How well an organization executes on both strategies should play a critical role in a private equity firm’s valuation of that enterprise. Read on for key inputs to your models and best practices to add to the consideration set in diligence.
An urgent email ripples through the bottom of your screen, followed by an immediate phone call. As quickly as the serenity dissipates, the reality of your next due diligence washes over like a flash flood.
Crowded markets, a hyper-competitive fundraising environment, diverse stakeholders, competitive auctions and a growing trend of tech-enabled industries competing for speed to service and the infamous ‘last mile’.
How are we going to add value to this asset? Can we think like a strategic and leverage our current portfolio for a competitive advantage? What do we believe is the true valuation, and what are we willing to bid to achieve that objective?
Jack Welch used to call it “seeing around corners”, but through the lens of today’s private equity professional, these are the table-stakes, primary colors in the mosaic of an average day.
Investors have largely relied on cost-take out, process improvement, and predicting (or riding) secular trends to achieve revenue growth and margin expansion. However, with more discerning LPs with a cautious outlook towards the rising tide lifting all boats, GPs are having to further validate their investment theses on organic growth and commercial excellence.
While most firms have underwritten to organic growth in their investment theses, many have been overweight on M&A and operational improvement, while underweight on actual revenue growth strategy and tactical execution.
If the typical LBO shops have been focused on M&A growth, whether vertical or horizontal integration, then what about organic growth?
The aggressive learning machine that is Private Equity is refocusing on top line initiatives and is now spending 77% more in due diligence on commercial effectiveness…but questions remain…
- How do you underwrite to marketing and sales force effectiveness?
- What other metrics or criteria should you be weighing as inputs for your models?
Here are 5 simple metrics to quickly diagnose the effectiveness of the current sales & marketing organization:
5 KPI Metrics to inform on Marketing & Salesforce Effectiveness
Run With Two Legs
Like eyes, arms, lungs and legs, Sales & Marketing work best as a synergistic pair. The most effective salesforce receives ~25% or more in pipeline contribution from a strong, tactically efficient marketing organization. The interlock between field sales & field marketing is vital to success and sustainable growth, especially in the context of valuation considerations.
Field marketing is the connective tissue between corporate and the field, but programs without localization will fail to produce revenue.
A well-executed field marketing plan has standardization with customization and accountability including Local Sales Enablement Plans and Field Marketing Scorecards to track & measure success.
The localized enablement tools should have a focus on product positioning to the ideal client profile and unique selling propositions mapped to customer buying processes (i.e. personas and playbooks). Scorecards should capture and measure the success of campaigns and enablement plays with revenue attribution.
Litmus test your potential target’s marketing capabilities against best practices with: Building the Modern Field Marketing Organization.
As part of an on-site team measuring and valuing company operations, financials, systems and human capital, evaluating organizational talent beyond leadership team may seem downright implausible.
But if we’re all looking at the same metrics, how do you get a leg up on your investing peers?
Talent is just one leg of the stool in The Critical 4, but maybe the most important and equally difficult to measure. Other than KPI metrics, another signal of a capable sales & marketing organization is a well-defined talent strategy.
Leading strategies will vary in execution, but all should have 3 main foundational components:
- A Plan – A singular philosophy for team & individual performance that drives the talent strategy ideals and its tactical execution.
- A Process – Top-grading is not a linear sequence of events, it requires feedback loops and continuous analysis of the team to optimize performance. Key tactical elements include talent assessments (current or recruited) against a set of competencies defined as ‘A-player’ characteristics, succession planning for peak performers and efficient offboarding for under-performers.
- Data-Driven Scorecards – Performance is quantified against two primary categories: Accountabilities (i.e. revenue targets and quota achievement) and Competencies (i.e. sales & presentation skills). Scorecards clearly define metrics for grading talent and performance coaching.
For more on talent & top-grading tools: Top Grading Your Sales Talent Should Be a Quarterly Exercise.
Rinse & Repeat
Operating resources that have largely been focused on IT & Finance, are now more Commercially biased towards revenue planning, tactical execution, optimizing salesforce effectiveness and meaningful KPIs.
Individual firms will vary in philosophy but instilling a culture rooted in accountability with clearly defined metrics is a common thread.
Repeatable and scalable standardization is key, and regardless of industry, size, maturity of your portfolio companies, all of them can and should implement.
Annual Revenue planning, when executed efficiently and effectively, is a sequenced event as per the example below:
To identify whether your prospective targets or current portfolio have this buttoned up, read our Q3 PE Quarterly Research: How Operating Partners Optimize the 2019 GTM Plans across the Portfolio .
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