Grasp value during the deal life cycle

High valuations and competition for good deals pushes private equity houses to emphasise  operational improvements in portfolio companies as their investment thesis.

private equity

High valuations

A prolonged period of expansionary monetary policy and historically low interest rates has produced a situation where large amounts of money are seeking returns. This has caused institutional investors, such as pension funds, to shift their focus to alternatives, like private equity. The allocation of capital to PE is thus at an all-time high, according to Forbes, and the same has been visible in Nordic fundraising as well. The money in search of good targets has led to higher valuation multiples, so that private equity houses are facing a challenge as they seek to continue to outperform other asset classes in even more demanding circumstances.

Tracing, finding and exploiting levers before and during an ownership period

The tough competition means that PE houses must, to an ever-increasing extent, be quicker to find and execute potential deals where they can unlock value. If any PE house underestimates the potential of an investment case, there will always be another that will value the opportunity more highly and acquire the asset. On the other hand, overestimating a potential deal will erode the value of the investment right from the beginning. Solving this dilemma may require co-operation with advisors, such as KPMG, that can provide support in creating a comprehensive strategy for the entire holding period of a portfolio company.

An integrated Due Diligence is a good way to quantify the opportunities in a holistic manner. Financial Due Diligence secures a reliable baseline for operations, Commercial Due Diligence describes the available market opportunities and risks, while Operational Due Diligence demonstrates the operational efficiency-enhancement opportunities, together with the implementation requirements.

KPMG’s Target Value Platform (TVP) tool quantifies operational improvement opportunities at deal speed

KPMG has developed a set of new agile tools for the more systematic identification of value creation possibilities in transactions. One of them, that could be described as an express version of a traditional Operational Due Diligence can, for instance, be delivered in a week.

The TVP is an interactive tool that identifies unleashed operational potential in a target and quantifies its value. A rapid TVP scan leverages benchmarks across several opportunity areas within cash improvement, revenue upside, cost reduction and the maturity of operations. The benchmarks are based on publically available data inputs, combined with proprietary knowledge that KPMG has collected through years of conducting engagements. The visual and adjustable deliveries facilitate discussion and can serve as a template for a 1,000-day ownership plan, including an implementation roadmap. The awareness of operational upsides should be raised, along with red flags, at an early stage of the due diligence process. With the TVP, that can be done cost-efficiently, and at deal speed.

 

Paulus Roiha has worked for 2+ years in KPMG’s Global Strategy Group. He has experience of several transactions and projects related to strategy and operations. Before enrolling to consulting, Paulus played football in the top flights of five different countries and represented Finland for 20 times. In his spare time, Paulus enjoys good food and all kinds of sports both as a participant (from skiing to padel tennis) and a spectator (from biathlon to American football).

Three challenges Finnish companies commonly face in post-merger integrations

Mergers and acquisitions are key initiatives of the highest priority for companies. In order to successfully achieve the set targets of an acquisition, serious effort needs to be put on the post-merger integration.

The KPMG Global Strategy Group Finland has conducted a study on Finnish companies’ post-merger integration performance. In total, 62 companies were interviewed regarding a chosen post-merger integration undertaken in the last 5 years.

Three challenges that companies need to address properly

Although companies generally rate themselves as having been moderately successful in integration projects, most seem to struggle with the same kinds of challenges:

– Align company culture. Obviously, cultural differences can arise in acquisitions where the target company is located abroad. But cultural differences should not be underestimated in domestic acquisitions either, since such differences can stem from factors such as different ownership (private, state or PE ownership), different maturities (old established vs newly started company) or different histories (e.g. competitor vs non-competitor). Aligning company culture is imperative in order to successfully merge two companies into one and achieve the targets of the deal.

– Communicate internally. Acquisitions usually cause uncertainties for employees within both the buyer and target companies. Therefore, open and frequent communication is vital in order to reduce any uncertainties and false rumors. When communicating, one should focus on how the message is delivered, and on ensuring that everyone gets the same message and that any chance of misunderstanding is minimized.

– Plan the integration process in advance. Integration planning should start as early as in the due diligence phase. Critical issues should be identified and addressed so that, when the deal is closed, integration can start right away with high momentum. Of course, not everything can be planned in advance, and therefore clear roles and responsibilities should be defined in order to handle upcoming issues efficiently. A well-prepared integration plan is critical in order to complete the integration process on schedule.

