Operational Value Creation

Beyond Cost-Cutting: Unlocking Transformative Operational Value in Private Equity

At DealMax 2025, Withum's Travis Loomis and Steve Brady delivered a compelling session on how private equity firms and portfolio companies can move beyond traditional cost-cutting to create sustainable operational value. Their insights reveal a more nuanced approach to operational transformation that balances short-term efficiency with long-term growth.

Technology Adoption: Start with the Business Need

One of the most common pitfalls in operational improvement is viewing technology as a solution in search of a problem. As Brady emphasized, "Technology shouldn't be the footstep. It should really be the neighborhood." This apt metaphor underscores the importance of letting business needs drive technology decisions, rather than the other way around.

For middle-market companies, particularly those transitioning from founder-led to institutionally-backed organizations, technology adoption can become overwhelming. The pressure to modernize systems can lead to costly overhauls that may not address the underlying business challenges.

The Withum team recommends a more targeted approach:

"You have to let their business need drive the decision-making on the tech," Brady noted. "If you're struggling with slow reporting, that may just be the point to say we need better data consolidation and analysis and automation in that space, not necessarily a brand new ERP system with all the bells and whistles."

This philosophy aligns with the broader theme of the session: transformative value creation requires precision rather than wholesale changes.

Cash Flow Discipline: The Foundation of Growth

While operational improvements and digital transformation capture headlines, the speakers emphasized that working capital management remains fundamental to value creation – particularly in the middle market where cash constraints are common.

"Working capital continues to be in the spotlight, and I think especially now it's becoming more important given market conditions," Brady noted. "The sooner that you can find ways to free up cash and understand cash capability and cash forecast planning, the sooner that money can then get reinvested and planned for other more exciting things."

These "more exciting things" represent the true value-creation opportunities: process improvements, equipment upgrades, sales and marketing campaigns, hiring, and technology investments. Without disciplined cash management, these initiatives remain aspirational rather than actionable.

For private equity portfolio companies, the speakers recommended focusing on fundamentals:

• Standardizing billing cycles
• Documenting and renegotiating vendor agreements (particularly the "handshake agreements" common in middle-market companies)
• Optimizing accounts receivable through improved payment terms
• Taking advantage of early payment discounts

Each of these initiatives can improve cash conversion without requiring significant capital investment or disruption to operations.

Culture and Continuity: The Most Overlooked Value Driver

Perhaps the most compelling insights from the session centered on culture as a value driver – an element often overlooked in traditional operational assessments.

"When you think about post-acquisition activities, [culture] is not the most overlooked but it certainly is not the most important thing," Brady acknowledged. "You bought something that is there for a reason. The culture that's been built there is usually there for a reason, whether that's understood or whether that's just the way that they've always done things."

For private equity firms, particularly those acquiring founder-led businesses, maintaining cultural continuity while enabling growth presents a delicate balance. The speakers emphasized transparency and retention of key personnel as critical success factors.

"In smaller businesses, especially lower middle market, with founders and long-time owner-operators, those long-tenured employees are really the keys to the culture castle," Brady explained. "Changes to those roles and positions can create some unexpected waves – that could be vendor changes or employee turnover, customer changes."

Rather than wholesale replacement of management teams, the speakers advocated for a transitional approach that respects what's working while adding capabilities for scale.

Finding Champions of Change

A practical insight for managing operational transformation came in the form of identifying "champions" within the organization – individuals who can bridge the gap between leadership vision and frontline execution.

"It really helps to bring the right people on that change journey and have them be your champions out on the floor," Brady noted. "You really want to find those individuals that are the most receptive, that aren't on the direct leadership team, because those individuals can be your champions."

This approach recognizes that sustainable change requires buy-in at all levels of the organization, not just the C-suite. The speakers shared an example of facilitating site visits between portfolio companies, allowing teams to learn directly from peers who had successfully navigated similar transformations.

"Change can be really scary, but positive change can be really contagious," Brady observed. "Once you find those opportunities and those wins, and you're able to communicate that feedback, a lot of doors open up really quickly."

The Rise of Outsourced Operating Partners

The session also addressed the growing trend of outsourced operating partners in private equity – a model that Withum and other advisory firms have embraced to serve middle-market funds.

Several factors drive this trend:

• Cost-effectiveness for funds with limitations on operational spending
• Access to specialized expertise across industries and functions
• The ability to bridge cultural gaps between investment teams and management
• Dedicated resources to drive change when portfolio teams are already stretched thin

"In smaller add-on acquisitions, you've got people that are already working one and a half to two jobs," Brady explained. "It's hard for them to prioritize [transformation] on top of just running the business. In the blink of an eye, six months goes by, and very little has changed."

Outsourced partners provide program management and dedicated resources to ensure operational improvements actually materialize – a critical consideration given the compressed holding periods in today's private equity landscape.

AI and Operational Transformation

No discussion of operational value would be complete without addressing artificial intelligence. While the speakers acknowledged AI as "everyone's buzz word for 2025," they offered a pragmatic view of its application in middle-market companies.

The most promising applications focus on low-disruption tools that can be implemented quickly:

• Solutions that integrate with existing systems
• Low-code options that don't require significant IT resources
• Tools that can deliver measurable improvements within 3-6 months

The speakers noted that while it's too early to claim "massive ROI drivers" from AI in the middle market, these technologies are already improving efficiency in areas like document processing and reporting.

The Ultimate Operational Value Driver

When asked to identify the single biggest factor that unlocks operational value in middle-market companies, the speakers emphasized clarity and intentionality.

"Answering the question with clarity of how do we now run this business – from the finance department to customer service and everything in between," Brady explained. "If you can answer that question with some sort of operational clarity that removes ambiguity, that gets everybody aligned on what the goals are, it can really accelerate decisions."

This clarity transforms decision-making from subjective debates to objective evaluations: "Does this help us run the business in the way that we want to run it? If it does, then go forward with it."

This approach acknowledges that operational transformation doesn't require perfection – it requires movement in an intentional direction, with the ability to adjust course as needed.

Balancing Efficiency and Growth

The session's title – "Beyond Cost-Cutting" – encapsulates the evolving approach to operational value creation in private equity. While efficiency remains important, sustainable value creation requires balancing short-term cost management with investments in growth and capability building.

For deal originators, advisors, and portfolio companies, this balanced approach means:

• Technology decisions driven by business needs, not trends
• Disciplined cash management as the foundation for growth investments
• Cultural continuity alongside capability development
• Identified champions to drive change throughout the organization
• Clarity on operational approach to accelerate decision-making

How we can help

Through our partnerships with specialized post-acquisition integration teams, Captarget helps connect you not only with promising acquisition targets, but also with the expertise needed to preserve cultural elements that drive value while building capabilities for scale.

From Identification to Transformation

Withum's insights highlight the importance of a holistic approach to value creation that begins during the acquisition process. Captarget's Pipeline Development and Warm Calling services are designed to identify companies where operational value can be created.

A Comprehensive Value Creation Approach

By combining Captarget's identification capabilities with our partner network's implementation expertise, we help you find the right companies and transform them in ways that create sustainable value – moving beyond cost-cutting to true operational excellence.

Contact us today to discuss how our approach and partner network can enhance your portfolio's operational performance and ultimate investment returns.