Jun 27, 2011

A continuation of our discussion with James A. Quella, Head of Blackstone’s North American Portfolio Operations Group

Q: You mentioned levers that drive performance.  Can you expand on that and maybe give some examples?

A:  Let’s start with revenue growth, which can come from competitive pricing, optimizing marketing expenditures, improvements in sales force productivity, and identifying new market segments and revenue sources.  There is also a big opportunity to help these organizations expand globally. Growth in developing and emerging markets, where Blackstone already has experience and connections,  represents a big growth opportunity in many of these companies.

First, we do a diagnostic analysis and then dive deeply into the customer facing processes and operations, doing customer research, competitive analysis, and sales force ride-alongs to ensure that we understand the drivers of the business.

For example, we worked with TeamHealth, a leader in clinical outsourcing for hospitals, to help them increase their new contract growth.  Our analysis and research informed an integrated growth plan, with a modified pricing structure, ramp up in marketing budget, identification of target hospital prospects and a retraining of the sales force.  The effort paid off: in 2010, new contract volume was up significantly and the impact was highly EBITDA positive. 

For Klockner Pentaplast, a global plastics manufacturer, we helped management enhance their pricing, sales organization and cost structure, allowing the company to weather a difficult economic cycle while investing in new production capacity in Asia and the developed markets. The investment of over €100m in state of the art manufacturing technology is providing better service to KP’s customers as well as providing jobs in the region.

Q:  And in other operations areas?

A:  That’s where we look at ways to improve productivity, quality, efficiency and capacity utilization, such as lean manufacturing processes or the supply chain, from the receipt of raw material to the shipment of finished product.  We focus on all processes that drive value – material flow or information flow – and apply very specialized lean tools to make the process more effective. 

Q: What are some examples of this?

A:  My first example is: Michael’s Stores, where we improved the manufacturing processes in its custom framing business that resulted in improved productivity and reduced scrap.  By doing a detailed transportation analysis of the frame shipments to the stores we were able to improve shipping box utilization and reduce the frequency of store shipments resulting in transportation and packaging reductions.  We also were able to optimize the store lighting and HVAC schedules resulting in reduced energy consumption. We are currently working with the management team deploying lean tools and processes to dramatically improve the efficiency and effectiveness of Michael’s end-to-end supply chain which will result in increases of EBITDA, and lower working capital.

Another interesting example is at Catalent, a pharmaceutical solutions provider, through the deployment of lean tools we were able to improve the labor utilization in its many manufacturing operations in a range of 30-90%, depending on the specific production process.

At Pinnacle, a branded consumer food products manufacturer company, through the deployment of Lean/6 Sigma tools, we were able to help the company’s management team reduce manufacturing conversion costs by 18% over the prior year by improving yields and efficiencies in the food processing operations.

Q:  What is your focus in services and infrastructure?

A:  We evaluate whether a company has scale in the things that are essential to its business.  If not, we want to build scale to make sure they really excel at driving customer satisfaction and business growth perhaps helping them buy services to do the job better. 

Information technology is a prime focus.  We help companies evaluate how effective and efficient their technology is in supporting the mission of the business. We help select vendors for major systems such as enterprise resource planning or ERP, and advise on large scale IT projects.  And we can leverage the total purchasing power of Blackstone’s companies to get better pricing and service terms from vendors.  A good example is Hilton Hotels.  By outsourcing data centers, software development for things like reservation systems, and the LAN/WAN networks in their hotels, they were able to offer franchisees better performing systems while improving their cost structure.  We also provide help in improving the efficiency and effectiveness of “back-office” support organizations like Finance and Human Resources. The projects liberate resources that can be redeployed to help the organization grow.

Q:  Talk about your purchasing and cross-selling initiatives.

This is an area where we can have an enormous positive impact on businesses.  Our portfolio companies spent about $10 billion on indirect goods and services last year.  By harnessing the buying power of our portfolio companies, our CoreTrust and group purchasing initiatives have saved around $50 million in 2010 and $350 million in the past five years.  Examples of purchasing categories with significant savings in the past year include insurance, IT software and telecom, freight and energy. 

We also have two cross-selling platforms to encourage portfolio companies to buy from each other, growing revenues in the process.  On the B-to-B side, for example, many portfolio companies are now using Hilton Hotels for corporate travel, Allied Barton’s security and employee screening services, and Orbitz for travel management.  Hilton’s intra-portfolio bookings, for example, grew 42% in 2010 over 2009.  Our B-to-C platform, Blackstone Marketplace, allows all the employees of our portfolio companies to buy discounted products and services, such as arts & crafts from Michael’s Stores or admission tickets to SeaWorld and Legoland.  There are now 125,000 employees using this network or close to 40% of the employee base in the US.  We estimate the incremental revenues from cross-selling at around $100 million.  

Q:  How are you helping portfolio companies with leadership development?

This is a critical area for us, and we’re very excited about its potential.  We start from the premise that it takes great management to create great value from an investment. Our primary focus is to ensure that each of the key C-suite jobs is filled with outstanding leaders. We have discovered that the Blackstone brand helps us attract great leaders to run the companies we invest in on behalf of our Limited Partners We also have instituted a rigorous approach to help us in selecting the very best for each unique situation. In addition, once we have chosen these leaders we work with leadership development approaches to improve their effectiveness.

Another way to create that value is through leader-led transformational change.  That means helping managements take a hard look at their talent, organization, skills and, most of all, culture, to understand what will be needed to lead and even accelerate a meaningful change.  We need to have leaders who can communicate a strategic vision, energize the organization, and move the business to a new level.  We’re also working to increase leadership supply by helping companies attract the world’s best talent.

We also help our business leaders to build relationships with other portfolio company executives via Blackstone’s proprietary CxO Network.  The Network is delineated by function, so CEOs, CFOs, chief information officers; chief purchasing officers, etc. can exchange expertise, share best practices and learn from each other.

Q:  You also focus on health care, correct?             

Yes and it is important for many obvious reasons. Our Equity Healthcare organization is all about delivering innovative, effective health care to portfolio company employees.  Part of that is group purchasing of health services.  Our portfolio companies spend $1.2B billion on healthcare annually.  Leveraging that, we can help even the smallest company in the portfolio to offer a more comprehensive health plan to employees at a better cost.  We estimate the annual savings for our portfolio companies at over $75 million.

Equity Healthcare achieves its cost savings by improving the health of employees as well as the quality of the healthcare they receive. Identifying and engaging employees at risk for illness or worsening conditions through health risk appraisals, better disease management, and steerage to the highest quality doctors and hospitals makes a positive difference in these employees’ lives. Employees with chronic illnesses have Personal Nurse Advocates to help manage their conditions, monitor medications and therapies, and develop wellness routines.  We’re proud of the measurable benefit to the lives of our portfolio company employees – a 20% improvement in health status for those employees engaged in the program in 2010. We also believe this is a great example of the power of responsible investment!