Maximizing Shareholder Value Checklist for Service Based Businesses

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1 for Service Based Businesses ABSTRACT: Service businesses are complex and difficult to manage due to their labor intensive nature and the codependent relationship between sales and the delivery of service, which has a direct impact on how efficiently the company performs. Precise execution is the key to sustainable profitability and attractive returns on invested capital. Product oriented performance improvement strategies such as deploying more assets, more technology, or a better mousetrap rarely improve service based businesses. Because of their unique characteristics, service companies respond better to scalable business processes and measurement and metrics systems. The factors that are unique to most labor intensive businesses create a number of challenges when working to optimize profitability: Change is not easily accepted by the organization Customer acquisition costs are excessive External factors and macro-economics drive the competitive environment Long-term value can be impacted by strong desire for immediate results Profitability is generally driven by mass and density inside geographic markets Sales process is based on availability of resources and labor market The cottage nature requires high touch management Ephor Group has created over $3.5 billion in shareholder value through strategic clarity and repositioning, by engineering and implementing performance improvement programs, and/or providing an exit strategy for mid-market companies. The objective of implementing best practices for service-based business performance are to: Increase near term earnings and the EBITDA generating capacity of the business within current economic conditions; Develop long-term operating infrastructure to ensure performance is maximized, and scalable; plus Position the company to attract an array of strategic alternatives for value realization i.e. wealth creation for owners and equity shareholders. This article has been written to serve as a checklist for maximizing shareholder wealth of service based companies. Ephor Group 1 (888) Greenway Plaza Suite 440 Houston, TX 77046

2 About the Author: Garry E. Meier Garry Meier founded the Ephor Group to apply the performance improvement methodologies and shareholder value enhancement processes he and his associates developed over his thirtytwo year career to a diverse group of technology and service companies. Mr. Meier is highly recognized as an industry thought leader in the business and technology services arena as well as the outsourcing sectors. He is a noted speaker on strategic effectiveness, value creation, industry trends, capital appreciation, performance improvement, outsourcing, and customer satisfaction. Additionally, he is an advisor to two private equity firms and two venture firms on their investment strategies and portfolio companies. Garry currently focuses on providing board, institutional investment, and C-level guidance to maximize strategic, operational, and equity effectiveness for mid-cap technology and service companies. About Ephor Group Ephor Group increases equity valuation for technology and service based businesses. Our approach is proven, pragmatic, and performance oriented. Our methodology: Perform Business Process fills in the gaps where functional expertise, intellectual capital, or domain expertise are not available internally. Ephor and its principals have a history of success, creating over $3.5 billion in shareholder value. Garry Meier Background Thirty-two years of strategic management, P&L management, investment banking, institutional investments, and operating company experience with broad depth of knowledge, and expertise in technology & service companies including: Operational & Executive Assignments IBM Corporation, Corporate Development Edward Jones & Company, Partner FFMC, Corporate Development, M&A Automated Information, President/CEO Technology Service Solutions, COO Global Integrity Outsourcing, President/CEO Med Physician Services, COO Outsource International Inc., CEO SmartTime Inc., Interim CEO BOD & Advisory Assignments Achilles Group, Chairman Certus Corporation, Director CentriconHRA, Chairman/Director Latin American Card Services, Chairman/Director Baird Capital Partners, Advisory Board Baird Venture Partners, Advisory Board Global Integrity Outsourcing, Director Outsource International, Chairman Personalogy, Chairman Workplace Solutions, Chairman TalentTree, Chairman SmartTime Inc., Chairman The Capstreet Group, Advisor Economic Development Authority Board, State of Missouri, Director

3 Which of these lifecycle s best fits your business today? At each step in a company s lifecycle executives and the Board of Directors face a multitude of obstacles, thus planning for them begins with understanding the underlying issues at each stage. To outline a few of these issues: Business Lifecycle Challenge Goal Early Stage & Emerging Growth Limited resources Create niche or platform and validate business model Established & Expansion Stage Inconsistent results, Misaligned corporate structure/team w/out full functional or domain capabilities Grow large enough to become a dominant player or be acquired to fill a niche Mature Consistent performance, innovation and growth, long-term strategic, workforce, and succession planning Reinvention and profitability Declining & Underperforming Multiple burdens, ineffective capital structure, lack of domain or functional expertise Maximize profitability and operations including sales and delivery Exit Planning & Analysis How to position for maximum valuation Either A. Manufacture an Exit or B. Develop Growth Plan C. Expand using portfolio approach Criteria Owners seeking to create wealth through 3 R s (Recurring revenue streams, referenceable clients, repeatable processes) Three to four dominant players control 80% of the market Three to four dominant players control 80% of the market Missed financial goals, consolidating or shrinking market space Owner and/or investors desire exit Revenue Revenues $1M - $20M Revenues $20M - $100M Revenues $100M - $300M Revenues $20M - $250M All Solution Develop the business model and fill the missing elements constraining the business Focus on the strategic drivers and operational initiatives needed to support a durable and credible increase in equity value Continuous inspection of external and internal factors and drivers along with strategic and functional assessment and analysis Strategic performance and improvement program Identify platform or market niche, manufacture alternatives, or exit Having a Game Plan is Necessary: Do you have one? Maximizing shareholder value starts with a thorough assessment and analysis to determine what strategic issues are affecting both the near and long-term effectiveness of your organization, and what execution flaws are impeding strategy. Since flaws in strategy or execution are often caused by the other, the true barriers to maximizing value cannot be resolved without first identifying the underlying issues.

