OPERATIONAL

VALUE CREATION
An Investor’s Edge

Pietro Castronovo
Operational Value Creation — An Investor’s Edge

Today, there is increasing pressure on investors to show return on investment (ROI) at both
scale and speed; however, the industry’s focus has concurrently shifted towards sustainable
operational value creation.

Therefore, private investors now need to also access operational expertise: a key set of tools
to ensure smart and sustainable ROI are operational value creation levers. In this paper,
we discuss what the various levers are, as well as the organizational structures needed to
maximize value. We also speak to leading equity and sovereign wealth fund investors, who
share how they themselves have laid the groundwork for success.

Operational Value Creation Levers:

These are operationally focused steps you can take, or levers you can pull, to unlock value
from a business. We have defined 35 potential levers. Which levers to focus on varies widely
per project, and so approaches must be customized. This is non-negotiable.

Examples of levers include logistics network redesigns, marketing effectiveness, customer

management, cybersecurity, and footprint optimization.

Some value creation levers, such as cybersecurity for instance, are more about downside
protection than direct value creation — but they are still essential, because you cannot build
value without avoiding pitfalls.

In 2021, global mergers and acquisitions (M&A) activity was at an all-time high of around
$5.9 trillion, but this dipped to around $3.5 trillion in 2022. Finding the right deal is a
challenge, but once that is overcome, investors deal with even bigger hurdles: namely, how
to provide accelerated returns and how to prioritize among potential investments.

With financial engineering skills becoming commoditized and cost-slashing not sustainable,
investors are asking themselves how they can best leverage operational value creation
levers to accelerate outcomes. Oliver Wyman recently conducted a series of interviews
with professional investors spanning sovereign wealth funds, family offices, and global and
mid-sized private equity firms. Our study found that more and more investors are turning
to operational improvement to create value in the long term and to gain edge.

© Oliver Wyman
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Operational Value Creation — An Investor’s Edge

DISSECTING THE THREE KEY FACTORS FOR SUCCESS

Despite a variety of approaches to operational value creation (see exhibit 1 and four models
on page 6), our analysis has revealed that there are three key things that investors consider
key to success:

1. Strong collaboration is important and good governance provides

guidelines — but takes time
“A key element is how you embed the value creation team within the organization,” says
the Head of Transformation and Restructuring for a Gulf Cooperation Council (GCC)
sovereign wealth fund. “We have a deal team, industry vertical teams and a value-creation
team. The most challenging part is how they work together.”

Meanwhile, the head of a global investment firm told us that they “believe it makes sense
to have operations partners working with deal partners.” But he noted that lines of
accountability can be an issue. “When a deal team does operations, if they mess up, it’s their
problem. However, if different teams do it, apportioning responsibility is blurred.”

Therefore, good governance is essential, which is why this particular firm takes a hands-on
approach: “We work with management teams to figure out what we should do. We have
multiple calls a week with portfolio companies on M&A, strategic initiatives, and new hires.”

Regardless of the model applied, all professional investors implement some sort of
centralized system to oversee their portfolio companies.

2. Upskilling and staffing adjustments — and the age-old question,

inhouse or outsourced?
Investors must analyze where and when to appoint external spend so that they are not
overloaded with internal costs without a clear understanding of incremental value add.
Those more cautious on the spectrum continue to maintain a lean organization, therefore
relying more on external spend, versus a more hands-on approach that creates capabilities
in-house. There are of course merits to both approaches — but the key is understanding
where to prioritise your focus.

Focusing on operational value creation means that skillsets within private equity firms need
to be constantly evolving, which in part means setting up specialist teams of operational
experts. Typically, these are staffed by professionals from the industry or strategic and
operational consulting firms.

One senior investment professional told us that in their experience, “Keeping the role
of value creation internal is better than hiring fixed-term consultants each year — but
the trade-off is the real risk of hiring long-term [internal] people who don’t add value to
our portfolio.”

© Oliver Wyman 3
Operational Value Creation — An Investor’s Edge

Some firms choose to double down on internal capability building in a way that reflects
their core investment focus. One seasoned investor at a global private equity firm told us
that, “Over the past few years we have been building up our [internal] subject matter expert
team in a very specific way, starting from particular priorities linked to our portfolio, such as
sales and pricing, cybersecurity, and executive talent. This is very consistent with the type of
portfolio and value creation initiatives we are doing.”

However, another seasoned private equity investor who has worked both firm-side and for
sovereign wealth funds prefers to outsource: “You hire the consulting team and the focus is
on them to create value really quickly. It’s about getting genuine experts who can add value
and be accountable for that.”

3. And then figuring out which levers are right for each project
There are many kinds of levers, and not all can be focused on concurrently, so prioritization
is key. Timeframes and priorities depend on a multitude of factors, requiring a deep
understanding of both your portfolio and its potential.

