With private equity firms currently holding more than 6,100 companies -- 2,000 of which they have owned for more than five years -- the industry can't sit back and hope the initial public offering markets rebound. It must find a manageable system for earning returns on its investments now. Assuming that most expense-control strategies are banked early on, the opportunity is organic growth.
Organic growth requires PE firms to roll up their sleeves, learn more about their customers and improve the productivity of the sales force. It means segmenting profitable customers, introducing different pricing strategies, adding product lines, exploring alternative channel partners and gaining market share through more effective use of the sales engine.
The formula for success boils down to a few critical steps:
Many PE firms immediately default to compensation as the primary driver of performance. But our experience with high-performing sales organizations suggests the main drivers of predictable, profitable growth are rigorous management processes (for example, selection, training and development, performance management, quota setting, pipeline management, measurement).
Our research shows unequivocally that high-performing sales organizations consistently get the frontline sales manager role right. We are referring to the structure of the role. In order to be successful and sustain growth, your frontline sales managers must possess the skills to develop, coach and energize sales people. The role should not be a dumping ground for an expense monitor or for a once-strong contributor headed toward retirement. This role requires a true leader with a manageable span of control. Individuals with dual "player-coach" roles often compete with their direct reports and sometimes give short shrift to the "coach" piece that is required to develop and mentor successful sales people.
Effective pipeline management and CRM tools allow managers to efficiently perform the analysis required to lead a high-performing sales team without sacrificing the time they need for people development aspects of the role. With the right customer activity fundamentals in place, an organization does not need to spend millions on a new system when an Excel tracker will get the team headed in the right direction.
Even with the right pieces in place, the path to success requires clear governance, decision making, accountability, and team-based communication. That comes from one source: strong, pragmatic top leadership that understands how to define the fundamental activities and get out of the way. This will create a nimble organization that knows how to execute without getting distracted by overengineered process or strategic complexity.
A recent Privcap LLC study about adding value to portfolio companies found that between 2006 and 2010 organic revenue growth accounted for 40% of Ebitda growth in private equity firms that grew the top lines of their companies. Cost reductions were responsible for 30%; acquisition was 20%.
Organic growth is not a new concept. A survey by CMG Partners found that in the past year 62% of PE firms focused on cost take-out, while 54% concentrated on organic growth. However, when asked about the coming year, 82% said the priority was now organic growth. CMG also found that a full 50% of Ebitda returns come from organic growth.
Showing up with capital or financing is not good enough to differentiate your firm for investors. Higher prices for assets are here to stay, so private equity firms have less room for error. With shareholders increasingly anxious for a timely return, we believe today's true opportunity lies in an organic-growth strategy that incorporates the steps we have identified to drive predictable, profitable growth.
Jeff Cox is a senior partner with Mercer Consulting in Chicago. Steven Baumgartner is a principal in the sales performance practice of Mercer Consulting in Chicago.