4 Shareholder Value Checklist: Assessment & Analysis Most companies have issues in their positioning, management, execution ability and/or their financial engineering. If you can answer YES to the question, check the box below. Each box is worth 5 points. Please check each box that your organization can answer sufficiently YES. Positioning Issues Checklist Have you verified that the target market is of sufficient size? Are you in a red ocean (blood cutting competitive market) or blue ocean (open sea of opportunity)? (If in blue ocean marketplace then sail on, check box, and add 5 points) Are you the dominant player in your market or niche currently? Is the business model of such nature that it has the potential to be a branded model in the sector? Have exit opportunities and strategic alternatives been identified and created? Management Discipline Checklist Is operational performance in the top quartile? Does your organization administer and achieve corporate targets and rely on forecasting? Are the business processes scalable and can they stand the test of exponential growth? Does your organization provide a dashboard of ten to twelve metrics for top management and the Board of Directors? Do you have the functional support (in-house or outsourced relationships) that is needed at each position? Are there current incentive programs aligning all stakeholders? Have leadership and training programs been implemented? Tactical & Operational Checklist Do you know to what effect customer satisfaction leads to referrals and cross sell opportunities? Does each team member from the executive team to front-line staff have a clear definition of success? Does the business have monthly, quarterly and annual corporate targets broken down to daily activity metrics for each location, department, and team member? Do you regularly identify classes of performers? Are IT/MIS and HR both contributing to the strategy and financial performance of the business? Financial Engine Checklist Is your capital structure adequate to ensure growth? Does the capital structure motivate management and facilitate additional funding needs? Does the capital structure support the long-term strategy of the company? (Versus settling for good for now )

5 For each checkbox on the preceding page add 5 points. (Maximum score is 100 points.) Total Score: Shareholder Value Checklist: Evaluating Your Score Score: Percent: Opportunity For Rapid Improvement Many times organizations pinpoint a singular issue, but ninety percent of the time the solution needs a combination of strategic guidance, operational improvement, management augmentation, or capital in order to solve the underlying issues. Your organization is clearly not maximizing shareholder returns and the opportunity for improvement is achievable by tacking your deficient areas while enabling the organization to focus on its core. A full assessment and analysis should be completed immediately by an outside firm. By first analyzing the business holistically including strategy, operations, and financial, and unbiased from what the opinions of management, board members, or other stakeholder s believe ensures that the right issues are identified and resolved. Often, strategic issues are affecting the effectiveness of the organization and execution flaws are impeding strategy. Since one is caused by the other, the issues cannot be resolved without first identifying the underlying root cause issues. Improving performance starts with solving the real issues, not the perceived! Score: Percent: Rising All-Star Your organization is well on its way to creating shareholder value. While many processes and systems are in place there appears to be some areas that need attention and improvement. Start with a business assessment and analysis to determine the underlying issues before throwing away resources on a singular functional challenge. Shore up your deficient areas and your organization will be well on its way. Score: 90 Percent Plus: Superior Performing Organization Your organization is in an elite group! Congratulations on building such a refined and robust organization. Superior processes and systems are in place generating above average returns. The next step is for the entire executive team and all Board of Directors to complete this checklist to determine if there is agreement and alignment.

6 The Goal is Operational Improvement (Evolve or perish!) Once the situation has been analyzed and underlying issues identified, the next step is to develop and implement a plan that solves the business challenges. Using Ephor Group s Perform Business Process above, developed for service based businesses, a project plan is created serving as a guide for improvement and aligning four overlapping phases: Strategic, Tactical, and Financial Clarity along with Operational Improvement. When each phase s goal is completed maximum shareholder value will have been created and your organization will have solved the value equation. Goal#1: Operational Improvement Implement process, measurement and metrics, and incentive programs to stabilize and focus where opportunity for improvement lies. Goal #2: Tactical Clarity By breaking down each function and analyzing it for effectiveness and efficiency and then implementing an improvement plan an organization insures that each department is contributing both strategically and financially.. Goal#3: Strategic Clarity The objective is to implement strategic direction and create strategic alternatives typically either to manufacture an exit, develop a growth plan, or expand using a portfolio approach. Goal#4: Financial Clarity This phase is achieved when a financial roadmap is implemented solving the delta between internal resources and capabilities and the requirements for near and long-term success.

7 Conclusion Because few organizations have all the internal resources, domain, and functional expertise to overcome their obstacles outside support is needed to bridge the gap between the internal capabilities of the organization and the plan for maximizing shareholder value. Developing a clear strategic vision and a perform-based culture within the constraints of available capital resources makes owning and managing a business at either end of the spectrum a real challenge. The first step is identifying the gaps and creating an actionable plan to fill them. If your organization is not consistently delivering the expected results repeatedly trying the same approach over and over will not deliver different results. The hardest step is acknowledging that change is needed. When will your organization take the necessary steps to maximize shareholder value? Did you enjoy this article? Drop us a line and let us know your thoughts on solving the value equation at ephor@ephorgroup.com. About Ephor Group Ephor Group increases equity valuations for technology and service based businesses. Our approach is proven, pragmatic, and performance oriented. Our proven methodology Perform Business Process fills in the gaps where functional expertise, intellectual capital or domain expertise are not available internally. Ephor has a history of success, creating over $3.5 billion in shareholder value. Contact us at ephor@ephorgroup.com for a pragmatic, no-obligation assessment of your situation.