Some General Partners (GPs) are missing out on significant savings opportunities by not combining shared services functions across their portfolio, and potentially foregoing upside on valuations.
Facing a lower-growth environment, pressure is on for GPs and their portfolio companies to reduce costs and increase operational efficiencies. One way to accomplish this is to have common support functions performed on a leveraged basis across multiple portcos while simultaneously taking advantage of lower-cost nearshore and offshore resources where appropriate.
Historically, portcos were encouraged to work with each other to find potential revenue opportunities, provided they remained operationally segregated to avoid messy detangling in the event of one of the companies exiting the portfolio. However, we have seen more and more portco leadership teams and PE GPs embrace the idea of leveraging low-touch shared services that can create significant upside value without hampering operational independence and any downstream monetization events.
The Opportunity in Portfolio Shared Services
We’ve worked alongside several PE firms that have not yet decided on whether to establish shared services centers or alternatively have outsourced the operations of any existing centers. Meanwhile, few of the companies in their portfolios have entered into multi-party outsourcing agreements independently and without the benefits of scale or sourcing leverage. The hesitancy on the part of GPs and their portco executives is likely a reflection of the generally held view that centralizing the needs of multiple companies in a single transaction or through a single entity would be too complex and might hamper the exit of any individual portcos – turning an IPO or sale of a standalone business into something more resembling a complex carve-out of a wider business.
However, we see affiliated companies outside of the PE ecosystem very frequently employ common outsourced IT, Customer Success, and other back-office platforms while realizing the benefits of internal economies of scale and lower overall costs. Many have standalone Global Business Service (GBS) Centers with their own P&Ls which they allocate back to their Lines of Businesses (LoBs) leveraging arm’s length pricing and documented Service Level Agreements (SLAs). With these observed success stories and the ability to track and carve out costs by GBS process, we believe it’s time to nudge GPs and their portco executives to overcome their hesitations and pursue opportunities derived from economies of scale being left on the table.
Questions for GPs and PortCo Executives to Consider
- How would the sale of a “receiver” portco that requires continued consolidated services from a “provider” portco be impacted and offset via transaction services agreements (TSAs) or other strategies?
- What happens if some of the portcos require different types of services or services at different levels than other companies in the portfolio?
- Would an ex-portco be capable of operating on a standalone basis – would the implementation of standalone operations or potential TSA requirements outweigh upfront savings?
AlixPartners Recommendations for Portfolio Shared Services
- Establish a standalone ParentCo-owned “provider” subsidiary (ServiceCo) that offers consolidated services. This ServiceCo would coordinate services contracts with third parties, and create new term sheets for potential TSAs on an as-needed basis for newly added “receiver” portcos to the service bureau.
- This prevents the “provider” portco from undergoing a liquidity event and runs it as a P&L center, which provides longevity to companies across the portfolio while preventing “ServiceCo” from being a drag on non-participating portcos.
- If an exit event of a “receiver” portco occurs, the TSA provides coverage for an assigned duration until the portco can independently stand-up required services, or its acquirer can replace them.
- Any consolidated services should be crafted to remain easy to disentangle (Ioose couplings) like credit card processing, recruiting services, materials procurement, time reporting, analytics, etc.
- Avoid tightly coupled single instance ERP or Sales & CRM platforms. ParentCos will still see benefits from consolidating demand and obtaining pricing concessions, but to maintain portco interdependence:
- Deploy unique “instance” for these broader common services
- Leverage standard operating procedures (SOPs) across instances as much as possible to ensure resources can be shared/moved across instances, minimize training needs and management overhead
- Ensure metrics, KPIs / dashboards are deployed to track, monitor, and flag performance
Hesitation abounds among GPs and portco executives when it comes to considering centralized shared services across the portfolio. We hope some of these considerations and recommendations can be used as guideposts for future explorations to create additional value and potential monetization opportunities.