This is not to disparage the importance of addressing other issues in PMIs but success in handling these three particular challenges will play a vital role in ensuring a favorable outcome for your integration and in realizing the benefits of the acquisition. Therefore, if the needed resources or skills cannot be found in-house, companies should consider the use of external support.

More detailed analysis of how well Finnish companies have performed in their integration projects can be read in KPMG’s report.

Klas Holmberg is Senior Associate at the KPMG Global Strategy Group (GSG) with experience in operations management with clients in e.g. transportation, food & beverages and process industries.

Data & Analytics as an integral part of today’s business

Are the D&A capabilities of Finnish companies sufficient? I claim they are far from it, and the “Building Trust in Analytics” survey commissioned by KPMG may support this statement.  From a strategic and efficiency-enhancing perspective, it may be worthwhile to have a look at what D&A has to offer your company.

data & analytics

The Building Trust in Analytics survey was carried out in 10 countries on all continents, and the 2165 respondents were all directors and C-level executives fully or partly responsible for data & analytics. Although the majority of companies interviewed for the survey deem D&A important for their businesses, only 34% are confident in the business operations insights generated by using D&A. Furthermore, just 21% trust the analysis/modelling they conduct. I find these numbers somewhat incomprehensible, and I’m left wondering why the trust in D&A is so low, regardless of its widely recognized significance. One possible reason is inadequate competence, combined with outdated and unsuitable tools.

D&A provides a myriad of possibilities

I’ve personally participated in projects focusing on cost and process efficiency, where D&A has been utilized and even heavily relied on. Even though I was familiar with D&A prior to joining KPMG, I’ve been astonished by the vastness of its application possibilities, as it can be applied within virtually any activity where data is available.  The only limits are essentially your own creativity and skills and the features of the software you’re using. More often than not, the finiteness of the software isn’t an issue.

So why not invest in D&A?

As the survey presented above does not include Finnish companies, it isn’t an indication of the D&A capabilities in them. Be that as it may, I know from personal experience that the use of a few Excel spreadsheets is still the most advanced form of “D&A” in many Finnish companies. Obviously I’m generalizing, but the truth is that I’m yet to be blown away by the D&A skills of a Finnish company!

Upgrading your D&A is surprisingly easy

Taking your D&A to the next level, so to speak, can be anything but cumbersome, and not quite the nuisance you might think. Licenses for extract, transform & load tools aren’t all that expensive, and some ETL and business intelligence software is even available for free. Using them is generally not all that tricky, and with just a bit of practice and the will to learn, you can make impressive visuals and save time with smart commands in your ETL software.

I’m very much inclined to recommend the use of D&A. There are clear efficiency-related upsides, as well as numerous other benefits, and the use of D&A in companies will most likely increase exponentially in the future. So, why not invest in D&A in the form of proper tools and skilled employees? We’ll be happy to help you, and you’ll most likely thank yourself for it later.

 


I am Erik Mustonen, a member of the KPMG Global Strategy Group. Ever since I was little, I’ve been interested in numbers and calculus. D&A is, in a way, another outlet for my passion for numeric analysis, and an exciting means to explore and learn new things. At KPMG I’ve been fortunate to be involved in D&A-related assignments. KPMG has clearly made progress within the field and a strong D&A community has developed here, which I’m happy to be part of.

Three key challenges slowing down growth in the smart home market

The Nordic smart home market is on the verge of explosive growth. Yet, no firm has successfully penetrated the market. The industry faces three key challenges that must be met before broader household penetration can be achieved. The company that first overcomes these three key challenges will gain a strong foothold in the market.

When away from home, many people begin to worry about whether they left the doors locked, the windows open or the water pipes closed. These worries are unnecessary since smart home technology is already available for most of these common everyday problems. In addition to increasing convenience and bringing peace of mind, the solutions offer various other benefits such as cost savings, and a higher degree of automation and environmental friendliness. But despite these benefits, consumer awareness and penetration have remained low. In my recent work, I have concluded that there are three key challenges to overcome:

1. The integration and interoperability of smart home solutions have remained low

A significant hindrance to growth has been the low level of integration between the solutions offered by different providers. Many of the current smart home products have their own apps. However, consumers would rather have only one master app to control all home functions – from heating and lighting to entertainment. The reason why product integration has remained low is the prevalence of multiple competing standards and ecosystems. Companies from various backgrounds have rushed onto the market without sufficiently considering the benefits of cooperation and interoperable solutions. This has led to a situation where the smart home market lacks industry-wide technological standards. Whoever succeeds in creating an industry-wide ecosystem will experience high growth.

