective of the value creation roadmap: establishing the “vital few” cumulative initiatives. As Larry Bossidy and Ram Charan remember the leaders of Execution: the discipline of getting things doneLess is more, meaning teams do better by removing a few deliverables at a time. What happens when the “vital few” require bandwidth or skills beyond the realm of reality for the portfolio company leadership team? The answer addresses the fourth goal of the value creation roadmap: identify capabilities vs. necessities. This is a “moment of truth” for the private equity deal team. By seeking out the private equity firm’s network of subject matter experts, the deals team builds relational bridges with the portfolio company’s leadership team while supporting the value creation effort. Of course, some private equity firms have operating partners who can cover the additional skill sets needed by the portfolio company initiative. Still, a bullpen of relievers is recommended for three reasons. First, the operating partners may also have exhausted their bandwidth. Second, some types of deliverables are so infrequent that the company is better off outsourcing than hiring people. Third, an outsider may occasionally have more situational flexibility than a member of the company.
Initiatives invariably have a set of tasks, including a critical path for those tasks. In addition, there is an optimal order of execution in all the initiatives and their required tasks. This is where good project management pays off. The execution recipe must be coded in a Microsoft Project plan. Project plans are enormously useful. They not only facilitate choreography and coordination, but also help with general management, performance management, meeting agendas, and communications. This is the fifth objective of the Value Creation Roadmap: leadership in execution.
Did we forget the elements of the 100 Day Plan? Of course not! They are in the mix. The point is that when the 100 Day Plans are done independently of the strategic exercises, potential dysfunction occurs. Because? Both are fed from a common resource pool. What happens with time? After the letter of intent (LOI), there is an inflection point at which the interested parties consider that the closing of the deal is imminent. This is when the planning should begin. “Homework” assignments begin in a two-week window on either side of the projected close date. Ideally, the value creation roadmap session occurs within 30 days of closing.
In short, a corollary of Harvey MacKay (Swim with the sharks without being eaten alive) line reminds us that we don’t plan to fail; rather, we fail to plan. The best time window for the value creation roadmap suggested above is an 80-20 scenario. Keep in mind, however, that 80% is more than double Ty Cobb’s lifetime baseball batting average. The results of prioritized planning are powerful.