“Too many portfolio companies have not invested in tech for too many years and find themselves playing catch-up.” - Marty Moore, Operating Advisor, Tenex Capital Management
On this episode of our Expert Insight Series, Blue Margin's CSO, Jon Thompson, hosts Marty Moore, Operating Advisor for Tenex Capital Management, an operationally focused private equity firm investing in mid-market companies. Marty joined Tenex with a decade of experience in digital marketing and analytics via pharma company Loeb Enterprises, the startup Blink Health, and AI service provider IP Soft.
Founded in 1999 in NY, Tenex has over $3 billion in assets under management (AUM) across the commercial services, energy, healthcare, retail, and IT sectors. In fact, Inc.com featured Tenex as a 2022 Founder-Friendly Investor Honoree (Winfrey, 2022). Tenex's high ratio of operating partners to deal team partners highlights their passion for operational excellence. To that end, Marty spearheads the firm's use of advanced data analytics to accelerate operational excellence in the portfolio.
5 Key Takeaways:
- Data visibility allows leaders to manage by exception and work more efficiently.
- Data visibility supports distributed decision-making and gives employees ownership of their part in the value creation plan.
- Investing in disruptive technologies is essential to stay competitive.
- Tenex's strategy for using dashboards to monitor portco performance and "manage by measurement".
- Data’s impact on valuation and differentiation.
Managing by Exception and Overcoming Resistance with a Founder-Friendly Approach
Tenex Capital uses data analytics to support their process of intervening in the portfolio only when financial and operational key performance indictors (KPIs) are lagging (Accounting Tools, 2022). Traditionally, management by exception has been hindered by retrospective, point-in-time data (Jain and Vaidya, 2022). Business Intelligence (BI) dashboards overcome this disadvantage with automatically updated dashboards, allowing Tenex and their management teams to make informed decisions in real-time.
Overcoming resistance to change
“At no point do I try to avoid that resistance. I take it in stride and work through it with the person so I can try to win them over.” - Marty Moore
Rather than taking a dictatorial approach to change, Marty recommends asking management teams for their input, building a partnership around an agreed-upon goal. McKinsey and Company cites this kind of partnership building as the #1 best practice for a private equity firm, writing, “A shared mission focused on a deal’s full potential is the glue that will make partnerships sustainable across the PE firm and the portfolio company’s management team.” (McKinsey and Company, 2021). Being listed on Inc.com’s 2022 Founder-Friendly Investors List testifies to the firm's shared-mission philosophy.
The Power of Distributed Decision Making
“We want to make sure that an employee can see how their contribution is helping to achieve the higher-level goals for the entire company.” - Marty Moore
How data can accelerate results
Business intelligence coalesces disconnected data into narrative-centric dashboards that bring visibility to the team and help drive accountability to the value creation plan. In a portfolio company environment, improving outcomes stem from these foundational steps:
- Investment and management teams align on the value creation plan.
- Objectives are broken down into team- and employee-level goals with KPI measurements.
- Shared visibility into KPIs creates a healthy accountability that empowers employees to take ownership of their work and to use data to monitor and improve their contributions.
A framework for setting KPIs
An important but often neglected step of the process is defining key metrics. In The Game of Work, best-selling author, CEO, and consultant Charles Coonradt gives three parameters for effective metrics (Coonradt, 2012). Measurements should be relevant to the process, they should be precise (real numbers), and they should make work an enjoyable "game" because they show participants whether they're winning, and how to win.
Avoiding Obsoleteness - Invest in Technology
“Too many portfolio companies have not invested in tech for too many years and find themselves playing catch-up.” -Marty Moore
With a recession on the horizon, it’s natural for leaders to adopt a contractionary, defensive stance, but reducing technology investments in the 2023 budget isn’t necessarily the most effective way to advance. In fact, Bain & Company has consistently advocated for strategic investments during bear markets.
