Value Acceleration

About two years back I noticed in a LinkedIn Update that Bob Walton, who was a Sr. Vice President at Kaiser Permanente, had joined Qualcomm. Bob Walton is now Sr. Vice President of Enterprise Services. When I looked at Bob's profile, I noticed that he was following a modified "Private Equity Value Acceleration" model developed by Bain & Company. Bob's profile on LinkedIn contained a link to Bain & Company website. I was intrigued. I followed the link to Bain & Company website and reviewed the presentation. By the way, I checked Bain & Company website recently and I was unable to find that multimedia presentation. I loved the presentation for its sheer simplicity. The presentation outlined in as few words as possible that the only way to create value was to follow a disciplined approach to management. Since then Paul Rogers, who had worked on developing the Value Acceleration model, has written an article in Harvard Business Review as well as a book on "Value Acceleration: Lessons from Private-Equity Masters" in cooperation with Tom Holland, and Dan Haas. Bain and Compnay have an excellent summary of this article available on their website.

I'm going to briefly mention some of the key points of Value Acceleration approach. First of all value acceleration requires defining a simple and short investment thesis to increase the value of the firm in three to five years. Investment thesis emphasizes a limited number of key success factors. After this private equity investors define their blueprint for action. It is said that what you can't measure, you can't manage. This has resulted in creation of too many metrics at the cost of focus. Private equity firms are not distracted by a large number of metrics. They focus on a few limited measurements. They hire managers for their attitude. The managers who behave as owners-investors and not as administrators or employers. Private equity firms make their balance sheet work for them by identification of firm's assets and redeployment of those assets in such a way that overall return is maximized. They eliminate unproductive capital without being sentimental about it.

I think one of the hardest equations to learn is Profit = Revenue - Cost. There are just three ways to increase profit. Either you reduce the cost, or you increase the revenue, or achieve a combination of reduction in cost and increase in profit. That's it. There is no other way to make a profit. Cost reduction is generally easier to achieve than revenue enhancement. I have noticed that a large number of firms regularly focus on cost reduction. But cost reduction does not increase value of the firm. While cost control and reduction are necessary conditions for creation of value, it is growth that creates real value for the investors. Therefore, General Partners of private-equity focus on creation of growth. However, private-equity firms are not stickler for a particular kind of management dogma. They do whatever is necessary to create value. In case of certain distressed firms, drastic and unsentimental cost reduction may be the only remedy. Private-equity firms do not hesitate to take the necessary steps quickly.

Eventually hardcore management discipline, intense focus, effective deployment of capital and effective cultivation of growth opportunities allow private-equity firms to create high rates of return. Thank you, Bob!