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Article  |  08/21/2020  |  Junaid Samnani

Navigating the Yellow: Finance Transformation in the COVID Economy

As Seen in Buyouts: Navigating the Yellow: Finance Transformation in the COVID Economy

By Junaid Samnani, Managing Director

This article was published in Buyouts on August 20, 2020

The COVID recession will be a U-shaped recovery curve. No, it will be V-shaped. Actually, there will be no archetype; recovery will be industry-specific, and sometimes even sub-industry specific. Some say we are just at the beginning of a major economic contraction. Others insist we’re more toward the middle.

Experts – be they economists, pundits, legislators – clearly disagree.

But there is one shared universal sentiment: While market disruption has made select, healthy companies greener (think: telemedicine, at-home fitness) it has created a sharply depressed performance outlook for many more organizations. As a result, there are many once thriving companies now at-risk. We call them the yellows.

Here’s the bad news: For sponsors, these yellows will have an outsized impact on fund performance, such that when a couple of yellows go dark, or fall to red, they will diminish fund returns and associated carry (and follow-on fundraising efforts).

Here’s the good news: There’s treasure buried in those yellows. While GPs will spend a substantial amount of time growing their greens and restructuring their reds, it will be the yellows to which they should yield unprecedented time and focus.

And here is the even better news: Sponsors can expect significant return from that yellow investment, if….  The ‘if’ is the critical caveat because we’re not talking about operating partners simply leaning into portfolio management. We’re talking about ‘if’ sponsors make real, substantive investment in portfolio company finance transformation.

Finance Transformation:

It sounds like a nebulous term, but it’s one with real teeth and real return opportunity. The finance transformation process establishes a vision for the finance function. The process identifies function-related performance gaps and develops a series of programs to enable finance to unlock ROI and deliver more, sustainable value to the organization.

In general, a holistic transformation project assesses and executes against seven critical, functional areas:

  1. Organization: Assessing the role and reporting relationships of finance within the enterprise, as well as the leadership, talent, governance, and culture of the finance organization
  2. Delivery: Examining the ownership and location from where the finance activities are delivered effectively
  3. Process: Looking at the design, deployment, and ongoing management of leading practice finance processes
  4. Controls: Ensuring sufficient control structures to provide quality, accuracy, and confidence in financial reporting
  5. Technology: Analyzing the integration and management of innovative, cost effective, standardized applications and platforms; and exploring digital transformation opportunities
  6. Data: Assessing real-time access to accurate data and data structures necessary to enable reporting, analysis, and predictive analytics
  7. Business Analytics: Looking at finance’s ability to generate meaningful business insights to support decision making and continuous improvement

And, the process has clear, compelling benefits. The outcome of a (successful) transformation process enables finance to move from score keeper to forward-looking business partner, to embrace disruptive technologies and enterprise data in order to drive competitive advantage, and to contribute to EBITDA improvement while maintaining quality controls.  (Of course, there are unsuccessful transformation processes, but we’ll get to those later).

Transformation in the COVID Economy:

While transformation projects existed (regularly) pre-COVID, their purpose post-COVID, particularly in yellow-company scenarios, has been more explicit: control/reduce costs.

Cost reduction has an operational component to it, and the outcome of the transformation assessment frequently has CFOs revisiting their model: moving to a shared service or BPO model in order to reduce full time employees in the organization, etc.

But, controlling costs can also often have an investment component to it, that may (initially) seem counter-intuitive to many yellow CFOs. Investing in technology can actually serve to reduce spend by leveraging intelligent automation to replace headcount. Of course, investing in technology also serves to create value beyond cost reduction in terms of building a platform to support scale, facilitating commons standards to streamline processes, optimizing data governance to reveal a single source of truth, and unlocking information through analytics and big data.

Avoiding the Pitfalls:

Given pressure to reduce costs, combined with longer hold periods, sponsors are increasingly investing in finance transformation initiatives. But, as with all major undertakings, however, they’re not always successful. In fact, according to a Gartner survey, they fail often.  But they don’t have to. The key to avoiding failure, and reaping the benefits of a transformation are 5-fold:

  1. Creating a dedicated transformation program office
  2. Developing a business case for change and a clear vision for the future
  3. Identifying effective change champions
  4. Communicating and managing business partner expectations
  5. Getting stakeholder buy-in and visible executive support
  6. Demonstrating and celebrating early wins

Investing in the Yellow:

Finance transformation programs, when successfully navigated, can have a myriad of benefits beyond cost containment/reduction and EBITDA enhancement. And, they can help prepare even the greenest of green companies for scale and profitable exit. But, if the green is all about growth, and the red is all about financials, the yellow is all about operations. And so, transformation initiatives that seek to optimize those yellow company operations, through cost mitigation and technology enhancement, are not only particularly critical now, but come with the promise of real (needed) ROI.

Finance transformation in the covid economy

The outcome of a (successful) transformation process enables finance to move from scorekeeper to forward-looking business partner.

About the Author

Junaid Samnani
Junaid Samnani
Managing Director

Junaid is a Managing Director with nearly two decades of experience in numerous consulting leadership roles. His specific expertise includes performance improvement, technology transformation, merger integration, and divestitures. Over the course of his career, Junaid has led engagements for public and private organizations and has serviced more than 30 private equity firms.  Read more