2. Finding winning business models has been difficult

Many smart home companies have been content with excessively traditional models. The choice of business model is crucial in differentiating the company from its competition and determining the role it wants to play in the value chain. The right business model can also ensure seamless customer experience at all customer touchpoints. Today, business models based around a pricing margin such as a monthly subscription are common. However, other business models with simple value propositions may be even more attractive for the customer. For example, companies with backgrounds in traditional industries may benefit more from business models such as service bundles, the-product-as-a-service, loyalty-based and insurance-based systems, and gamification. Loyalty-based models may provide tools to keep customers and lower churn in the company’s core business, whereas service bundles are ideal for cross-selling opportunities.

3. Data protection poses a challenge, particularly in the European market

Smart home companies face various challenges when it comes to data collection, storage and use, particularly in the European market. When the EU’s General Data Protection Regulation will start to apply from May 2018, companies must be able to tell consumers what data they have on them. Furthermore, companies must be able to erase all information collected on a customer if the customer so desires. The regulation also poses a brand risk for companies, since consumer trust will be easily lost if data is mishandled. Being as transparent as possible on data security will help companies to mitigate private data concerns and the fear of misuse. One concrete step will be to set clear rules on how the data is to be stored, and where and how it is to be used.

Sami Ali-Mattila has worked for the KPMG Global Strategy Group since March 2017 and has recently worked on several projects related to disruptive technologies. Sami holds a Master’s degree in Finance at the Aalto University School of Business. He has two years of advisory experience, particularly in growth strategies, commercial due diligence and M&A. In his free time, Sami enjoys various sports activities and travelling.

Scaling agile portfolio management for large enterprises

Everybody seems to agree that agile methodologies are best practice. Pretty much all the customers I work with are agile to at least some degree, and typically have a multi-speed (or “bi-modal”) operating model consisting of entirely new businesses that have been built agile from ground-up and older legacy businesses that work with more traditional, slower clock speeds.

Agile portfolio management

However, after the initial enthusiastic wave of adopting agile methodologies is over, most companies seem to hit a stone wall. Agile just doesn’t seem to fit big businesses. And I’m not talking only about old giants, encumbered by legacy systems and large organizations. I see this even in new school technology companies.
There’s a gap between business strategy and what the agile teams are doing. Nobody seems to be able to link individual teams’ activities to the big picture of enterprise strategy. IT struggles to prove its alignment with business goals.

Interdependencies start creeping in and coordination between different, self-contained teams becomes difficult. For example, although your CRM development may be agile, its progress may be blocked by issues with the ERP – which has a one-year release cycle. The legal department may want a cumbersome regulatory acceptance process before go-live, which thus forms a waterfall gate in the process.

How do you scale agile from a bunch of small teams to larger, strategic projects and an enterprise-wide way of working – without losing agility?

Agile portfolio management

The answer is clear. You need a comprehensive agile portfolio management system reaching all the way from the company’s strategy to individual agile teams:

– The corporate strategy process clock cycle needs to be intensified (e.g. a rolling 3-month cycle), and there needs to be more constant feedback from both customers and operations back to decision-making.

– There needs to be a process for cascading the strategy to a portfolio of themes, within given financial and resource constraints, as well as a governance structure and portfolio-related ownership.

– If it doesn’t already exist, a clear program management layer must be built for the purpose of prioritizing projects arising from large, strategic initiatives into more operational projects, and bundling groups of e.g. 5-10 project teams under unified management (e.g. those with a shared vision and backlog, as well as common coordination).

The changes may be significant, but the benefits will be tangible. You’ll get more innovations and shorter lead times for testing new ideas. Employees will be happier, because they’ll understand the big picture and find purpose in what they’re doing. You’ll increase the alignment between IT and business. Due to the continuous updating of business cases, it will be easier to kill projects that aren’t delivering, or are no longer strategic. You’ll get more trust and transparency throughout the enterprise.

Many customers have adopted the Scalable Agile Framework (SAFe). It’s a robust approach, but only a part of the solution. It does not cover the full scope of changes required for an agile enterprise – in other words, how to make a high-level corporate strategy process more agile. And ultimately, all frameworks and governance systems require tailoring to your organization. You need a comprehensive system without gaps that fits the purpose and suits your needs. And that’s something you can’t just buy off-the-shelf.

