Le Blog’Ich

As I was recently reviewing documents regarding a company’s financials, highlighting the gaps vs. plan and their suggested actions to close the gaps, one thing really struck me; all documents were showing that the numbers were below target across all regions, businesses etc. especially from an EBITDA perspective and the Management’s one and only response was to systematically cut cost; while the target was at times off by more than 20%, it was never suggested in those plans that maybe the target should be revised and that the plan was too ambitious, or that there was something bigger there than just an efficiency issue. Cut, cut, cut…

This is the symbol of my favorite topics and one I will likely post a lot about in the next weeks/months: value destruction due to short-termism and Private Equity Ownership. It’s a sickness, and that Company seems to have all the symptoms.

The way it typically translates, is that everything will be cut to reach unrealistic targets, so that the Investors and incentivized Top Management can exit at a profit as fast as possible, regardless of what happens next. Typically, in the long-term, those actions hurt the company and ultimately destroy value but who cares? The decision-makers will be long gone then.

In the case of Company X, I am amazed to see the type of decision-making process they used: for example, where the top-line was also declining due to clients challenging the value of the service they received and hence pricing, Management instead of trying to “fix” the business and invest to justify prices to their customers, what did they suggest? Well, they decided to reduce headcount drastically, to cut training expenses and incentives, i.e. jeopardize the quality of your delivery, only to meet the bottom-line target, rather than challenging it.

At this stage, taking such actions is not only short-sighted, it is a self-fulfilling prophecy…