“When GAAP standards are adhered to, financial reporting provides an accurate measurement of business past performance” - Andrea Sotgiu, Managing Director, Lavan Financial Group
If we think of a business as an engine, the output being operational performance measured by financial results. The key financial measurement is profit, and thanks to GAAP and a regulated industry of accountants we can rely on the financial reporting of the business and the historical performance.
We have financials reporting - Lagging data reporting on what was achieved, maybe reliable if GAAP standards are adhered to, but to understand the dependability of future performance we need to look under the hood at the operational business engine; the Primary and Support activities that combine to produce results and see how well they are running.
Operational excellence is a high standard of operating throughout the broad activities that combine to drive reliable, and dependable future performance - It is generally understood as the foundation of a valuable business.
Naturally, a measurement of both financial performance and operational excellence provides an invaluable view - An evidence-based picture of a company’s operational status quo, pointing to strengths, weaknesses, and the capabilities to deliver future profitability is the basis of our organizational diagnostics. Every service we provide is underpinned by this premise. Data can be collected for all drivers, activities and disciplines including human capital, typically the highest expense item, but in reality not an expense. When harnessed through organizational health, both tangible and intangible outcomes of having the right people in the right seats with capacity to perform are multiples and THE ROI and CRITICAL investment.
Bank’s do not lend based on financial reports alone, they require some further level of due diligence, and view filtered through underwriting criteria to determine risks of repayment default. Similarly, historical financials and quality of earnings reports are not adequate insight into risks for most buyers. Certainly not astute buyers, institutional buyers like PE firms will conduct thorough due diligence to determine more reliable measures of operating quality. They will examine the metrics that drive future profitability, tangibles, intangibles, and risks that impact enterprise (equity) value, revenue continuity, upside and operational strength. Can the business operate without the exiting owner’s presence, how diverse are the clients, the proven process to obtain new business, client retention, customer satisfaction, segmentation, margin trends, brand recognition, concentration risk, recurring revenue, quality of earnings the list goes on.
Robust due diligence reveals operational strengths and weaknesses, and a measurement of efficacy to drive future profitability. To optimize value a business must strive for operational excellence.
The primary and support activities (captured in M Porters' value chain) that take place within a company represent the gears and belts of a business engine.
Categorized into 18 drivers, each is integral to value creation and overall output. When optimized, and working well together they produce operational performance.
Measuring the status and performance of each driver through a diagnostic assessment, provides basis to understand the dependability of future performance, and profitability - And also a premise to help determine enterprise value, and if we wish, a basis to make changes to improve.
Research Shows 18 Factors Drive Operational Effectiveness:
To be of value, and help make systematic improvement possible we need to observe what’s relevant, and matters across all business drivers. We require a “barometer” of standards at which highest performing companies achieve statistically proven best in class results.
Observing and documenting activities across the business drivers of peak performing companies provides an understanding and basis of private business standards, best practices and a metric for operational excellence. Capturing qualified information, quantifying, comparing and benchmarking against industry best practices enables identification of value gaps - revenue growth, enterprise value and operational strength. We can then define how to close those gaps, prioritize and choose to act to drive improved outcomes.
We use a patented methodology to gauge performance against a set of private business standards first developed at MIT, designed to measure operational strength and quantify company value as an operating asset. Reporting includes the present strengths of the business and offers suggestions for improvements to enhance overall growth, profitability and operational strength.
Analysis of business drivers derived from the diagnostic leads to comprehensive reporting including the present strengths of the business and offers recommendations for improvements to enhance overall growth and profitability categorized by most critical issues with highest ROI impact.
Clients can choose to take project task goal recommendations and move ahead independently.
Alternatively, following phase(s) options are available and discussions on next steps occur; audit or evaluation of existing strategy, and or strategy formation, and implementation choices.
We use a quadrant graph to help determine planning priorities and objectives
Once objectives are confirmed we develop a scope of project plan.
With objectives determined and prioritized we collaborate to develop a Scope of Project (SOP) as a working draft of a potential engagement. We define output, success metrics, tangible/intangible benefits, roles, responsibilities, conditions, timelines, and a collective understanding of overall ROI.
The SOP is rationalized by a series of discussions and becomes both a de facto roadmap for the project and the basis of an engagement agreement. Our agreements are both project-related targeting specific initiatives and or retainer-based.