We understand the frustration of waiting for growth plans to kick in and deliver the promised results. Too often, plans laid in the autumn and enshrined in the budget don't start producing results until well into the next year — and then, because of the slow start, deliver a fraction of what they promised. Moreover, growth initiatives tend to focus narrowly on specific areas, yielding short-term gains without enhancing overall enterprise capabilities for sustained growth.
There is a better way to cut through the problem of stalled or siloed growth efforts — a proven approach that has been honed to a sharp edge by private equity (PE) firms to identify areas for revenue growth, value creation, and cost reduction, but is rarely used in the execution of growth strategy: due diligence.
When due diligence is done right, it's much more than an exercise (undertaken after a deal is agreed upon but before a contract is signed) to check that a target's books are in good order, to identify potential efficiency gains, and to probe for hidden problems with operations, technology, contracts, or customers; it's an aggressive search for opportunity on all fronts, including growth. And it's focused on accelerated, measurable results.
There's no reason to only do this in the context of an acquisition. We have seen companies of all kinds accelerate growth by using a "due diligence mindset" to identify commercial and operational opportunities fast — faster than usual — and get them moving faster than usual. And, because private equity firms have also been quick to adopt artificial intelligence and machine learning (AI/ML) to enhance and speed up the diligence process, their experience sheds light on how all companies can use it to achieve tangible growth gains within one to two quarters.
How to Use Due Diligence to Execute Your Growth Strategy
Here are a few steps from the due-diligence playbook that all companies can apply to growth strategy.
Establish an objective, discrete, and dedicated team to identify value-creation opportunities
Part of what makes due diligence work is its clean-sheet-of-paper approach — asking what a new owner can and should do with a set of assets. You can simulate this by creating new-growth teams within each business, connected to but separate from the operating team, and provided with key objectives. These teams, in turn, should coordinate on the enterprise level. It's a good idea to create teams that know the company and the industry, but are not biased toward or invested in business as usual. For the same reason, set this project up separately from the budget process and with specific, tight deadlines.
Find reference points and benchmarks from comparable companies and competitors
Good due diligence looks for cost, revenue, and other reference points from comparable companies or competitors. Reference points assessments are most often used to identify ways to optimize costs (for example, by comparing G&A or IT spending), but they can also uncover revenue growth opportunities grounded in real-world research. For example, they can show whether your company has higher-than-normal customer churn or lower-than-average cross-selling, and can illuminate what's possible in your industry. Pricing is another area; many vendors offer services that scrape competitors' prices from across the web. These can be adapted to find weaknesses in your offerings, or areas where competitors are vulnerable. Virtually all of these can be done faster and cheaper using AI and machine learning.
Reference points assessment has limitations. It's suggestive, not prescriptive. It's better at describing the size of a pie than how to carve out a bigger slice for your company. Ideas derived from company-specific insights can more easily become turnkey initiatives. Benefits inferred from benchmarks may or may not be realized. For example, the strategic and commercial diligence teams for one acquiring company we advised had forecast 14% revenue growth without considering that the target was already running its plants at full capacity and would need to upgrade its IT infrastructure to handle that level of growth.
Examine revenue and cost initiatives simultaneously
Here's where companies can improve on both prevailing PE practice (which tends to overemphasize the search for efficiency) and on the conventional corporate approach (which tends to handle growth and cost initiatives separately). Leaders are always asking where to get the money to fund growth. With a due diligence approach, you can answer that question by bringing cost and growth ideas to the same table at the same time. We worked with a satellite-services provider that came to us looking for ways to slash overhead; in the course of our work, we found that the company was hemorrhaging customers because it had under-funded innovation. We proposed that they use the money they were saving to fix the customer retention problem, beginning with a new customer segmentation strategy based on customer lifetime value. The company then used AI to build a model that identified which of its most valuable customers were most at risk, combining that with newly designed giveaway and upgrade programs that were targeted especially to that segment. The value of the new accretive revenue turned out to be three times greater than the value of the realized savings — and was entirely funded by those savings.
Build a "commercial fitness exam" into growth planning
An acquiring company almost always evaluates the structure, quality, and capabilities of its target's commercial organization. How good are its website and social media team? What is its sales force coverage model (geography or product line, etc.)? How does it manage major accounts, middle-market customers, small businesses? How does it handle sales pipeline reviews and lead management? These are elements of what we have started to call "commercial fitness." They are almost always ignored in growth strategy planning. For example, sales pipeline and service delivery reviews, which frequently become perfunctory, can be reenergized by tying them to growth plans and augmenting them with AI, which can be used to model customer behavior or identify customers at risk of leaving.
Instill a "deal thesis" mentality
Thinking like an investor can give precision and urgency to growth projects and focus them on the goal of increasing enterprise value. In PE and M&A, this is called the "deal thesis" — a plan for investment, cost cuts, commercial actions, and organizational change — that should produce a big increase in the value of the company. You want to make sure that individual business unit plans support and advance your value-growth thesis. You also want to favor ideas with the highest return on invested capital, because not all growth is equally valuable in its impact on shareholder value. One way to bring the enterprise perspective into the room is to include people from different divisions in a business unit's "growth diligence" team who are the experts in particular functions and industries. This can also be a great opportunity for high-potentials to show their stuff.
Exploit the opportunities that AI and machine learning generate — especially in segmenting markets
Data from a forthcoming AlixPartners survey of PE-firm executives shows that about a fifth are using artificial intelligence and machine learning in their due diligence, and a third are urging portfolio companies to use them to improve commercial operations. And with good reason: AI/ML can speed up many of the activities we've described, and also makes new kinds of initiatives possible. Not every company has the skills, processes, and technology to use AI well, but due-diligence-type growth projects provide a powerful way to develop and test them. One big opportunity is to target very specific sets of customers — what jargoneers call "hyperpersonalization" or "microsegmentation." For example, we helped a multibillion-dollar musical instruments retailer build an AI-powered "propensity to buy" model to analyze purchasing patterns to spot customers who were candidates for upselling and cross-selling. It was able to show which customers were almost certain to buy, which were almost certain not to, and — the sweet spot — which customers were persuadable, and which offers they would find most persuasive. Two campaigns based on those insights delivered 34% and 40% improvements on comparable campaigns from the previous year.
Lather, rinse, repeat
In dealmaking, due diligence tends to be a one-time thing — at least, one time per deal, with the process refined and repeated over many deals. But in growth strategy, a due diligence mindset can become part of a company's culture and processes — an institutional capability. This confers three advantages: First, you'll get better at it, just as sophisticated acquirers do as they repeat the process in deal after deal. Second, the investor's mindset you have created will result in a more empowered management team throughout the organization, which will create execution discipline. Third, (particularly when you infuse AI/ML into the process), your data set will become a living thing. The more you use it, the better the data become and the more parts of the process you can automate.
The process of due diligence is a core capability of private equity firms, but it's not unique to them. The same tools and experience can be found in most large companies, but they are off in the corporate development team — the folks who handle M&A, who rarely have a chance to apply their expertise to a company's ongoing operations. These steps can provide a seed that, planted and nurtured, can have a profound impact on growth planning and execution.
It is frustrating for executives to see growth plans lose momentum as conditions change or interest wanes. By adopting a due diligence mindset, leaders can quickly get visibility into the organization's fitness, where the opportunities are, and what is achievable. And by integrating the discipline of ongoing efficiency improvements with sustained growth efforts, winning companies are turning growth into a habit, not an event.
Originally published by Harvard Business Review.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
