This blog post was originally published in Engineering Revenue, a weekly newsletter for investors, CEOs, and executives that helps demystify the principles of revenue generation and value creation for lower-middle market businesses.

How Private Equity Can Leverage Revenue Operations To Boost Portfolio Value

As go-to-market dynamics have shifted post pandemic, it is overwhelmingly clear that growth is a “team sport” and that there is a causal relationship between organizational competence in go to market effectiveness, organizational information sharing, customer experience, and cross-functional collaboration with enterprise value. Growth leaders are the caretakers of the assets that create the most value for the business, so building this organizational competency is a critical business discipline. This is especially true in private equity portfolio companies, where financially engineering your way to market alpha is no longer feasible. Instead, investment teams and management teams are going to have to work collaboratively to drive improvements in the company’s revenue operations functions to create predictable, sustainable, and scalable future cash flow.

Revenue Operations is a Fund-Level Issue

Revenue operations is a fund-level issue that requires top-down leadership and change management for a simple reason – it directly impacts their primary fiduciary responsibility to mitigate risk, grow the total portfolio value, and deliver the returns to LP’s that they expect. This is because organic revenue growth, and the commercial assets that create it, have become essential to value creation. In fact, the ability to grow revenues organically has created more firm value than all efforts to reduce costs, expand earnings multiples, and improve free cash flow combined.

How Investors Can Integrate Revenue Operations Into Their Strategy

The good news is that any business can unlock more growth and value by improving the return on their commercial assets. The bad news is that investors and their management teams still cannot agree on the causal chain of events that leads to revenue growth and the future cash flows that underlie firm value. This leaves investment teams and management teams without a financially valid way to make growth bets and tradeoffs and optimally allocate resources across growth alternatives. It also makes it difficult to build a business case and management consensus on the capabilities that can create the greatest value for the company. They understand these things are strategically important, but in most cases they lack a basis for evaluating and managing these value drivers and a tangible set of actionable initiatives to exploit them. This is exactly why the discipline of revenue operations management is a critical competency to develop if investors are going to grow the value of their portfolio despite the current headwinds they face.

For investors and managers that are new to revenue operations and its role in organic growth, we will explore several practical ways that they can integrate the concept into their current operations.

Revenue operations is at the heart of the private equity value creation playbook. It is all about identifying the levers within an organization that generate revenue. By assessing these levers, you can gain a fundamental understanding of how the revenue ecosystem operates, allowing you to make more informed investment decisions before you take operating control of an asset. 

However, traditional diligence feels more like a frantic home inspection where a team is quickly assembled to examine different high risk areas and make sure the house is in order. A few partners look at the foundation, another takes a look at the plumbing and electrical, and another looks at the roof. If investors want to underwrite more value, they need to move away from viewing diligence as an opportunity to find a leaky faucet. Instead, deal teams should look at this as an opportunity to identify and quantity ways to capture value during the ownership period if the deal transacts. For example, a deal team might identify new cross sell and upsell opportunities or new ways to monetize data, and quantify it as a balance sheet asset. Deal teams that orient diligence this way ensure that not only are their efforts conducted with a focus on value creation, but also that those efforts are building business cases that are grounded in actionable steps the firm can take if the deal closes. Providing value through the diligence period requires an analysis of the company’s core revenue generating assets, understanding the connective tissue between those functions, and determining the highest priorities items that can be tied to operational plans that drive P&L performance. Looking at diligence this way allows deal teams to be more aggressive in their bids, more confident in their offer, and be more competitive for assets.

The majority of company value is built on intangible assets – customer relationship equity, brand preference, data and insights, process know-how, and digital channel infrastructure to name a few. The challenge is that these intangible assets rarely impact revenue growth directly. Instead, they work through a complex series of cause and effect relationships. The primary goal of revenue operations is to understand these complex relationships and create alignment between the teams that execute the process that support growth.

When these assets underperform, investors and management teams have no financially valid way to make course corrections, determine tradeoffs and optimally allocate resources across multiple growth functions. It also makes it difficult to build a business case and management consensus on the capabilities that can create the greatest value. The underlying issue is that revenue generation is inherently more interdisciplinary and connected than ever before. It requires alignment of all assets that contribute to revenue generation to be effective. This is why assessments like Quality of Revenue have proven to be valuable, particularly for underperforming companies. 

Looking at a business through the lens of revenue operations allows teams to examine how companies operate and why certain assets perform well and others underperform. This reveals the key underlying drivers of revenue generation, and allows management to identify and fix any cracks in their revenue generating foundation. With proper diagnostics and action planning, leaders can begin to address the underlying root causes of stagnant revenues instead of just treating the symptoms. This examination provides management teams with a performance improvement blueprint for knitting together the systems, processes, and operations that support revenue growth in ways that generate scalable, predictable, and consistent growth.

In the years when multiple appreciation could reliably deliver the majority of buyout returns, deal teams were willing to take considerably more risk. But that kind of approach has gone the way of 0% interest rates. Today’s higher capital costs, increased competition for assets, and economic uncertainty mean the margin for error in underwriting a deal has shrunk substantially. Buyers are reluctant to bid without convincing evidence that every dollar of projected earnings growth is plausible and achievable. This is why a strong exit story is critical. 

Ideally, it is an extension of the original value-creation plan, meaning the company has, in fact, made a significant step forward in performance and effectively positioned itself to capture a new, robust phase of growth.

Imbedding revenue operations in your exit plan helps you tell a complete value creation story to prospective buyers. By focusing on the alignment of the assets core business functions leading up to an exit event, you are able to demonstrate a clear understanding of how the company’s people, processes, and systems work together in unison to generate revenue. This can help build confidence with potential buyers that the future cash flow they are acquiring is sustainable, predictable, and transferable. 

Additionally, you are also better able to communicate where you believe money is being left on the table and where the right investment and management team can come in, take what you have already built, and make measurable improvements leveraging their firm's investment strategy and approach to growing value.

Opportunities for value creation exist across the entire deal cycle. Knowing when and where to get an assessment of a company’s underlying ability to generate organic value is crucial to build value creation plans that result in crisp execution. To do this effectively, investors must find ways to leverage data, systems, insights and process improvements to unlock more revenue growth from customer relationships, selling channels and markets they already have access to. This makes the ability to reliably assess, improve, and maximize a company’s core underlying ability to generate these future cash flows a very important business discipline.

The QoR assessment model is built on the premise that sustainable revenue growth is significantly influenced by internal operational levers and functional drivers. These include, but are not limited to:

• The alignment of the commercial teams, systems, processes and operations that support the full revenue cycle across people, product, process, and technology;
• The robustness of the core functional capabilities in marketing, product and revenue cycle management;
• The strength of growth leadership and the growth strategy, planning process, and culture they have instilled;
• The maturity of core operational capabilities in pricing, analytics, performance measurement, and customer experience management.

Through a comprehensive evaluation of 50 distinct criteria across 12 core operational domains, the QoR model offers private investors a granular view of a company’s revenue generation ecosystem. This assessment facilitates the identification of potential gaps in execution and strategy alignment, thereby enabling targeted interventions for improvement.