Q&A with Mark Billige: “Private Equity Investors Value That We Can Leverage Our Experience to Drive Change”

June 18, 2019

Mark Billige

Simon-Kucher specialises in working with companies to grow earnings. How do you differentiate your offer and how does your firm interface with private equity?

We are a specialist in top line growth and that encompasses all aspects of pricing, sales and marketing. The business employs 1,500 people and has 120 partners. We have deep expertise in our specialist area and apply that expertise across a broad range of sectors. Whether you need work done on the pricing of mining equipment in Argentina, or consumer finance in Italy, we will have an expert in that area.

Private equity has become an enormous part of our business and what has been interesting to observe is how the tide has turned with respect to how private equity firms engage advisers. There is a move away from the house consultancy, that applies the same rigid playbook to every situation, in favour of keeping a small stable of specialists with unique capability and expertise. We work with a diverse range of firms, from regional mid-market houses through to the large global firms.

One of the advantages of specialising is that we have seen and done it before. When the call comes in we would almost certainly have worked with a company of similar size in the same sector at least once or twice, and can deliver results quickly as a result. Private equity investors move at pace, so they value the fact that we can leverage our experience to drive change. The top line is also front of mind for dealmakers at a time when assets are fetching high valuations. They value what we bring to the table because top line growth drives bottom line growth and that drives the multiple on exit.

When are you typically engaged by a private equity client? Who do you work most closely with and how and when does the value you bring crystallise?

We work directly with the portfolio company and we secure that work through the financial sponsor, who will recommend us to the management team. What sponsors and management teams like is that the value from working with us crystallises within a few months of an engagement.

We deliver that value by looking at pricing and revenue models, which have a direct impact on revenue. Take pricing, for example. Increasing pricing is usually seen as a painful exercise by management teams, because it means awkward conversations with clients. But if you can increase the margin of a 20 per cent margin business by just five per cent, that feeds through to a 25 per cent increase to the bottom line pretty much straight away. It is as immediate a lever you can pull.

There is a science to increasing prices, however. Take the software industry, where the model has moved from a one-off installation license model to a model where users are subscribing to a service. That transforms how the product is sold, how often you can bill and how, and what, you charge. There is more complexity and detail involved in increasing prices than simply pushing a rise onto customers. It encompasses understanding and analysis of revenue models, sales team structures and marketing, and knowledge of how these elements fit together.

One trend we have noticed is the increase in the amount of upfront work firms are doing before closing a deal, so that they can hit the ground running on day one. Have you observed this in your interactions with private equity?

It is an interesting development. Most of our private equity work still involves coming in post-deal, but an increasing proportion does see us coming in pre-closing to give a view on pricing or sales that feeds into the due diligence and value creation plan.

The increase in the amount of work firms are doing upfront comes down to the fact that in order to acquire assets they have to write bigger cheques. If an opportunity to increase revenues is flagged in the IM, then firms are obviously going to want to stress test and validate those assumptions, because a material increase in revenues is what makes the asset buyable at the asking valuation.

Private equity dealmakers are definitely looking closely at valuations and asking what they can do to increase prices or improve marketing. They want to know that later on they can bank what they are underwriting now.

From our point of view this is a great way to work. Topping up the due diligence and contributing to the growth plan opens the door to coming in post deal and working with the firm and management team to deliver on those plans.

Buyout firms conduct detailed research and due diligence on the companies they buy and the markets those companies operate in. They also have a keen sense of value. What do you bring to the table on pricing and sales that private equity firms don’t know or see themselves?

Every firm kicks the tires and does a deep analysis of what they are buying, but it comes down to being a specialist. We have the global and sectoral depth in our focus area that allows us to drop in a team of 25 people with specific experience to work on a transaction, whereas private equity firms will have a number of other priorities to look after. They will have an understanding of pricing and how to manage it, but with our specific knowledge we bring ideas to the table that the financial sponsor wouldn’t have thought of.

Once engaged to work with a portfolio company, how do you manage the human aspect? I am assuming that pricing and growth strategy is something that senior management are very closely involved with and will want to maintain control over. How do you win management team buy in?