Exhibit 1: Across our decades of consulting in this field, we have identified 35 levers for
operational value creation in portfolio companies

Value creation levers

Revenue EBITDA1 margin improvement levers

growth levers

Commercial Product
8 Product cost-down 9 Product portfolio streamlining
effectiveness optimization
1 Sales force
effectiveness Sourcing 10 Direct material 12 Indirect spend
11 Tier 2/3 sourcing
optimization sourcing optimization
2 Channel
optimization Supply chain 13 Logistics network 14 Warehouse process 15 Demand planning
3 Pricing/customer and logistics redesign optimization /forecasting
profitability 16 Inventory 17 Carrier/mode 18 Advanced logistics
4 Marketing optimization selection market testing
effectiveness
Manufacturing
5 Value 19 Footprint optimization 20 Manufacturing ops improvement
and footprint
proposition

6 Customer 21 MRO2 optimization 22 Make/buy 23 Digital manufacturing

management

7 Product Overhead/SG&A3
cost-down 24 Headcount effectiveness 25 Zero-based budgeting
excellence

Cross-levers

26 Operational due 28 Governance 29 Performance 30 100-day plan

and talent management 31 Digital
diligence (Pre-deal) and PMO4

32 Restructuring 35 Post-merger
27 Strategy refresh & refinancing 33 Cyber security 34 Carve-outs integration

(1) Earnings before interest, taxes, depreciation and amortization, (2) Maintenance, repair and operations, (3) Selling,
general and administrative expenses, (4) Project management office
Source: Oliver Wyman

© Oliver Wyman
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Operational Value Creation — An Investor’s Edge

Of course, such a colourful toolbox demands focus and specialization, and must take
into account many factors, including:

• Overall investment philosophy or the mission of the investor

• The size of the investor
• The number of sectors or specializations
• The concentration of the portfolio companies
• Geographical focus
• Expected financial and non-financial returns or targets
• Potential synergies in the existing portfolio
• Resources and investments available

Value-creation levers need to be relevant and specific to an existing portfolio of assets.

For example, we are seeing these key levers influencing the consumer/retail sector:

• Value proposition: how to adapt to a changing environment in terms of customer

behaviour and preference, the impact of COVID-19 on spending attitude and the
high-inflation environment.
• Logistics supply chain and demand planning: identifying new ways to serve customers
more efficiently, in a shorter time period, and at lower costs.
• Digital: there are significant investments required on digital platforms, both on the
back-end and front-end — including how to link customers with physical stores, and
developing additional offerings and services.
• Initial public offering (IPO) readiness: understanding value and how to present
performance to investors, maximizing attractiveness, and delivering the best value to
existing and future shareholders.

© Oliver Wyman 5
Operational Value Creation — An Investor’s Edge

THE 4 MODELS
Globally, we see private investors adopting a diverse range of approaches to managing their
portfolios, which run along a sliding scale from passive to direct and hands-on engagement:

Passive/pure financial investors — observing from a distance, these players:

• Have no role in value creation — the fund is only provider. They trust management
and other shareholders to lead value creation
• The portfolio companies commit to strategic plans, and then the investor reviews
the results against the plan, only acting if the targets are not being met
• The investor delegates most of its authority to its portfolio companies

Active or cooperative strategic investors — wielding more direct influence,

these players:

• Establish key performance indicators and then monitor performance regularly

• Have a role in decision-making through board representation, largely focused on
highly strategic topics

Industry developer and operator — this set plays a more active owner role by:

• Taking active board position(s), with a high involvement in decision making

• Overseeing the work of external strategy consultants

Interim management and/or turnaround specialists — the most hands-on of

the models, they:

• Take on the role of C-level management (for example, Chief Transformation Officer
or Restructuring Officer)
• Steer value creation on the ground

When it comes to value creation for portfolio companies, we are seeing today’s investors
moving further away from the passive approach in which they wield no substantial
role in value creation and their fund is merely the provider of capital. In these passive
situations, the deal team is often supported by a specialized operations team, who oversees
value creation.

Instead, there are increasingly demanding growth targets that require new, experienced and
dedicated executive management teams to ensure that the ROI’s potential is fully realized.
In line with this trend, we are seeing significant investments in acquiring those specific
operating capabilities in the GCC’s sovereign wealth funds, both with the objectives of taking
a closer role in value-creation initiatives, and to supervise specialized external consultants.

© Oliver Wyman
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Operational Value Creation — An Investor’s Edge

Value is not created by magic. It is the result of capability building, careful planning, and
smart prioritization. Therefore, with each investment, it is incredibly important to find
the right operational value creation model and then pull the correct levers in order to
maximize return.

We have identified more than 30 operational value creation levers — and it is important
to consider which you may turn to for each project — as well as which you are best placed
to add value to. It is also important to do so early in the process, even at the investment
decision phase. Then, once the investment is made and you are further on in the process you
will need to reevaluate which levers need to be worked on.

This has to be an ongoing and evolving process. So yes, there’s no one-size fits all approach,
but considering your operational value creation model — and choosing the right levers — is
one of the surest paths to unleashing breakthrough.

© Oliver Wyman 7
Oliver Wyman is a global leader in management consulting. With offices in more than 70 cities across
30 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations,
risk management, and organization transformation. The firm has more than 6,000 professionals around the world
who work with clients to optimize their business, improve their operations and risk profile, and accelerate their
organizational performance to seize the most attractive opportunities.

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AUTHOR

Pietro Castronovo
Partner and IMEA Head of Private Capital and Restructuring
pietro.castronovo@oliverwyman.com

Copyright ©2023 Oliver Wyman

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