PracticeAccounting FirmsView from the board: Tough enough?

View from the board: Tough enough?

A young investment executive in one of the top tier US private equity firms was bemoaning the performance of one of their investments

‘I don’t understand it,’ he said. ‘We bought this business on the premise
that we could reduce the cost base substantially and now, a year later, we still
have not been able to do that. Why can’t we drive the cost out of the business?’

No one had the heart to answer the question, because it wouldn’t have been
complimentary ­ but it was simple. He had never actually run a business in his
life. University had led to an MBA and that had led to employment with one of
the best firms in the market. But he had never had to worry about dealing with
procurement or driving headcount reductions.

Current market conditions have created a real problem for private equity and
a real opportunity for finance leaders. The credit markets are so tight that
there are few opportunities for refinancing or sale. So people simply have to
run their businesses better.

CEOs need to be reined back in and businesses need to be focussed on cost
management.

Now you have two options in this sort of situation ­ change the CEO or change
the CFO. If you take the first course of action, you really need to give the
incoming CEO three years to make a difference. This focuses the attention on
changing the CFO. The benefit of this is that you can bring someone in who can
make a step change in how the business is managed ­ a change that has much more
immediate impact.

In situations where you have to spend every pound wisely, a finance function
working hand-in-hand with the business is essential.

It can develop the right mind-set in operational management and transform a
business into one where its leaders are very focussed on saving cost. And when
everyone has a stake and when multiples could be four, five, six or more times
your money, saving a million here and there suddenly makes a very real
difference to your retirement age.

That young investment executive was daft to think the cost could be driven
out of the business. But a good CFO can find ways of reducing costs signifi
cantly, and can help to ensure the business is well run. It helps, though, if
your MBA (if you have one) is backed by solid experience and sound good sense.
For the brave-hearted, these are great times to be an accountant in private
equity. Really.

Mark Freebairn is a partner at
Odgers
Ray & Berndtson

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