Ephor Group - Solving the Value Equation

Ephor eNewsletter Q1 2009 : Garry Goes to Washington

Ephor Group Perspectives:

Using Consultants and Advisors

The complexities created by the current economic situation and the changing political environment requires all investors to now play coach, designated hitter, free safety, GM, agent, and team leader.

While experienced investors have the time and expertise to provide strategic advice on strategic issues; many seek out operating partners or advisors to drive operational improvement, develop, and implement the necessary business model changes required by all exogenous changes affecting the company. (Four out of 10 private equity firms have retained consultants or operating partners to help their portfolio companies according to latest Thompson Reuters research).

Moreover, it is becoming increasingly common for PE (private equity) groups and institutional investors to utilize operating partners for domain knowledge, for highly experienced functional expertise, and for change management and leadership management.

Operating advisors or partners augment and benefit their companies by connecting required operational improvements with business model adjustments to strategic opportunities being created by this new economy.

For example, the current lack of debt capital creates a sea of opportunity to acquire customer bases and top talent at very attractive prices. Operating advisors bring proven practices and methodologies to acquiring, partnering, and advancing business models which all organizations need to take advantage of in these new market conditions. Businesses that disorderly attempt to change, reduce costs, and change product/service constraints will negatively impact customer service, frighten away ‘A’ players, while thoroughly upsetting the entire business model.

While not the first thought, especially when a business is cash constrained, outside advice and counsel is often required to combat root-cause issues that are multi-pronged across an organization. Without a holistic approach, trying to solve singular or functional issues causes “upstream and downstream” problems elsewhere in the business. Companies need holistic, strategic, and tactically oriented advice that is actionable, measurable, and has a long-term positive effect on the business model. Event orientation or a series of one-time decisions is simply the kiss of death.

Moreover, there are advisors that are not fee-driven and will provide expertise on an incentive bases (i.e. operating partners will put some of their own “chips on the table” via flexible fee and incentive structures).

Common Value Creation Levers Initiated by Operating Advisors:

“Rightsizing” to the near and long-term forecast (Resizing customer acquisition, service, and operating costs to this economy)
Operational Improvements to operating margins and EBITDA plus optimization of SG&A
Optimize People “Production” (Productivity Measurement and Metrics)
Create Value-Added Alliances, Joint Ventures, and Partnerships
Brand Equities Improvement
Augment Decision-making with primary market research and competitive intelligence
Implement Corporate Development program resulting in a pipeline of acquisition targets based on organizational and strategic fit
Alternative Distribution Creation

Common Operating Partner Pitfalls to be Avoided:

Hiring single focused functional consultants (Our changing times requires a holistic approach)
Divorcing the executive team from operational and P&L responsibility
Procrastination and failure to respond timely to changing market dynamics
Confusing oversight and ineffective management practices
Poor governance practices by the BOD (Board of Directors)
Focusing on short-term targets; too much emphasis on the short-term and falling into “event-orientation”

The Business Case for “Operating Partner” support is clear:

Today’s market and economic environment requires proven, experienced, and unbiased management.
Wealth Creation = Timely Strategic and Operational Execution coupled with consistent improvement and change.
Strategic Effectiveness creates exponential wealth.

The Common Mistakes Of Private Company Boards

Now more so than ever, the Board of Directors specifically of private companies are being called upon to provide leadership and skills that go beyond traditional governance activities. According to a 2008 McKinsey Quarterly survey' seventy percent of privately held company boards are involved in core performance and value creating activities.

Even in the best of times, irrespective of the new challenges we face currently, every company faces barriers to its success. Now more so than ever the effectiveness of the company’s governess process is critical to the organizations near and long-term success.

We invite you to read the full article, “The Common Mistakes of Private Company Boards” which provides a set of guidelines for directors, including highlighting the most common mistakes made by board leadership that quite often reduce a board’s effectiveness.

The Role of the Chief Strategy Officer

Question: Why do most small business owners fail at strategy?

It is well documented that small businesses do fail at many of the strategy elements: according to the SBA approximately 600,000 small businesses are created every year and less than 1% make it to ten years and $10M in revenues.

Failure is most often because of resource constraints (capital and talent), lack of a defined business model and business processes, and a shortage of strategic alternatives, or simply inappropriate strategic positioning.

