For middle-market private equity funds, the past five years have been about cutting costs, refining operations, integrating add-on acquisitions, and searching for revenue growth opportunities.
As we start 2014, we notice that funds are looking for other sources of profit growth and are finding the following:
- The low hanging “fruit” has been harvested
- The global business environment is extremely competitive
- Real product and market innovation is complex and risky
- The M&A market is increasingly efficient and acquisitions are expensive
With much of the low-hanging revenue and profit-generating opportunities harvested, where should one look for fresh growth initiatives this year? We believe that 2014 is the year when strategic focus on people initiatives will accelerate profit growth:
- Hiring above the mean – In today’s world, customers have significant choices, which means that customer service is changing from an activity that is transaction-oriented to one that is relationship-oriented (think Whole Foods mentality across all business sectors and most business functions). Companies with a “relationship” orientation (like IKEA in this New York Times article) will challenge their traditional cost structures and pay more for better people, recognizing the direct connection between customer service, customer satisfaction, and profitability.
- A-Players – We believe the use of the relationship-oriented business model outlined above will increase dramatically in 2014 and, given the low levels of unemployment that we see for the “A-players,” finding the best people will be increasingly more difficult and costly if companies do not have a comprehensive approach to sourcing, recruiting, and integrating “A-players.”
- Return of training programs – Along with new hires, Companies need to focus on cross-functional training for all current and new employees. This knowledge will prepare employees to better provide the customer with 360-degree customer satisfaction and a comprehensive view of their organization’s capabilities.
- Technology – Companies with new or updated technology enable their employees to solidify a direct connection with the customer and, if done well and with the right tools, each interaction between a customer and the employee could result in increased revenue; many of us know and recognize that excellent customer service is rare (it is easy to talk about, but difficult to deliver on, like eating well and exercising!) and people willingly pay a premium for consistent excellent service.
In closing, the month of January has an etymology whose roots are with the Roman God of Beginnings and Transitions, “Janus.” We believe that with the recession behind us, revenue growth challenging, and the labor market tightening, new beginnings in 2014 will be anchored in the transition to a full-fledged focus on quality people at all levels of an organization.
See full newsletter here.