Excepted from 2006 speach appearing at http://www.kkr.com/news/speeches/02-21-06.html
Today, if you talk to a KKR professional for any length of time, you will likely hear the firm’s mantra: “to be successful, the real work in a private equity transaction begins on the first day of owning a company. Buying a company is easy. Just pay enough and you will own a company.” The hard part is making changes in the way a company operates so as to increase shareholder value. In the late 1990s, we made mistakes by not immediately getting the management of a newly acquired company to agree to certain first steps for change. We thought management had gone down the road and turned right, but in fact they had turned left. We had to find them and bring them back to where we thought they were going. This is time consuming and set us back by six months or more.
To make sure we corrected this mistake, we began implementing a “100-day plan” that is agreed upon by management and ourselves. This way we ring-fence the management and have an agreed upon plan to immediately improve the operations of the company. This plan is a detailed agreement on the steps necessary to achieve strategic and operational goals – for example, what are you going to do to improve margins and productivity? How can we shorten the supply chain? It is a very detailed, line-by-line, person-by-person review and strategy. In many ways, it looks like a 100-day plan that, say, GE would implement once they buy a company. A 100-day plan assigns specific responsibilities to managers, KKR professionals, and our own in-house consultants and is an effective means of holding management accountable for results. This one improvement in the way we operate is probably the most important change we have made.
In addition to the daily or weekly KKR interaction with management, KKR actively monitors its investments at the board level, and we rigorously review the performance of companies before our portfolio committee. When necessary, we put people in the company who work with management to improve certain operations. A key KKR resource for strengthening operations is our in-house consulting business, called Capstone. We didn’t have a comparable resource for most of the 1990s, and, consequently, we had been missing opportunities to improve businesses. With a team of 18 consultants based in New York, Menlo Park, and London, Capstone focuses on operational issues that have an immediate impact on the bottom line in such areas as manufacturing, product sourcing, and sales and marketing. We don’t require our companies to use Capstone, but we find that most managements eagerly embrace its operational expertise and bottom-line focus. In fact, our biggest problem is getting the Capstone personnel back from the company where they are working, because managements want to keep them engaged since they are truly value added.
One of Capstone’s most valuable contributions is helping our portfolio companies develop actionable metrics to monitor performance. I have been very surprised how few companies have truly good metrics in place. Financial statements, as valuable as they are, give you a rearview look at performance. Appropriate metrics in manufacturing, sales, distribution, purchasing, and other areas help you look at a business going forward. They identify opportunities to improve operations and measure progress toward goals.
Our input, including metrics, 100-day plans, and active monitoring create a productive sense of urgency in our portfolio companies from the first day of our ownership. These changes have been very instrumental in the strong improvements in our portfolio of companies.
When we looked at our business in the late 1990s, we also recognized that the world was shrinking and that we needed to have a global footprint. Many of the companies we buy are multinationals that require diligence and operational efforts across different markets. In addition to our offices in New York and Menlo Park, we have opened offices in London and Paris and we have recently established a presence in Asia, with new offices in Hong Kong and Tokyo.
Our global perspective not only helps us make better investment decisions around the world, but also strengthens our ability to improve our portfolio companies – wherever they may be. For example, we can help our U.S. and European companies globally source key parts, shorten supply chains, and enter new markets due to our Asian presence.
