Written by Peter Ward, 15 August 2022
Maybe continuity of ownership is getting in the way of renewal
Those who know me will know I am heavily influenced by the continuity agenda. Corporates can get stronger through nurturing a common culture, learning and innovating together so that the needs of all stakeholders are met over time. They have a business model which assures good returns for shareholders over time while retaining funds needed to invest for their continuing prosperity.
But recent experiences have illustrated a need for a redefinition of the business that might continue. The reality is that, as a business grows, the needs of the individual business units differ. Some will be in that part of their business cycle which requires investment and, perhaps, will be promising lower current returns. Others will be in a growth sector and will be harvesting the returns of past investments. Quite understandable and in the old days of portfolio management, diversity would have been seen as a strength.
But now? An investor may be less likely to see the benefit of a portfolio and more inclined to look at the component parts. Capital will be allocated to the faster-growing parts of the business and those where investment may be needed, but with only longer-term returns in prospect, might struggle.
Such was a recent case for a group that was contemplating going public. The combined performance was excellent and recent improvements in profitability impressive. But did it impress the market? Well, yes…but:
Would it not be better to split the business so that investors with a specific sector interest could engage?
Where is the value add from having these businesses in one group?
Are we getting value from the head office functions that co-ordinate and report activity?
With my continuity hat on, my first reaction was ‘shame’, but then, applying my continuity thinking to the individual businesses, this was potentially a better result for all of them:
It would provide necessary focus for each of the businesses
It took decision-making down a level and closer to the end customers
It eliminated an element of internal reporting
Each could run at a pace appropriate to their markets and other external circumstances
And once they had got over the regret about the break-up, the energy released through establishing ‘three new market facing businesses’ was impressive. Yes, trading as a group was rewarding and sharing a positive culture enabled higher performance but taking that culture into the separate businesses created stability through the transition.
The real learning came from the value released in, what was seen as, the least attractive part of the business. No longer competing with the higher growth businesses for investment funds, it is now able to develop a long-term strategy to partner with significant organisations in more traditional industrial sectors as they focus on their impact on climate and the use of the earth’s natural resources.
Made me think. There must be a lot of unloved businesses that are consolidated into a group, rather than separated out to realise their own potential. I recall a conversation with a frustrated divisional executive who found his profitable, but not core, business consolidated into an ‘irrelevant’ division for reporting purposes. Another level of reporting was too much to bear and resignation an inevitable consequence. What if that executive had been consulted to examine options for that business on a stand-alone basis and the impact that might have had on its potential? Maybe, just maybe, the continuity for that business would have been enhanced through new ownership. Or maybe a new understanding by its current owners.
We continue to operate in challenging times. The pandemic and geopolitical issues are impacting markets, costs and supply chains and many are anticipating difficult trading conditions into 2023 and possibly beyond. We can see an emerging need to manage costs and, if past experience is anything to go by, the cost reduction pressure will be applied not just to operating costs and overheads, but also to areas of investment. Where the investment is discrete, it will be possible to reassess the business case and make a decision on continuity, modification or discontinuation. But what about the hidden investments? The HR budget for learning and development? The staffing levels to allow for ongoing development of future generations? The investment in digital resources that are likely to be needed to meet future product development? The marketing campaign that will take time to support future demand? None will impact on immediate results and therefore might be seen as fair game, and perhaps an easy target, for cost reduction.
I wonder whether there is a smarter way to maintain momentum in these investment areas and yet still meet the needs of the organisation to reduce costs.
We have recently been involved in the potential ‘carve-out’ of a unit of highly talented professionals that were threatened by redundancy, based not on what they were doing and the potential value of their outputs, but on the cost of their inputs and the potential to reduce costs on an ‘across the board’ basis. It is possible that we have found a home for them in a like-minded organisation that will absorb the people and contract with the organisation to provide a service to the former company within their new cost constraints. In looking at this transaction, my thoughts strayed into ‘what if’ territory:
What if this part of the business had taken charge of their own destiny 12 months earlier and taken their commercial proposition to the host organisation?
What if the difference in this talent pool had been recognised and set up as a profit/capability centre rather than a cost centre?
What if we had the time to find investors that would back the buy-out?
Unloved businesses and unloved functions. No one will admit this, but as soon as there is cost pressure, it becomes evident as to who is deemed essential to the future of a larger organisation. Time to look at continuity on a more granular basis to the benefit of the host organisation and the people involved.
Maybe it is time to consider new owners for these businesses and part businesses. Too late when we are embarked on cost reduction but not too late if we start identifying those ‘at risk’ and inviting them to explore options. Given the likelihood of slow trading for the foreseeable future, maybe the time is now.
Is it time to look at continuity on a more granular basis to the benefit of the host organisation and the people involved?
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