The reduction of access to capital has caused privateequity firms to rethink their value-creation strate-gies. As significant efficiencies can be achieved

through operational improvement, more firms are focus-ing on business process optimization to improve their ownas well as their portfolio companies’ internal rate of return(IRR).

The SAP Private Equity Performance ImprovementTeam, a group that helps maximize enterprise value andportfolio synergies, analyzed data from more than 2,000companies in an effort to identify a road map for operationalvalue creation. The information accumulated sheds lighton the critical question: How do best-performing compa-nies maximize business value?

SAP’s investigation uncoveredthree guiding principles to maximiz-ing business value. The first princi-ple calls for investors to understandthe highest value-potential throughperformance benchmarking. Thesecond requires sponsors to iden-tify high-yield strategies that max-imize value creation. The third prin-ciple guides investors to implementgovernance for continuous businessvalue creation.

Maximum value can be derivedfrom a small set of initiatives. In to-day’s economy, companies muststrive for optimal use of workingcapital, focusing on select, high-im-pact initiatives that drive maximumbusiness value.

SAP’s research shows that regardless of whether com-panies are public or private, high-growth or distressed,outperformers adopt consistent, high-impact strategiesthat spur better performance. These high-yield value strate-gies provide 80% of the value creation from 20% of the ini-tiatives. The benchmark studies support the notion that a

company can optimize performance with the right opera-tional initiatives, showing that private companies tend toachieve the same operational performance as their pub-lic peers but with more effective use of working capitaland balance-sheet management.

A common pitfall for companies focused on maximumvalue creation is that they often focus on improving busi-ness processes that they have already mastered, simply be-cause they have significant expertise in these areas. In-stead, to derive maximum value from the smallest set ofinitiatives, these companies should focus on identifyinghigh-yield value strategies by assessing which businessprocess improvements will have the largest positive impact

on the company’s operations.Performance benchmarking is

a key tool to identify which busi-ness areas have the highest valuepotential. It can point to the parts ofa company that would benefit themost from new management prac-tices, or the departments where IT-driven process improvement andtechnology automation will providemaximum value-add.

Many organizations tend toover-emphasize pursuit of eithernew management practices or IT-driven process improvement. Butfact-based data analysis shows thatit is a combination of these ap-proaches that leads to maximumresults, stressing the importance of

targeted identification of high-yield value areas.The SAP Private Equity Performance Improvement

Team helps PE groups and their portfolio companies max-imize enterprise value and portfolio synergies by leverag-ing SAP’s industry and process benchmarking, high yieldvalue strategies and rapid implementation solutions.

Rethinking Value Creation

By Tamas Hevizi

Studies show how top-performing companies maximizeenterprise value

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Tamas Hevizi

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Maximumvalue can bederived from asmall set ofinitiatives.

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hance penetration in particularly attractive industry segments, such ashealthcare. Also, a weakening US dollar may attract foreign strategics look-ing to benefit from favorable exchange rates and put cash reserves towork in the United States. Thawing of the credit markets for leveragedbuyouts is also likely to bring financial sponsors back to the BPO space

in search of opportunities for market growth and consolidation.

Tye, Hamilton and Walker lead the Business Services practice at Edgeview,a Charlotte-based middle-market investment bank. This article is basedon essays that appeared in recent editions of Edgeview’s Business Ser-vices Industry Insights newsletter. Please write to business-services@edgeview.com if you would like to be added to the subscriber list.

60 ACG > MERGERS&ACQUISITIONS November 2009

COMMUNITY COMMENTARY

The 4,000 SAP customers that participated in our benchmarking stud-ies identified a few of the most common high-yield strategies that pro-vide maximum value creation.

SAP has outlined some of the potential key high-yield strategies forprocurement, supply chain, and general and administrative expense (G&A)- three areas with cross industry relevance.

Of the companies we surveyed, top-performers have 95% of directspend under contract, as opposed to average performers, which haveonly 71% under contract.

Similarly, we found that unplanned indirect purchases at top-per-forming companies occur less than 3% of the time, compared with 14%at average companies.

Key strategies identified by our group to improve procurement throughextended spend management include driving negotiated pricing to non-managed categories; strengthening spend controls and enforce compli-ance; simplifying the employee purchasing process with direct orderingand extended coverage; and improving regional contract terms for localperformance and compliance.

With regards to the supply chain, top performing companies inte-grate their planning processes across supply, distribution and productionareas to drive execution performance. While leading organizations achieveon-time delivery 98% of the time, average organizations have an 87%on-time delivery performance.

We identified a number of key strategies to improve supply chainperformance through integrated planning processes. For instance, com-panies should ensure supply, distribution and production plans are con-sistent in the short-term; gain cross-functional, executive alignment on mid-term operating plans; keep plans up to date with feedback from executionsystems; and provide visibility of availability to customers.

As it relates to G&A or support functions, simplification, standardi-zation and automation of business processes have significant impact onsupport function costs. SAP research shows that leading organizationsspend 1.4% of revenue on support functions such as finance, HR, pro-curement and IT, whereas the average organization spends almost threetimes as much - 3.9% of revenue.

Key strategies to improve support function include driving end-to-end process workflows across organizational boundaries to reduce and

rework multiple touch points; simplifying and automating work effortsfor compliance; reducing manual entries with simplification and automa-tion; and leveraging self service for employees, managers, suppliers.

End-to-end process view is critical to maximize value. Along withidentifying high-yield strategies, SAP research also reveals that top-per-forming companies take an end-to-end process view of the examinedbusiness operation.

Many companies try to improve accounts receivable activity throughbetter collections and credit management - two processes that are partof the same department. However, often the best way to improve ac-counts receivable efficiency is to focus on processes that are part of oth-er departments yet still affect accounts receivable, such as higher orderfill rates, product quality and improved transportation planning.

Also, to achieve sustainable value creation and management, it iscritical for companies to establish a framework that pulls data and inputfrom a diverse range of sources. This helps ensure more accurate identi-fication of the high-yield value areas.

Today, many leading companies establish value management officesto provide a governance structure for value creation. Ideally, a combina-tion of benchmarking, business case-based governance, value realiza-tion processes, and value creation measurement should be employed.

The pursuit of high-yield value strategies leads to competitive ad-vantages. With a critical eye on operations and a road map to identify-ing high-yield value areas such as those outlined above, private equity com-panies can improve the management of their assets to meet today’sincreasing market and shareholder pressures. Teaming up with a partnersuch as SAP’s Private Equity Performance Improvement Team can helpwith the identification and pursuit of high-yield value strategies, allow-ing private equity companies obtain better exit values from the capital theyinvest while providing a competitive advantage that will foster long-termsuccess.

Tamas Hevizi is SVP of Private Equity Performance Improvement at SAP.Tamas has over 20 years experience in business transformation in Asia,Europe and North America. He was Vice President at Deloitte & Touche’sSAP business, National Partner in Ernst & Young’s Performance Improve-ment practice and recently spent 7 years as a leader at SAP’s Value Engi-neering organization focusing on value creation strategies in consumerproducts, technology and manufacturing.

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