The focus on operational improvement caused by the pandemic is now impacting most stages of the deal lifecycle. This GrowthTV conversation with Ragu Bhargava, Co-Founder and CEO of Global Upside, focuses on areas where private equity portfolio companies can improve operations, including their HR and employment functions.
Improving Operational Inefficiencies
at PE Portfolio Companies
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Transcription - Improving Operational Efficiencies at PE Portfolio Companies
Katie: Welcome to this episode of ACG’s Growth TV. I am Katie Mulligan with Middle Market Growth magazine. Today’s episode is brought to you by Global Upside, which provides comprehensive accounting, HR, payroll, tax, incorporation, and talent acquisition services to help companies grow both domestically and overseas.
I am joined today by Ragu Bhargava, Global Upside CEO, to talk about some areas where private equity portfolio companies can improve operational efficiencies and how to get started.
Ragu thank you for joining me.
Ragu: Thank you, Katie.
Katie: The COVID-19 pandemic has led companies worldwide to look for ways to make their operations more efficient. And that trend is starting to have an impact on M&A transactions too. Can you talk about how the focus on operational improvement is impacting the different stages of a deal life cycle today?
Ragu: Yes, absolutely Katie. The deal life cycle has many aspects to it starting all the way from the deal-making or the due diligence side of it. What we are seeing is, even that part of the deal-making is getting impacted. “Why?” Because you are on a global transaction, you have limited ability to travel. First of all, you may not get a visa. If you get a visa, you may not be able to get on a plane. If you get on a plane, you may have to quarantine when you get there. So how do you work this in an environment like that? Beyond that, over the past few years we have seen these Zero-day TSAs or Transition Services Agreement and what that is doing is it is having a bigger impact on PE firms to scale-up on day 1, which actually brings PEO as an option in particular in the hard-to-set up countries.
With these Zero-day TSAs, it becomes hard to procure benefits and set up the payroll systems and things that you need to go live on day one. Payroll is extremely important for the benefit of the employees and you cannot leave these people uncovered without benefits even for a day. Ongoing support needs to be evaluated based on the headcount. Not only just on day one but also your plans for the medium/ long-term. Because that may determine the strategy you implement to move forward and like I mentioned payroll and HR are very important.
But to support those functions you need to think about Global Systems, systems that can scale up and support you globally, provide you that visibility so that nothing slips through the cracks. That one employee in that one country, you do not want to miss him. A hundred employees in a particular country, you do not want to miss one of them.
Katie: After a private equity firm has bought a global business and it is thinking about different employment structures, what factors should it look at for optimizing efficiency?
Ragu: Optimizing efficiency starts with knowing what your footprint is today. Because once you understand that and you layer on your medium/ long-term plan, then you can build an efficient system to support that. The thing that matters more than just the footprint is the employees’ rights and benefits that are grandfathered from an acquisition. So, remember these benefits and the rights that these employees have are by contract. You cannot just change it at-will and it can be very expensive sometimes and very time-consuming to make those changes. Now, obviously, the length of the TSA matters in your early stages because how do you scale-up? And how do you stand up on your own? And yes, outside firms can provide you the support you need. But then as you are looking at the operational efficiencies, and you need to think about your future.
Now keep in mind that outside of this back-office support, some companies, we have seen what they do is they convert employees to contractors because there is a very low head-count in a particular country or countries. Keep in mind that when you convert these people to contractors, you may face risk with IP, intellectual property rights, so they continue to develop a product for you. But you may or may not have rights to that IP if you have not transitioned them off your payroll and as a contractor properly, so you have to be mindful of that.
Katie: And what are the first steps a private equity firm should take to help its portfolio companies streamline their HR and employment functions?