To this end, the 2022 KPMG U.S. CEO Outlook surveyed 400 U.S. CEOs on current challenges and opportunities in driving business growth. The survey found that, despite 91% of CEOs believing that there will be a recession in the next 12 months, and only 34% of CEOs believing that it will be mild and short, 72% of CEOs continue to invest in digital transformation (KPMG, 2022). “CEOs identified advancing digitization and connectivity across the business as their top operational priority to achieve their growth objectives over the next three years (KPMG, 2022).”
In light of these findings, the growth-minded trend is to invest in technologies that advance digitization and connectivity (e.g., data analytics, BI, Internet of Things (IoT), and machine learning (ML)). Likewise, Marty recommends business leaders avoid obsolescence by adopting technologies at the forefront of progress, rather than succumbing to a fallback position.
The Power of Dashboards for Monitoring Investments
Dashboards serve both portfolio companies and their private equity sponsors. On the PE side, Tenex leaders daily rely on dashboards for insight into portfolio company performance. Tenex maintains a room of wall monitors, each assigned to a specific portfolio company. As a result, they maintain a dynamic lens into the real-time performance of their portcos, rather than settling for a diminished, rear-view perspective.
To ensure their dashboards have the intended impact, Tenex employs best-practices, including:
- Spotlighting the most important KPIs on a single monitor that encompasses the company's entire VCP at a high level.
- Measuring KPIs from every department, including corporate functions and operations; maintaining consistent accountability across the company boosts an ownership mentality and sense of team across the org chart.
- Building dashboards that start with a proven template to create efficiency and minimize errors.
- Implementing recurring, data-driven performance reviews informed by real-time data enables leaders to consistently recognize high performers and coach lower performers.
The Impact of Data on Valuation and Differentiation
Data impacts both valuation and differentiation. Bain & Company finds, “Investing in digital operations can deliver impressive results—for instance, production efficiency gains of 15% to 20%, as well as improved manufacturing flexibility and product quality. Those returns dwarf the average 2% to 4% production efficiency gains from standard continuous improvement methods (Bain, 2017).”
While a common use of dashboards is to drive behavioral change, Tenex also uses dashboards to track KPI trends from the time of purchase, through to liquidity (e.g., watching customer service satisfaction levels rise or missed shipment numbers decline.) In this way, Tenex can measure the overarching impact of data on critical value-drivers throughout the portfolio and can tell a compelling story of trending value gains to prospective buyers.
“We have the historical data to show dramatic improvements.” – Marty Moore
If you’d like to connect with Marty, you can find him on LinkedIn or via Tenex Capital Management. The firm primarily targets major equity positions of family-owned, sponsor-owner, and carveout companies with $3-$40 million EBIDTA.
Blue Margin helps private equity and mid-market companies quickly convert data into automated dashboards, the most efficient way to create company-wide accountability to the growth plan. We call it The Dashboard Effect, the title of our book and podcast. Our mission is to deliver breakthroughs early and often - within your timeline and budget.
Other Expert Insight Series Interviews
- Change Management and the Power of Data for Distributed Decision Making
- Tecum Capital: Using Data for Higher Returns in Manufacturing, Services, and Distribution
- Notch Partners: Finding Executives for the Right Deal at the Right Time
- Adam Coffey and The Exit Strategy Playbook
- Accounting Tools. (2022, March 2). Management by Exception. Management by exception definition — AccountingTools
- (2017). Orchestrating a Successful Digital Transformation | Bain & Company
- Coonradt, Charles. (2012). The Game of Work. Gibbs Smith.
- Jain, Pranjal and Vaidya, Dheeraj. (2022). Management by Exception. WallStreetMojo. https://www.wallstreetmojo.com/management-by-exception/
- (2022). KPMG 2022 CEO Outlook. KPMG 2022 CEO Outlook - KPMG United States (home.kpmg)
- McKinsey and Company. (2021, July 29). Winning at private equity integrations. McKinsey and Company. Winning at private-equity integrations | McKinsey
- Data and the Art of Exploiting Headwinds (bluemargin.com)
- Winfrey, Graham. (2022). Founder-Friendly Investors: How Private Equity and Venture Capital Are Helping Founders Level Up | Inc.com