Build versus Buy of G&A functions
for Private Equity-owned portfolio companies
by Alli Zheng, Ishita Korgaonkar and Amlanjeet Dutta
A fresh take on an old debate
“To be or not to be?” the prince of Denmark, Hamlet, famously asked. “That is the question.” Private Equity-owned businesses in this day and age find themselves faced with somewhat different, yet equally tricky, questions. “To build or to buy?” is a one that comes up often in the case of G&A functions. In this context, “to build” is to create an internal shared service capability from the ground up, often in a cost-advantageous overseas jurisdiction. And manage all non-business support functions from this location. “To buy,” on the other hand, means to outsource these functions to one or more third-party providers, often in a low-cost jurisdiction offshore.
In several deal thesis, there are several value creation opportunities tied to the optimization of the G&A functions, and post-close it’s one of the key initiatives, the Private Equity Operation leaders and portfolio management focus on starting to deliver deal value. A systematic approach may be considered to look at the P&L statement of the organization, analyze the sources of revenue generation, and the associated cost-to-serve. Our research and experience indicates that the mission-critical cost pools to address are the SG&A functions.
For the purpose of this discussion, the SG&A functions in scope – Finance, IT, Marketing, Sales Support and Operations, Inside Sales, HR, Customer Service, Trust and Safety, Contingent Workforce, Technical Support, Procurement, Real Estate, Facilities Management and some aspects of Legal – generally have established proof-points, service delivery maturity, established processes and tend to be IT-enabled.
Service Delivery Model Choices
Guiding the portfolio company through this process requires a structured analysis of the organization’s strategic priorities, internal management systems, process maturity, options modelling, including size of the prize, time-to-value, return on investment, impact of terminal valuation, and ability to leverage adjacencies, if any. A custom-built software product guides financial sponsors and the portfolio analysis through the structured process.
On conclusion of the structure, management can analyze their options and the relative trade-offs for each mega factor as well as a consolidated weighted view of all factors.
Based on the above analyses, here’s our view of management decisions.
