The 3 Elements of Building a Profit-Driven Management Team - Modern Distribution Management

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The 3 Elements of Building a Profit-Driven Management Team

De-emphasize activities that do not take full advantage of core competencies and motivate managers to operate with a new performance discipline.

One of the most important recent trends is the accelerated interest and involvement of private equity investors in wholesale distribution. Stuart Mechlin's blog on focuses on thinking differently by using a Private Equity Investor Framework. He recommends distributors think more like investors to add value to their businesses.

Ask the best private equity investors, or for that matter, any acquiring company such as chains, vertical convergers or platform investors – even independent distribution acquirers – and they will tell you that human capital – leadership and management – is a key factor to consider in any investment opportunity.

The private equity investor is looking at management as:

  1. a resource for growth;
  2. a resource that can be matched up with external resources such as additional capital,  economies of scale and outside management expertise; and
  3. a fertile field for improving performance discipline.

When combined, these three elements lead to superior returns beyond what either element can deliver by itself.

In this installment of my blog I will look at management using the Private Equity Investor Framework, which I first introduced in my post, The Value of Thinking Like an Investor.

Let’s examine the three elements I outlined above:

First, investors are looking for human capital resources for growth that they do not possess. Most private equity investors are generalists – they don't know our business nor are they experts in any other business that they may invest in. The same can be said of any acquirer adding different vertical distributors to their portfolio.

They don’t have information about suppliers and end-users, markets, technical expertise or industry relationships, just to name a few. They also don’t have the reputation these management teams have in the market. These items are expensive and time-consuming to duplicate. They are distinctive to the respective business vertical. Investors know they need good leaders and managers as a knowledge platform if they are to have any chance of generating superior returns and growth.

Second, private equity views management as a resource that can be matched with external resources that management may not be exposed to currently. For example, an owner or management team is terrific in most things they do, but may be risk-adverse, less skilled in raising capital or reluctant to actively manage capital. The answer may be for the capital-raising pros to match that skill with the resource to fuel the engine of growth.

Another example: We may think that information management, backroom operations, certain services, IT, logistics, HR and other non-core, generic aspects of the business are unique to individual companies. Unfortunately, economies of scale are hard to achieve either because we think this way or because we just don’t have the critical mass needed to operate at the level of our larger competitors. An investor may have a portfolio of companies to spread these resources over, benefiting all.

No matter your size, you can achieve some economies of scale by taking advantage of outside resources. However, you may resist taking advantage of significant net profitability improvement through economies of scale for non-core activities because you don’t own it, manage it or control it. That attitude can limit growth. Let management focus on what is core to growth and outsource the rest if opportunities to use economies of scale present themselves.

The final element is a receptive management platform that will accept and respond to improved performance discipline. The three elements of this are:

  • A focus on the right metrics for growth: In particular, management should focus on EBIDTA improvement, multiple improvement, new market growth, net profit improvement and risk reduction.
  • Proper and meaningful incentive alignment: Future and ongoing rewards have to get people's attention and fit the culture of the organization. There should be fewer layers between cause and effect.
  • Accountability: This includes an easy-to-read scorecard, ongoing communication, and nimble and flexible midcourse corrections.

The private equity investor demands management that uses all these elements to be additional value creators (AVC). They motivate managers to de-emphasize activities that do not take full advantage of a distinct core competency, are either non-core or that others can do better cheaper and faster. They motivate managers to operate with a new performance discipline.

I suspect that many companies’ owners and senior managers believe their management resources are much more aligned than they really are. Again the objective is not to change how you do business or how you run your company. The objective is to align what you do best with performance that creates additional value, net profit and larger multiples.

Here are just a few questions you can ask to uncover how well your practices align with some of the best practices outlined above:

  • Are your salespeople spending too much time protecting their customers rather than discussing pricing initiatives?
  • Is your senior purchasing manager is spending too much time on the 300-400 minor suppliers that generate 20 percent of your business and maybe impact your net by .001 percent? Why?
  • Is your IT staff worried more about protecting its turf and not enough on the impact of solutions such as the cloud on overall bottom-line profitability? Does IT management view its job strategically?
  • Does your accounting staff prepare “inside baseball” reports rather than outward-looking growth and profitability reports?
  • Are your bonuses structured to reward ill-defined goals? Consider what you’re incentivizing.

As with every element we’ve discussed, the goal is to use the Private Equity Investor Framework to supplement your own management practices and principles to create additional value.

Take an objective look at ways you can improve the management of your business by combining best practices in alignment and compensation and removing non-core competencies from the job description.

After 18 years in the wholesale distribution industry, including the role of senior vice president of Affiliated Distributors’ Industrial Supply Division, Stuart Mechlin is actively engaged in working with distributors and suppliers on profitability and growth strategy. He is a member of several wholesale distribution company boards of directors. Mechlin has worked for several best-practice companies, including McDonald’s and Fel-Pro. He is also a member of MDM's Editorial Advisory Board. Contact him at or connect at

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