Why is productivity more important than ever?
Productivity improvement is an important focus area for anyone seeking to build a more resilient business. It is also an effective route to building a more valuable business if you are thinking of selling.
Productivity improvement is a major motivator for acquirers. It is described in different ways, but ultimately, all amount to the pursuit of improved productivity. The motives list is long, but might include for example:
- Recurring revenue
- Access to clients for cross-selling
- Automation
- Filling skills gaps
- Advanced systems and processes
- Innovative, disruptive, lower cost business models
- Unique data
If productivity is a major motivator for acquirers, then owners considering a sale are wise to also recognise and focus on it.
Definition and business benefits
Productivity at company level is simply a measure of how efficiently and effectively outputs are produced from costly inputs. Greater efficiency and effectiveness in how inputs are used leads to greater productivity.
So far so simple you might say, every company already seeks to make the best use of inputs, don’t they?
The evidence doesn’t support that view. Pretty much every company operates in a competitive environment and it is possible to benchmark productivity against your competitors. The most productive businesses in any sector enjoy freedoms and characteristics which less productive businesses do not:
- They produce more outputs from the same inputs.
- They convert inputs to outputs quickly, releasing surplus cash from margins for re-investment into priorities.
- They have greater pricing flexibility when its called for and can apply significant pricing pressure to competitors.
- They enjoy higher profit margins.
- They systematise how they do things, documenting the causes of success so that they are repeatable and teachable.
- A culture of continuous [productivity] improvement is “baked in” to their commercial DNA.
That’s quite a list of [enviable] benefits which not surprisingly gets acquirers very interested.
If you want to be a prime target for acquirers and you want to sell for maximum value, a focus on productivity is a very good place to start.
Productivity improvement
Productivity is an output which results from the right inputs and how they are used. What we are really talking about here is process improvement and optimisation. A process is of course, the actions undertaken to convert inputs into outputs.
Process improvement and optimisation activity though, has a wider scope when preparing for sale. Yes, look inward to identify inefficiency and ineffectiveness, but look outward as well.
Look outward as well as inward
When preparing your business for sale looking outward includes your customers, but also your peers and your likely acquirers – the latter being indispensable.
Every business wants to understand customer needs to shape products and services which best meet those needs.
When considering a sale, a business owner should liken an acquirer to a customer. Getting to know the acquirers [customers] specific needs and wants enables you to assess your saleability. Informing how well you meet acquirer need, it also provides clarity for how you prepare for sale.
Let me give you one common example of something which really motivates acquirers, the first item of my opening list in this article.
The risk reduction, compounding and productivity enhancing effect of recurring revenue is well understood. The presence of recurring revenue alone, however, is not sufficient to motivate an acquirer. An acquirer will almost certainly have expectations about what percentage of turnover should be recurring. An acquirer will also look very closely at client retention levels, the longevity of those recurring revenue relationships.
This acquirer expectation is repeated across the numerous attributes which get acquirers seriously interested. It is both the presence of an attribute and its qualitative nature, as defined by the acquirer, which must be present.
Additional benefits and conclusion
I try to steer clear of economic forecasting if possible, but I will share this view anyway. If I’m correct the added business resilience benefit of productivity gains will be invaluable. If I’m wrong, the benefits described above still accrue to your business anyway.
There are some key events which may mean we will have to get used to higher inflation:
- The unwinding of what has been a deflationary cause for much of the last few decades, offshoring to lower wage economies, China most notably.
- The pandemic will cause supply chain re-engineering to accelerate – reshoring or nearshoring was already underway. The cheap[er] labour motive is now more likely to be displaced by other imperatives, for example ethics, security, continuity, quality control.
- Lesser free trade with the EU, possible tariffs, or more likely, heightened compliance costs.
- There is inevitably some pent-up demand which when released will be inflationary in some sectors – although this may not be sustained over the medium-term.
In conclusion, focus on productivity, it makes good business sense no matter what.
If you are considering how and when you might sell-up, it is a route to building a more value-adding business whilst you still own it, and a more valuable one at the point of sale.
Fivefold provides solutions which deliver productivity improvement in a business sale context – enabling our clients to look inward and outward.
We combine expert M&A research, analysis and market engagement skills with process improvement and optimisation capability.
Steve Anstey - Managing Director
