Beyond Cost Restructuring: Strategic Transformation of Businesses

In its simplest form, cost cutting reduces the current level of resource - people, direct and indirect spend, capex and cost of capital. To change the resource game in a more dramatic and sustainable way, management should initiate changes that we label "beyond cost cutting." Once implemented, a beyond cost cutting program permanently transforms the yield from a given business process.

There are numerous examples of extraordinary transformations that go beyond cost cutting and strategically shift the way business is done on a permanent basis, enhancing market position, increasing profits and creating shareholder value. Industry consolidation, monetization of IP, leveraging the internet as a channel, product and service rationalization, value-based pricing, supply chain optimization, outsourcing and off-shoring are just a few themes that can dramatically change business results. We have invested behind these themes in several companies and proactively help our portfolio companies identify and initiate such value-added initiatives.

As growth oriented investors, we do not seek restructuring or turnaround situations. Yet, the opportunities to create value through strategic process transformation are too great to ignore even in companies with healthy growth rates. With our deep network and broad application of value-added initiatives we can be helpful in going beyond cost cutting and assisting our portfolio company management in initiating and executing a holistic approach to transforming both revenue and expense cycles for increased effectiveness and efficiency.

The first step in executing a beyond cost cutting program is an evaluation of strategic direction to determine core competencies and business value. It is critical to answer the following questions:

- What is your core competency and how will it evolve?
- Who are your key competitors and what are your competitive advantages?
- How do you envision the future competitive landscape and your market?
- How will you sustain or achieve market leadership into the future?
- What internal processes are likely to enable or disable your market success?

In evaluating the top line, several categories can be examined to uncover new revenue generating opportunities as well as greater efficiency. Product/service rationalization, exploring alternate channels of distribution, evaluating pricing options and structures, monetizing unused or underutilized IP, scrutiny of sales and marketing efficiency and an intense look at customer reference-ability can all positively impact the top line. Several of our portfolio companies have initiated comprehensive programs in these areas. Many have partnered with outside experts (BCG, Blue Ridge Partners, Edgewater and Simon Kucher among others) to provide the expertise and the external impetus to jump start a transformation effort.

Similarly, analyzing transformational opportunities within operations and the overall cost structure includes an overview of many areas. A broad view on consolidation and rationalization opportunities within major functional areas, systems, physical footprint and providers/vendors can yield significant savings. An evaluation of span of control and comprehensive direct and indirect spend analysis can highlight areas with significant opportunity for ever greater efficiency in addition to a permanently enhanced cost structure. "Right-shoring" or optimizing process location can significantly transform process cost. Several of our portfolio companies provide services to assist firms (e.g. Genpact, Hewitt, Xchanging, Hexaware, ServiceSource) and many of our companies have experienced the benefits of beyond cost cutting operational transformation.

Emdeon is one such company. With two years into a multi-year transformation, they have consolidated duplicate business functions and de-layered management levels, organized the sales channel around markets and clients vs. products, rationalized client delivery systems and corporate infrastructure and optimized its people footprint through a combination of co-sourcing and co-shoring. George Lazenby, CEO, is quick to note, "While the targeted $60 million of improved EBITDA is an important driver of shareholder value, the more compelling value will materialize as we emerge from this transformation with a simplified and streamlined management structure, an improved operational process and an updated technology environment that will serve as a solid base for innovation. For example, leveraging market, product and customer intelligence into speed-to-market and value based pricing has become possible in a way that did not previously exist."

Corporate development including m&a, divestitures, partnerships, joint ventures and alternate channel relationships should not be overlooked as an important enabler to a transformation strategy. The key is in identifying those opportunities with extensive quantifiable synergies which can be executed with a high degree of probability. In an environment in which values and multiples are finding historical lows, there will be opportunities to consolidate, expand and gain competitive advantage.

Regardless of how you describe your internal efforts to perform better - transformation or continuous improvement - there is a short list of techniques that can continuously provoke a new path to improving performance yield. Like many great ideas, they are not new but merely old themes re-visited and executed exceptionally well. They include:

- a planning and budgeting system that links the company's vision, business strategy and   objectives to specific financial, client, product/service and people level initiatives
- portfolio approach to investment decisions and priorities based on a disciplined set of criteria   (returns and payback threshold, execute-ability) stack ranking opportunities globally vs. locally
- a reliable system for generating business intelligence vs. business information
- a set of KPI's that provide insight into the capability of your key process and/or assets (e.g. cycle   time, unit yield, unit cost, quality)
- a "voice of the customer" system that delivers the perspective of the customer vs. process   owners
- rigorous external benchmarking
- compensation systems that are aligned with shareholder value in that they reward for increased    levels of performance that can be delivered on a sustainable basis

The current macroeconomic headwinds are a license to aggressively maximize efficiency and look for both top and bottom line improvements. We urge our management teams to "seize the moment" and consider several initiatives that not only can help weather a potential softness in certain regions or product/service offerings, but also make your organization more nimble to leverage current business and take advantage of new opportunities. For more information on beyond cost cutting, contact your GA team or our Operations Group.