It is quite interesting. Pricing isn’t necessarily the first thing that a private equity firm or management team will look at after a buyout, but it touches every aspect of the business, from customer fairness and sales culture to marketing and the chief executive’s vision for the business. It is one of the most immediate levers to pull, it is also one of the most complex.

Increasing prices is emotional for the customer and owner, and almost every sales person we speak to will think that if you increase price you will lose a customer. So it is crucial that we understand the dynamics and secure the buy-in from management for what we are doing.

As I mentioned earlier, our introduction to a portfolio company will come via a recommendation from the financial sponsor. Although strongly encouraged to do so, the management team won’t be forced to hire us, but we normally find that one of the main reasons for partnering with private equity is to tap into their networks of experts and advisers like us.

Co-operation from the beginning is therefore important, and generally we find that when we explain that we can help a business increase revenue by 20%, management will get behind us. Another important part of securing buy-in is to back up what we say with evidence. When we challenge existing pricing models, for example, it is about using benchmarks and replacing anecdote with fact.

Tweaking pricing does come with risk, so you have to do the preparation and understand who the customers are, but if it is done properly the additional money can start hitting the bank account within eight to 12 weeks in come cases. If you can deliver that then teams will run with the changes. But it comes down to an ability to get it done and be pragmatic. It is not simply doing the maths.

When considering the various projects you work on, how many are entirely bespoke and how many lend themselves to the implementation of models and methods that you have already seen before?

The themes are generic but the situations are bespoke. Every business is different and has its own idiosyncracies, but each sector will have clear themes that come up time and again.

In a software-as-a-service business, building out a subscription model will be a recurring theme and you would never come in and introduce a massive price hike at a discount player that competes on cost. A company selling large back office systems, meanwhile, will look at pricing entirely differently to a hosting company that sells its products off the rack.

The trick is to build a case up from the bottom up rather than impose a thesis from the top down.

Following on from that, are there any particular things that you find you are doing time and again irrespective of the size of company or its sector?

The sales structure and culture is one area that is always fascinating to look at. There is the entrepreneurial model, where the sales team know their clients and are incentivised sensibly; and the command-and-control rate card model, where pricing is rigid with limited scope for discount.

If a business has thousands of customers it will usually have a command-and-control model, but if it is selling a complex product in an area like radiation monitoring, where there is a two-year sales cycle, then you are not going to sell off a rate card.

Many companies will fall between the two, and we usually work on pushing the pendulum one way or the other.

We work closely with the company to make that change. It involves exploring why a product is sold for 100 rather than 120 and creating pricing transparency across the sales peer group. We will also bring in positive pricing guidance and explain to sales teams that they can make more commission if they never sell below X and aim to sell above Y. We will also help sales teams to coach customers through price increases.

Pricing is ultimately as much about psychology as it is economics. We really dig into why products are priced the way they are; and why and how salespeople choose the paths they do.

Finally, how has pricing and sales strategy changed over the last ten years, especially taking into account the way tech has disrupted sales models and introduced more price transparency?

Technology has certainly had an impact on how customers buy products and what they pay, but it is important to see digital as a new sales channel and distinct product.

There has been distintermediation. You don’t buy flights and holiday accommodation from a High Street travel agent. You buy it online and that channel shift has brought more price transparency.

It is easy to assume, then, that digitalisation always means prices come down, but that is not the case at all. There are more players around, because technology has lowered the bars to entry, but that simply makes pricing more complex rather than lower.

Take online insurance policies. There is pricing transparency but there is not value transparency, and that influences how the customer makes a decision. No-one is going to base their decision on what insurance to buy solely on price, and that makes the pricing environment more dynamic.

There are hundreds of products at different pricing points, and what we have found is that the ratings of the product are as influential in the buying decision as the price. So there is space to increase price, even when there is greater pricing transparency.

If you just plugged in the computer and left it to set pricing, prices would keep going down until there was nothing left. There needs to be a brain on top looking at the strategic questions.

We see this all the time in our work with unicorns. We have more than 30 unicorn companies on our books and one of the themes that comes up across the piece is how to disrupt a market without destroying price. Technology is not a replacement from pricing strategy.

This was originally feautured on realdeals.eu.com