When Understanding Customers is Better than Cutting Costs

Private equity often overlooks customer satisfaction in their portfolio companies. Paying more attention to it could boost your returns.

In private equity portfolio companies, the customer isn’t always No. 1.

In pursuit of higher returns, private equity firms often cut costs, and sometimes the quality of customer service suffers. Although it can lead to lower expenses in the short term, in time, lower customer satisfaction eventually leads to lower revenue…which leads to more cost cutting to preserve profits and cash.

This is called the “doom loop,” says Jean-Remy Roussel, a managing partner and head of operations at CVC Capital, and he argues that his operations team’s unique, repeatable approach of focusing on the customer—starting with due diligence done prior to an acquisition—can improve the portfolio company’s performance without necessarily cutting costs.

CVC uses a process for all of the companies it acquires called Value Creation Plan (VCP). The goal is to capture customer insights, and then develop an action and investment plan accordingly, Roussel says.

“This approach is rather unique,” he continues. Most management teams expect PE operations managers to essentially discuss efficiency and productivity. “On due diligence, [we ask], ‘Do you have customer feedback data?’ Or we would interview customers. Sometimes [that takes] three-to-six months, sometimes it takes one month.

“The most important thing we’re trying to get across to CEOs or investors is that VCP isn’t about cost [cutting]. It’s really about understanding how you become more competitive, and get better across the board, from the customer point of view.”

The firm has portfolio companies around the world, but has only six operating professionals for the U.S. and Europe, with five more for Asia. This is supplemented by an external network of consultants, industrial experts, and serial managers. Because of the breadth of CVC’s office locations and countries it has companies in, the VCP plan and a standard template of questions for every acquisition target is key.

Roussel worked for TPG Capital for two years, and prior to that, was the European chief financial officer at Mars Inc. All of the other operating professionals at CVC also have senior management and consulting experience, he says. Since CVC is a generalist firm, it deliberately seeks professionals with that breadth of broadly applicable experience.

“When you sit down in front of the management team and they know that you worked across many industries, the management team tends to respect you more,” Roussel says. “If you’re only a consultant…many people have an aversion to consultants.”

Using customer—and employee—feedback to improve a company is extraordinarily effective, he says. One example involved a large European soup company that was steadily losing market share. “When we acquired the company, we performed thousands of consumer and customer interviews to gain insights, and then I personally went into stores with the salespeople and interviewed them about how they choose that brand over another brand. Very few people spend time understanding how to regain customer preference.”

The result? Roussel says the company regained sustainable market share in six months—after being in a decline for six years—and held it for two years.

Few companies have reliable data on market share and customer insights. Many are unaware of the number of people who know about their product or service, or the percentage of people who consider the product and then ultimately buy it. “You step back and any company, regardless of the industry, has customers. If you crack that [customer] code, you will beat the competition.”

Roussel says the experience working with a firm looking to acquire a faucet manufacturer made clear that understanding a customer often trumps cutting costs.

“The customer, whether they pay $200 or $120…If they get a brand that’s going to work for the rest of their life, they don’t care,” he says. “They want reliability. If you make it using a cheap producer in Asia to save costs and it’s shipped [from there] and it breaks, it just doesn’t make business sense.

“Where we make the biggest returns is when we can massively invest, early on, on improving the customer experience and satisfaction. If you can demonstrate it’s a better product than six months or a year ago, then eventually you gain market share. It’s a brilliant result.”