Ragu: Yes, absolutely. Again, I hate to keep bringing this up – understanding your footprint. But because everything is people-driven, especially in the technology business or in the non-manufacturing business. Because in the manufacturing business you are a little bit tied to that facility as much as you are tied to the employees. But in a non-manufacturing situation, you are tying into the people is much more significant. So, once you evaluate that you really need to think about the support that these teams need on an ongoing basis, whether it is HR, payroll, whether it is your own compliance and accounting requirements. So obviously, it makes sense to do a PEO for the smaller countries – countries with a smaller headcount and in particular if it takes a long time to set up or if you do not have plans to expand there. Now, obviously, in the larger headcount countries, you need to build your full HR and payroll support. You cannot have that expertise built-in for every country that you may have a footprint in. So, you have to think about outside service providers. How do you leverage those relationships, where they provide services? They fill in the gaps that you may or may not have and then work that. Now, as soon as your payroll HR issues are addressed, you have to think about the compliance and accounting issues, because then that in itself is a little bit of a big animal, in particular compliance because compliance many times cannot be addressed remotely. And so, you need local assistance, local support, partner with the right firms that have M&A expertise that has done these transactions over and over again, is extremely important because what that does is they know what the loopholes are, they know what the pitfalls are, they know how to support you, and then customize their solution to fit your need.
So, another deal, they may have 100 employees in the UK. On this deal, you may have three employees. How do you pivot and find a different solution versus “Oh, it worked last time, so it should work this time?” The headcount matters. Keeping all of these in mind, the thing that you should not forget is data privacy, also known as GDPR, for the European Union, but broadly data privacy. And what we are seeing is that the GDPR was the one that started it but more and more countries, even the state of California has their own requirements. So, they are pushing that, and you need to comply with the data privacy requirements. Again, finding the right service provider, finding the right systems provider is extremely important because you want to make sure that those guys both have done the appropriate actions to comply with GDPR/ data privacy requirements, and can help you scale that.
Katie: Ragu based on your experience working with clients, is there a real-world example that you would point to a private equity firm that uses these steps to improve efficiency in its portfolio?
Ragu: Yes, Katie. Thank you for that because that opens a million examples for us, been doing this for 20 years. But let me just focus on one example, and I will also talk about why I picked that one. So, one of our PE firm clients was buying a leading software provider with about 120 people overseas in about 13 countries. Of these 120 people, 80 of them were in two countries – the UK and Singapore and the rest 40 were spread in 11 countries.
Initially, they wanted us to put everybody in a PEO, allowing them lots of time to set up their entities and then transition these people over. We push them to say, “Hey, let us set up your own entities in the UK and Singapore.” We were able to accomplish that and we transitioned these people directly from the seller to the PE firm’s own entity. The other 40 people in the other 11 countries went on our PEO and over a period of one to six months, they were all transitioned over to their own entities as they got set up.
Now, why this example? Why does it matter? Well, keep in mind, these acquisitions are a lot about the people that you are acquiring. And you want to have them have the minimum disruption necessary. So, putting two-thirds of the people straight on a PEO – great answer, because they did not have to worry about the double transition. Even the other 40 people that went on our PEO and our transition, because we have done it for so many years, we have standard FAQs. We customize them to the client’s particular situation and we staged it with the employees to say why they are going on a PEO. What does it mean to them as an employee and their relationship with the PE firm? When should they expect to get on their PE firms’ payroll directly? By staging all of this, the employees had a great experience. Now, I may not have mentioned that the PEO model is a little bit more expensive model than your own entity. So, if you just focus on the PEO business, we would charge them a lot of money and put all of them on our PEO. But we focused on the needs of the client, and the value it brings to the table, to the employees. That combination drove us to do what we did – create the entities, put the bulk of people on directly, and then transition the rest. What that resulted is a great employee experience, a great solution, a much cheaper solution for the client. And everybody looks happy, comes out winning.
Katie: Well, thank you for sharing that example. I think it is a helpful illustration of the point, and it is always great to talk with you on Growth TV. Thank you for joining us Ragu.
Ragu: Thank you, Katie. It is always a pleasure to talk to you.