Toni Heinonen works as a Senior Manager in KPMG’s Global Strategy Group. He has 17 years of experience in management consulting, ranging from growth strategies and M&A to large-scale transformation projects. Toni has worked extensively with technology, media, telecoms, consumer services and other industries that have been heavily disrupted by digitalization.

Outside of his work, Toni enjoys jogging, outdoor activities with his dog, playing musical instruments, and photography.

Understanding organizations’ unwritten rules in post-merger integrations

Post-Merger Integration (PMI) has been a challenge for many companies, as is amply testified by the countless articles and books written on this subject around the world. Global research indicates that, in most cases, a clash of corporate cultures or incompatible cultures are among the top five reasons why PMIs have not been successful.

post-merger integration

Companies are very seldom really interested in understanding cultural issues during the pre-deal phase. In most cases, resources are focused on the negotiations, and on financial and legal Due Diligence (DD) for the purpose of closing the deal. In some cases, companies spend time on operational DD, but very rarely from the perspective of corporate culture.  Even those companies that claim to take cultural issues into consideration during the pre-deal phase often face just as many challenges during the post-merger integration as those that neglect this area entirely.

In my opinion, one of the major failures related to culture is that companies are unable to identify the unwritten rules of their organizations. What companies see and observe during the negotiation, the interviews they conduct with key individuals and the various kinds of DD carried out, relate to what I call the written rules – policies, procedures, descriptions, codes of conduct, etc.  After closing, when the sweet talk about the deal is over and the integration process starts, the unwritten rules slowly make their presence felt through simple expressions such as “yes, but” or “however”.

These caveats tell us what drives each individual’s day-to-day behavior and reveal the existence of “unwritten rules”, or what I call it “The internal politics of the business”, – the honest advice one would give to a friend about how to get on in the organization.

These unwritten rules are neither good nor bad, only appropriate or inappropriate for what you want to achieve from the integration. You must be aware of them, and plan well in advance on how to tackle them.

But where do the unwritten rules of companies actually come from? They typically start with top management. On the one hand, they derive from the way top management thinks and acts, and, on the other hand from what can be conceived of as the “written” rules that they establish or maintain.

The unwritten rules are what help people survive and thrive. They are a set of highly sensible coping skills adopted by all employees – not just by those destined for the top.

Bozorg Amiri is Partner and Head of the Global Strategy Group in KPMG Finland.

Building a bridge for strategy implementation

Over and over we hear the importance of strategy implementation. You can have a great strategy, but if you are unable to put it into practice, it is worthless. So if it is already old news that implementation is the key to success, why do we still see many companies failing at this stage? Well, simply because the complexity of implementation is underestimated.

Though many rely on external support to develop a new strategy, people consider implementation more of an internal activity or separate task. I met a client who told me “Strategy is developed in the ivory tower, and then it’s up to us to figure out how to make it work”. That got me thinking what had gone wrong in that particular case. In my experience, development and implementation go hand-in-hand. So how can we help to build a bridge between strategy development and implementation?

Here are three key points:

Involve key stakeholders from different organizational levels

If you involve different organizational levels at the development stage, not only will you develop a strategy that addresses the points that are important to your team and has a practical approach, but you will also get easier buy-in to the strategy.  Selecting the right people to involve will also take you one step further when it’s time to execute the strategy. In this respect, it’s not only expertise that is important, but leadership skills and the ability to influence others will also be key to ensuring successful implementation.

Make your strategy implementable

Make a robust plan that considers funding, phases, tasks, timetabling, resources, and well-defined roles and responsibilities. Furthermore, be realistic about the resources you need to implement the strategy and how daily work will be affected by the additional tasks. Getting an extra pair of hands and expert advice at this stage can pay off, if it paves the way to a smoother transition.

Communicate and manage change

Unfortunately, this is many times overlooked. Clear, timely communication doesn’t just happen. Spend time thinking exactly what needs to be communicated, when it should happen, and who will do it. This will benefit by getting your organization onboard faster and avoiding negative feelings due to people not knowing what’s going on. Remember, the larger the scale of change, the more effort you need to exert in order to make it happen. A proper change management plan will make your life easier by accelerating the pace at which changes are adopted in the organization.

What’s your view? Can you think of any other points to add to the list?


Claudia Salto
is an Assistant Manager at the KPMG Global Strategy Group. She has experience in Operations Planning, Procurement, Change Management and Process Improvement. She has worked for several international companies in industries such as Telecommunications, Retail, Consumer Durables and FMCG. In her free time, she enjoys being with her family and friends and travelling to sunny places that remind her of home.