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Why Do Capital Market Organizations Underachieve their Planned ROI?


Firms that invest in acquisitions, such as private equity firms and investment bankers, only achieve their end-goal by raising the market value of the acquired companies. Acquiring organizations are called capital market firms. Their ultimate financial gain is realized from the buy-sell spread when they divest each investment. But research studies reveal that only a minority achieve their targeted ROI. One study reported that less than half of mergers achieve their goal.1 Why such poor results? Do they over plan but under execute their economic value creation activities?


Five Value-Capture Categories to Realize Results


Realizing actual economic value from mergers and acquisitions (M&A) is a high stakes juggling act.2 So many things must be correctly executed to maximize the potential economic value. Problems arise such, however, as the disruptions from executive and employee turnover and poor strategy execution - both the modified business strategy and the M&A integration strategy.


Figure 1 displays five value-capture categories that contribute to lifting shareholder value from an enterprise’s initial conditions. Although this figure describes opportunities for an M&A deal, it can be applied to any existing commercial organization.


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Employees fear that the majority of the value lift will come from the third arrow - operating expense savings - which is perceived as code for employee layoffs. How can all five of the arrows generate the lift?


How Can Performance Management Methodologies Unlock Potential Value?


There is confusion about what performance management (PM) at the enterprise level is; and PM is too often narrowly described as just visual dashboard measures and better financial reporting. It is much broader. PM is the integration of multiple managerial methodologies (e.g., customer relationship management, a balanced scorecard, Six Sigma) with an emphasis on analytics of all flavors, particularly risk management and predictive analytics. PM’s methodologies themselves are not new, but organizations tend to independently implement each of them sequentially, often using disconnected spreadsheet tools rather than formal and proven information technologies. PM deploys the power of business intelligence (BI) to enable decision-making.3


Although there are interdependencies of PM across all five value-capture categories, different PM methodologies play a prominent role in each category:

  • Integration strategy and management - The heavy lifting is done in the next four categories to the right in Figure 1. In the first category the main PM methodology is human capital management (HCM). Employees, like information, can be a powerful asset to lift ROI. A robust HCM system is not just an automated personnel database, but is much more powerful in aiding employee selection and retention. For example, an analytics-powered HCM system can quantify historical employee turnover and apply statistical correlations from that history to the existing work force to rank-order predict the most or least likely employee to resign and therefore enable management interventions. Both the employer and employee benefit. With an aging work force approaching retirement at many companies, an HCM system becomes essential.

  • Revenue growth - Several PM methodologies are engaged here:

    • Enterprise risk management (ERM). ERM goes beyond monitoring the traditional three pillars of market risk, credit risk and operational risk. ERM formally manages an organization’s risk appetite with its risk exposure.
    • Business strategy management and execution. David Norton, coauthor of The Balanced Scorecard book series, has stated that nine out of 10 companies fail to successfully implement their business strategy.4 PM addresses this with the integration of:
      1. Strategy maps;
      2. Scorecards (for strategic objectives and their associated key performance indicators (KPIs) with targets);
      3. Dashboards (to cascade downward all measurements for operational actions;
      4. Incentives; and
      5. Analytics (to drill down to examine problem areas plus predict future outcomes).5
    • Price optimization. Pricing is too critical to be a “thumb-in-the-air” intuitive feel for what price the market will bear. PM tools that optimize pricing include price elasticity analysis of consumer demand. This is incorporated into scalable forecasting and optimization routines that determine profit and volume maximizing price-point - for example, for each retail stock keeping unit (SKU) at a store specific level.
    • Product, service-line, channel and customer profitability. Profit is calculated as sales minus costs, but few managerial accounting systems properly trace and assign consumed resource expenses into costs; they rely on antiquated broadly averaged cost allocations that distort true costs and profits. Traditional costing practices mask and hide costs of a product or service as a lump sum. PM’s inclusion of activity-based cost (ABC) principles resolves these deficiencies. It is critical to have visibility and transparency of the contributing elements of costs - with accuracy - and to understand the many layers of profit margins.
    • Customer value management - To determine the value of a customer, marketing staffs have traditionally relied on basic customer recency, frequency and monetary spend data. That data is not enough. Today there is a much greater need for customer intelligence that measures psychodemographic information of customers as well as apply customer lifetime value metrics to answer the key questions. Some examples of key questions are: What types of customer microsegments should we retain, grow, acquire and win back? Which types should we not? How much should we spend with differentiated deals or offers on each microsegment so we don’t risk over-spending on loyal customers or under-spending on marginally loyal customers who may defect to a competitor? The more powerful and scalable PM technologies answer these questions and enable the ultimate microsegmentation - to the individual customer or consumer.

      Maximizing ROI is not accomplished by just growing sales, but rather by growing sales profitably. That is, smart revenue growth rather than growth at any cost.

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