Operational Management:
The key to success in SME acquisitions
The Reality of Operations Management
Unstable processes lead to more losses than just lost sales, margin and EBITDA
In most SMEs, processes are insufficiently controlled, stable and/or formalized. This makes the outcome of those (production) processes uncertain and prone to error.
This leads to internal rejection, inefficiency, high operational costs and customer complaints. As a result, managers are busy adjusting operational activities or fixing errors. Apart from failure costs already factored into the outcome, there is also an invisible cost: the opportunity cost of lost time. Time that has gone into fixing mistakes and maintaining the status quo.
Time that is therefore not available for other things, such as realizing growth plans.
Different role, different responsibilities, different behavior
With a new shareholder on board, expectations for the management team may change. Instead of being primarily the day-to-day manager, more focus is needed on developing new activities and markets. This changes the role of incumbent management. Managers who were previously successful may need support with new challenges. This is because the old behavior no longer fits the new responsibilities. But beware, those steps should not be too quick or too big. Hurry slowly. In other words; in most cases, the organization cannot go any faster than they have shown in the past. Past is prelude.
Imperfect management teams
Although rarely mentioned explicitly, many management teams within SMEs are not always effective. Decision-making is driven more by historical results and personal alliances than by facts and common goals. This hinders effective business operations and thus is a source of lost time and opportunity.
Consequence: new plans in old implementation usually fail
Because of the combination of daily operational pressures, adherence to old behaviors, and ineffective management teams, managers and new shareholders overestimate the organization’s ability to realize new plans. New plans in old processes lead to repetition and, unfortunately, unrealized returns.
The Reality of Operations Management
The lure of “sexy and wild” and…
New shareholders tend to create value in high-risk activities such as launching new products, entering new markets, back-office integrations, Pricing Excellence or other commercial adventures. And these are also very good initiatives when used at the right time. Often these activities are too complex to begin with due to the aforementioned arguments. It is wiser to focus first on disciplined and stable operations. So first get the basics sufficiently in order and free up time for more complex issues that deserve the full attention of the management team.
…The often overlooked ‘boring but sure’
Investors and upper management often have a blind spot for the costs hidden in suboptimal day-to-day processes. Improving these daily/operational processes actually offers a low-risk, high-return opportunity for freeing up time and money. Consider also reducing lead times, fewer rejects and lower inventories. By strengthening the operational foundation, it actually makes it possible to carry out more risky activities successfully. And, en passant, eliminating waste leads to improved margins, EBITDA and working capital.
Solutions
Prioritize process-oriented operational due diligence
Even where access to people is limited, more substantive work can be done on operational due diligence. For example, documents such as status reports and operational KPIs, quality management system, maintenance plans, incident reports, customer complaints, continuous improvement initiatives, onboarding and training plans, can be retrieved and measured against standards within that industry. This provides insight into the organization’s maturity in operational management.
Make strengthening operational processes the core priority in acquisitions
Immediately after acquisition, make a deeper assessment of the operational organization first. Does it turn out that the company is less mature than thought in terms of operational management and Continuous Improvement? Then assess how realistic the growth plans are and what it will take to get the basics right. Strengthening operational processes can improve operational results in the short term. And the success rate of more complex projects later increases.
In the first few months, make support available to the management team
Make support available to executive, and management teams. Particularly effective are consultants who have had operational line management responsibility. In doing so, it helps that SME boards have help available from people who understand both the perspective of the new shareholders and the perspective of management. Because these consultants speak both languages, they can bring both perspectives closer together.
Conclusion
Successful growth and ambition following an acquisition require a view beyond financial, commercial and legal facets. Understanding the maturity of operational processes and the power of operational management is also critical. By being aware of potential pitfalls and approaching them proactively, investors and management teams can significantly increase their chances of success. Some recommended steps include:
- Assessing the maturity of daily processes before or immediately after acquisition.
- Identify and eliminate waste in daily processes immediately after acquisition.
- Offering targeted support to current management shortly after acquisition.
- Timing new initiatives until operational processes are stable.
By adopting these strategic priorities, an organization can unlock its full potential while generating short-term value for all stakeholders.
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