RESEARCH REPORT
Unlocking private equity operational value with managed services
5-MINUTE READ
March 1, 2024
In brief
- In private equity (PE), managed services are surrounded by myths: companies are too small, the time to value is too long and exit options are reduced.
- These myths have all been busted due to technological and commercial advancements, and as the outsourcing industry evolved to a strategic play.
- PE firms and their portfolio companies are missing tremendous opportunities to unlock significant value.
The need for operational value
Private equity (PE) firms are increasingly engaging in deals that are more complex, such as carve-outs and add-ons.
- Operating models are more fragmented and under pressure—lacking scalability for organic growth and equally unable to support inorganic bolt-ons.
- There are too many transitional service agreements (TSAs) that go on too long and drain value and focus from the NewCo.
- The ability to drive end-to-end experiences and services for customers and employees is compromised because the operating platform has no unified business process.
14%
increase in average hold period along with rising cost in capital put return on investment under pressure.
These circumstances are challenging PE leaders to delve deeper into operational value creation. They believe financial engineering should account for just 25% of their efforts, according to a study published by Accenture. The remaining 75% should focus on operational value creation.
It’s time to evolve the playbook
The good news is that the levers for operational value creation are known. Many are tested and proven. The true complication is in the ability to execute on a wide range of levers in a short timeframe.
The challenge with pursuing value through operations is that most portfolio companies lack the leadership, capabilities and culture to tackle a wide range of levers.
Today, only 8% of mid-sized companies achieve operational maturity. In these companies, talent, data and AI are critical to driving continuous, enterprise-wide reinvention through their operations.
2.3x
higher margins for companies reaching the highest level of operational maturity by 2025.
A massive 92% of mid-sized companies have room for operational improvement. PE firms that move more boldly can build higher levels of maturity and drive significant competitive advantage.
Gaining an edge through strategic managed services
Many portfolio companies fail to hire the required talent at the required pace. They also struggle to develop mature, efficient operating models and processes that are enabled by data and technology. Forget handling complex transformations, like setting up standalone operations after a carve-out, or rolling up acquisitions if the PE sponsor pursues a targeted buy-and-build strategy.
Going at it alone risks missing out on speed, quality and predictability of intended business outcomes.
Such complex initiatives require strong strategic partnerships to drive the desired results. The managed services these partners provide benefit from the innovation developed for Fortune 500 companies, while being tailor made to serve the need of private equity and mid-market companies. They:
- Focus on financial performance, driving efficiencies to operate and scale.
- Accelerate time to value.
- Mitigate delivery risk.
- Drive better service to customers, while allowing the company to focus on growth.
Companies working with a managed services partner experience higher top-line growth and capture better operating margins.
Client example: Rewiring for operational value
Consider our partnership with a European PE-owned telecommunications provider with revenue below $1 billion. Our journey started with order fallout management and since then our partnership has grown through strategic managed services. The company is currently transitioning more than six million households from copper to fiber. Accenture is a key value accelerator in this, supporting their capacity- and order-driven fiber rollout.
Accenture has generated an estimated $40 million in savings for the client since 2013, representing an 89% internal rate of return per annum on an initial investment of $4.4 million to set up the service.
When the PE owner decides to exit the portfolio company, these strategic managed services will help ensure a smooth transition as they provide a vision, visibility and continuity to the new owners.
Three considerations to maximize value
Strong strategic providers help build resilience in a time of disruption and become true partners in innovation, operating with a “one team” mentality. As you prepare for your next investment, consider the following:
1. Get a head start
Think about strategic managed services pre-close, rather than several years into the investment. Doing so allows for deeper interventions by providing a longer tail for savings and returns on any initial investments.
2. Embrace value-based models
Pick a partner that can identify and commit to delivering outcomes commercially, and can look beyond optimizing individual functions. This helps ensure no important opportunities for value are missed.
3. Amplify benefits with larger partners
Working with a large provider means having a trusted partner that can put its balance sheet to work and acts as a “one-stop-shop” to deliver the outcomes at your portfolio company.
Writing a new page
Many PE firms are evolving their strategic playbook, turning to a new page focused on operational value beyond financial engineering. Getting there means joining with partners that can deliver new skillsets, resources and cultural orientation and building a competitive advantage that spans geographies and portfolios.
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