Do You Need a Value Creation Plan?

One thing that sets private equity apart is its relentless focus on value creation. That's why we have this channel. We want to bring  PE value discipline to any digital transformation program.

A value creation plan, or VCP, is an enterprise-wide view of all initiatives that will improve the company. Above and beyond business as usual. These can be both digital and non-digital projects.
There are some best practices that make this value creation plans particularly effective. There are 3 great things private equity firms do when they create value creation plans.

1) Have very few but high impact initiatives
2) Have the right executive own the results
3) Treat value delivery as important as deadlines and budgets

Transcript

Organizations have clear responsibilities for ongoing business results. Sales drives revenues, procurement reduces spend and so on. When it comes to digital initiatives, it is not clear who should own tangible outcomes. Who should be responsible for projects increasing revenues and reducing cost of sales? Should it be sales, marketing or IT? Let’s take a look…

One thing that sets private equity apart is their relentless focus on value creation. That's why we have this channel. We want to bring  PE value discipline to any digital transformation program.

Many companies struggle with this. They all have to run their core business. They pursue customers, get orders, deliver products and services and keep customers happy. And they also make sure the back-office is running great. And by the way, they have to meet and raise your quarterly earnings forecast.
This is already a lot of work even for the best companies. Then you want to improve that core business. There are many questions:
- How do you add a set of improvement initiatives on top of running the business?
- How do you keep executive focus on both running the ship and upgrading it at the same time?
- Could do you balance the core business and the innovation projects?
- Can you make sure both sides have enough resources to succeed?

Value creation plans help to achieve this balance well. They help run new initiatives as well as you run the core business.
Before we get into best practices, let’s first talk about what value creation plans actually are.

A value creation plan, or VCP, is an enterprise wide view of all initiatives that will improve the company. Above and beyond business as usual. These can be both digital and non-digital projects. Expanding digital marketing; automating finance operations or implementing chat-bots in customer service.
The VCP tracks all improvement projects. Those that will improve sales and those that drive cost reduction.

Companies often realize they have hundreds of random projects. They compete for executive attention, people, time, and money. I have once seen over a thousand projects in a business. That is  chaotic and will not result in consistent value creation. Some projects get delayed due to resource constraints. Others get neglected and die a slow death. Wouldn’t it be better to sign up to fewer projects that the business can actually deliver on? That’s what private equity firms do when they invest in a business. They agree with management on what is the best they can do with limited resources.

There are some best practices that make these value creation plans particularly effective. There are 3 great things private equity firms do when they create value creation plans.

1) Have very few but high impact initiatives

What are the 20% of the projects that create 80% of the value? Most companies have far too many initiatives with questionable benefits. There are not enough resources and insufficient executive focus to complete them all. You should rank your projects based on hard value and speed. There are videos where I covered criteria for project priorities. I will link those here in the video, you may want to take a look.
The projects that deliver the most value the fastest should be the only ones on the list. Otherwise ask the questions: Can you make the scope bigger for higher value impact? Can you speed up time to value with more resources? If not, keep that project off the list.  Also, any project without a clear executive owner, you will have to cut. Speaking of which, it brings us to;

2) Have the right executive own the results

The biggest reason digital projects fail is that executives fail to take ownership. There is a simple rule of thumb to check if you have the right ownership. Look at the business metric or KPI your initiative is trying to impact. Let’s say it is sales growth from a new digital product. Who is the ultimate owner of that metric? Let’s say it is the SVP of merchandising. That is the person you need to own the project. They own the benefits, they own the budget and assign resources. They can only succeed if the project does. If you do not yet have the owner of the metric on your side then the project is at risk. You either get them on board or you must cut the project from the value creation plan. There should never be any ambiguity of who is accountable for the value created from any project.

3) Treat value delivery as important as deadlines and budgets

Many companies are good at developing thorough business cases. Even assigning the right executive sponsors. Once the project is running, they focus only on timelines and budget. They forget all about the value and the business case. This is where value creation plans shine. PE firms make sure the projects deliver the value they signed up to deliver in the plan. Value realization gets tracked with the same rigor they used in planning.  With rewards at stake, management will make sure that projects deliver the value. They treat value slippage the same as missed deadlines or budget overruns. 

Let me summarize. Keep your list of initiatives small. Make sure the right executive is accountable for project success. And treat value delivered as important as deadlines and budgets. Most businesses find value realization reviews eye-opening and transformational. Real value creation starts there. There are many new tools to help with value realization and ongoing value management. I will cover these tools in a future episode. 

Talk soon