A “Chief Strategy Officer” (CSO) can create and enhance all the elements of a relevant strategy: therefore resulting in additional strategic alternatives, scenario planning, and finally insuring that there is indeed a direct connection of the strategy elements to the daily execution of the business, and finally the financial forecasting mechanism.

Simply stated: while the CEO makes the ultimate decisions; a CSO explores alternatives and creates options. The role of the CSO is not one of “business planning;” as that task is the role of the CFO, while the role the job of budgeting/forecasting is the role of operating management. The CSO function to focus on exploring strategic alternatives, examining potential acquisitions, alliances, and alternative distribution strategies.

CSOs performs primary market research, market intelligence gathering, and market forecasting to insure that the executive team and Company Board are able to understand the implications of various choices in order to make informed decisions. An highly effective CSO facilitates healthy dialogues and debates in the company leadership ranks, leading to effective strategy elements.

A CSO is a consultative role; part leader and part doer, an experienced visionary, an experienced executive with the responsibility of ensuring that execution supports the strategy elements. This unique background takes a multitude of different operating experiences and must include being both a creative thinker and influential collaborator.

A small business by its very nature has limited resources and options: either grow organically, increase the financing structure, partner, merge or sell. The priority role of the CSO is to create “Optionality” for the organization. As a business grows and becomes profitable it creates options for itself and the stakeholders such as:

The CSO activities need not be an internal or dedicated resource, or even a large fixed cost. Many small to medium organizations have elected to outsource this role to domain experts, advisory firms, or a dedicated Board member that can bring the experiences, intellectual capital and best of breed processes to the organization.

Maximizing Shareholder Value Checklist for Service Based Businesses

Because service businesses are complex and difficult to manage due to their labor intensive nature, Ephor Group, has created a checklist entitled “Maximizing Shareholder Value Checklist” to assist managers of these firms.

This checklist will help owners, executives and investors to:
• Increase near term earnings and the EBITDA generating capacity of the business within current economic conditions;
• Develop long-term operating infrastructure to ensure performance is maximized, and scalable; plus
• Position the company to attract an array of strategic alternatives for value realization.

This checklist includes a holistic view of an organization’s environment including:
• Strategy and Positioning;
• Tactical and Operational Execution;
• Financial Engineering; and
• Management Discipline.

Why read “Maximizing Shareholder Value Checklist for Service Based Businesses?” Because of their unique characteristics, precise execution in a service business is the key to sustainable profitability and attractive returns. Since flaws in strategy or execution are often caused by the other, the true barriers to maximizing value cannot be resolved without first identifying the underlying issues.

Assess your organizations performance with “Maximizing Shareholder Value Checklist for Service Based Businesses” which can be read at http://www.ephorgroup.com/download_checklist.asp

Board of Directors Are Moving Beyond Governance: Common Mistakes Made by Company Board of Directors

Because moving beyond traditional governance activities is uncertain ground for many Boards and Board members, Ephor Group has created “Common Mistakes Made by Company Board of Directors” to guide private board directors. This article identifies prevalent board mistakes and details how to avoid common traps.

Relegating the Board of Directors to classical governance issues alone fails to take advantage of the experience and knowledge the board has to offer. By providing strategic leadership, boards can create value while ensuring successful performance.

It has been proven repeatedly that good governance leads to higher valuations. Evaluating management, driving corporate culture, and setting strategic direction are all board responsibilities critical to maximizing shareholder wealth. Board membership is a responsibility that goes beyond the bounds set by management presentations and board meeting agendas.

Common Mistakes Made by Company Board of Directors” includes:

Mistake #2: Exiting for the Wrong Reasons: Knowing when to exit is the most misunderstood issue facing investors today. An exit should be the result of a strategic initiative to seek a realization and not the result of factors that make an exit imperative. The most common reason to exit -- market timing -- is often also obvious to strategic buyers and will negatively impact the value at realization.
When an exit is appropriate and desired the solution is to manufacture the outcome through strategic planning. The key is positioning the company to be strategically valuable for the right reasons to the right buyers at the appropriate time.

Mistake #3: Not Strategically Positioned: A company can have great technology, people or operating history, but still fail to produce expected gains.
This is a typical problem, but the numbers will not expose the issue, because the problem is not in the execution of the business so much as in the firm’s strategic positioning.

Read all ten common board mistakes in the full, complimentary article "Common Mistakes Made by Company Board of Directors” at http://www.ephorgroup.com/download_board_mistakes.asp