| 1888 Articles Home | Business Articles | Business RSS |  |
||
Private Equity Strategies: When Economies of Scale Fail |
||||
|
There are presently over 3000 Private Equity (PE) firms world-wide controlling hundreds of billions of dollars of productive capital seeking to create value for investors through the exploitation of their staggering buying power. As the number of firms and their capital resources have expanded, competition within the industry has heightened, driving up buyout prices, reducing the potential returns on investment and drawing ever more scrutiny to the critical nature of efficient administrative cost structures. |
||||||||||||
| Author: Don Steiner |
|
|||||||||||
While the concept of economies of scale is generally acknowledged as an effective means of reducing administrative expenses through the pooling of corporate-wide overhead under one or more vendor Master Agreements, leaner cost structures may not only fail to materialize as a result of these blanket contracts, but the PE firm may potentially be exposing themselves to profit-draining litigation and a loss of reputation.
Failure to meet profit objectives may likely occur due to:
• Impact of the 80/20 rule – while a blanket vendor agreement may successfully translate into savings for 80% of the PE firm’s diversified companies, it is likely to increase costs for the remaining 20% due to peculiarities in specific [service] usage patterns, and may result in higher overall expenses.
• Lawsuits - since earn-out and other performance-related compensation to management is tied to profit projections and objectives, unexpected administrative expenses may expose the PE to costly litigation; the implications being that the PE could easily lose far more than they stood to gain through the portfolio company purchasing program.
Two additional sources of projected cost structure failure lie in:
• Lack of validation of actual savings/cost reductions – the PE is rarely prepared to perform savings validation, and therefore relinquish control over meeting objectives.
• Confirmation of compliance – even with vendor agreements in place that promise specific rates and service levels, the PE is ill-prepared to confirm that these rates and service levels are actually being delivered.
Regardless of the specific cause, the misguided implementation of a portfolio company purchasing program fails to produce the intended competitive administrative cost structures, and hence, profit and related financial objectives, thereby exposing the PE to a loss of their reputation for delivering on investor expectations.
© 2007 Profit Recovery Partners, LLC All Rights Reserved
About Author
Don Steiner, founder and CEO of Profit Recovery Partners, LLC, is recognized as one of the nation's premiere experts in the area of administrative expense reduction solutions for the Fortune 1000. To contact Don, or for more information on how PRP may help your organization achieve a lean indirect cost structure and improved profit margins in pursuit of competitive advantage, please visit http://www.prpllc.com.
Article Source:
http://www.1888articles.com/author-don-steiner-5337.html
Other Related Articles Loans for bad credit: make your financial task simple by Carmen Cortez Relief From Debt Demon by amenda dorothy Secured Loans: Boost Up Your Personal Needs by Andrew Baker Private Equity Strategies: When Economies of Scale Fail by Don Steiner Payday Loans – Get Instant Help For Combating Urgency by Tom Dikkin Unsecured Loan – smaller risk free borrowing for any purpose by Andrew Baker Unsecured Loans – Borrow Funds Without Incurring Any Risks by Kara Wade |
