Q&A: Baird Private Equity Saves Millions Through Portfolio Management Program

Baird Private Equity’s Portfolio Management Program (PMP) assists BPE’s portfolio companies in leveraging the size and best practices
of the combined BPE portfolio, including BPE’s global resources. PMP supports the group’s investment teams, operational resources and
portfolio company management in developing and implementing high value projects and best practices across the portfolio. Baird Private Equity recently talked with the U.S. PMP team, Principal Rob Ospalik, about the goals of the Program, the success they’ve achieved in this challenging environment, driving more than $11 million in savings over the last two years.

Click on a question below to view the answer.

In basic terms, what is the goal of PMP? PMP is designed to use the size and resources of our private equity portfolio to drive operational value in our portfolio companies. We strive to gain the best of both worlds by partnering with smaller, high-growth companies where we can selectively apply the size of our combined portfolio to support best practices, group purchasing programs and the application of our global resources in Europe and Asia. Working hand-in hand with the company prior to and immediately following our investment, we identify the highest impact priorities and develop a strategic operating plan to meet or exceed our investment objectives. Across Baird Private Equity’s U.S. domestic portfolio, we have over 30 companies with more than $1.5 billion in revenue and over 3,000 employees. In our U.S. buyout portfolio, which has 11 companies, we realized earnings contributions of $6.6 million across the portfolio in 2008 and we estimate more than $5 million this year. These earnings gains are strictly from shared spend programs, best practice sharing across the portfolio and leveraging Asia. Plan elements typically include a 100-day plan, a 3- to 5-year strategic blueprint, shared spend programs, and business and financial tracking tools. In the early days of an investment, we focus on establishing a shared view of the company’s priorities and critical business metrics.

What differentiates Baird’s PMP from buyout industry peers? Our biggest differentiator is Baird Private Equity’s global platform. Our experience is that no one else in the industry has the scale of global operating resources that we do in the United States, Europe and Asia, particularly our Baird Asia team of operating professionals in China and India. This group, coupled with our other tools, set us apart from the field in terms of the kind of operating expertise we can provide to our portfolio companies. Compared to other private equity firms in our size range, we believe we are unique in the breadth and scope of what we have to offer and in the investment we’ve made in helping our companies navigate the global landscape. Managing a global supply chain and supporting a global customer base can be a daunting proposition for smaller companies. We make this possible through PMP, working closely with our Baird Asia resources and portfolio company management to identify and execute on opportunities created by globalization. In a down market especially, it’s important to maintain a long-term focus on strategic planning to build the business and invest in opportunities to gain market share. Expanding to Asia or building a stronger sales and distribution system can help a company take advantage of weaker management teams at competitors and accelerate its momentum coming out of the down cycle.

Often smaller companies lack the scale and resources of larger companies to negotiate favorable terms on vendor services, and it sounds like PMP’s shared spending strategies help to level the playing field. What successes have you had in this area? Our shared spend strategy has been hugely valuable in the current environment, given the emphasis on cost reduction. Frankly, it’s a good time to leverage the volume in our portfolio to negotiate favorable pricing from vendors, and we’ve gained quite a bit of momentum. Our companies are seeing double-digit price reductions on commodities like benefits, truck and ocean freight, and also on indirect spend like IT, telecom and office supplies. For example, we’ve had tremendous success aggregating costs for health and welfare benefits, which represent one of the largest areas of common spend across the portfolio. Individually, our companies have limited leverage for price negotiations and gaining access to higher quality service and data to manage claims and wellness. We worked with brokers and providers to structure a program that provides maximum flexibility for individual benefit program design, while the size of the combined population allows for large group service levels from carriers. Overall, we identified potential savings of up to15 percent some participating companies. These savings are significant when you consider the cost of healthcare for most companies is going up by double digit rates.   Another example of the success of our shared spend strategy is the savings we’ve realized related to less-than-truckload (LTL) freight, which is what most manufactured products companies use to move product. By aggregating the purchasing power of our portfolio and applying best practices, we were able to realize a 34 percent overall price reduction for participating portfolio companies. This is extremely impactful, given the total spend for this service across our portfolio. Since our portfolio is comprised of lower middle market companies, these companies typically do not have access to the tools and processes larger companies have available. Our ability to provide these tools and processes has allowed us to unlock value throughout the portfolio.

PMP also develops and executes a number of tools and projects to support company needs. How are these developed? Is there one tool or project that has been most heavily used and/or has proven most impactful? As part of our planning process, we identify a variety of common areas of need across the portfolio. As we mentioned earlier, some of these needs, like reducing healthcare and freight costs, can be addressed through shared spend programs. When it comes to addressing strategic planning, supply chain management, and sales training and process needs, we look to our toolkit of resources and projects designed specifically for that purpose. Through the toolkit we can bring additional resources to our portfolio companies to help them examine their needs and determine a path forward, and that takes different forms depending on the need. For example, with smaller companies there is always an opportunity to top grade management, and it’s not difficult to find great talent in a down market. While smaller companies may have one or two strong senior leaders, typically they have weaker infrastructures and systems where private equity firms can help. In one situation we might connect a portfolio company with one of our Operating Partners for counsel on how to most effectively build a sales force. In another, we might host a workshop for a company to identify and structure sourcing strategies. Last year, our toolkit yielded $1.4 million in savings across the portfolio.   On a quarterly basis we convene roundtables to facilitate knowledge sharing between executives across the portfolio. We cover a wide variety of management topics from cost savings opportunities to best practices for protecting cash when the liquidity crisis was taking hold. Our most recent roundtable brought together our portfolio company CFOs to discuss how their companies were faring through this challenging economic environment. Perhaps most importantly, we take a flexible approach to the needs of our companies. We recognize that while some of their needs are quite similar, others require more customized individual solutions.

Ultimately, how does PMP impact Baird Private Equity investors? Our focus is on positioning our portfolio companies to meet or exceed our investment objectives. Success means that we’ve generated meaningful returns for our investors.