When customer demand changes and margins erode, a business transformation is often the key for future success. The Chief Executive Officer (CEO)’s vision takes shape in new a target operating model that responds to evolved customer demand. In many respects, implementing this overarching vision is the responsibility of the Chief Operating Officer (COO).

Following on from our articles on the CEO’s and CFO’s roles in transformation scenarios, this piece will examine the COO’s key responsibilities. It is down to the COO to guide and implement the transformation’s most important workstreams – delivering improvements, efficiencies and innovations that make the business fit for the future, as well as implementing sustainable cost reduction. In this process, the COO should carefully manage relationships with several different stakeholder groups.

Steering the organisation towards operational excellence

Although the CEO is ultimately accountable for the transformation’s success, the COO is key to driving the transformation plan itself. Once the CEO and board decide on the optimal target operating model, it is the COO’s responsibility to implement the right changes to achieve the headline goal, keeping it at the heart of the transformation. In bringing the new operating model to life, the COO should aim for operational excellence: the goal being to organise and direct operations in the most productive way, wherein products are produced to the highest standard at best cost.

The journey to operational excellence is often nuanced and complex, and the COO will have to bring both qualitative and quantitative skills to the table. One element central to all activities is to be number-driven and metric-focused. Whilst the COO should not overlap with the CFO’s work, they must understand the financial impact of the different stages through the value chain, from R&D through to engineering, production and distribution.

COOs should as a priority seek to establish and deploy measurable goals and key performance indicators (KPIs) that will indicate progress through the transformation. Failure to positively tension the system could result in false starts and a lack of clarity making the transformation cycle stall and in the worst case fail completely.

Owning the numbers that underpin operational improvement translates into higher sales, better lead times and lower cost per unit. Effectively, this means that much of the COO’s agenda will centre around a series of ‘make vs buy’ decisions. Establishing what products to build in-house and what to source from elsewhere, in a transformation context, will define which KPIs should be central.

To deliver operational excellence, the COO needs to carefully structure the implementation of transformation initiatives. Removing cost is a priority and must be the initial target for focused activity, before further system improvements and innovations take centre stage. However, it is unwise to wait until the cost-out process is finished before starting further structural performance improvement work. Once a ship is built, the shipbuilder does not wait until it is across the ocean before starting their next project: work can begin as soon as it has left the yard. The COO should seek to identify the right point to move from cost-out to performance improvements, so time is not wasted and the transformation can keep moving. In certain cases the COO will have to bring new capabilities and new processes into the organisation to ensure new innovative products can be engineered, procured and built. This effort will require foresight and planning to ensure the right talent or technologies are being selected.

Steps to success: managing stakeholder groups and avoiding unforced errors

The COO plays a vital role in supporting the CEO’s communication agenda. This means regular interaction with a few core stakeholder groups:

• The rest of the management team

In interacting with the management team, COOs need to be engaged without getting lost in the detail of other functions. For example, the COO must work in tandem with the CFO without feeling the need to get too involved in financial reporting strategies. Again, measurable KPIs are a way to sustain strong and productive relationships with other senior executives. We recommend regular (monthly) KPI reporting and controlling, as well as biweekly interactions on specific cross-functional projects. This cadence provides the positive tension required to keep leaders and their teams focused on their own initiatives while ensuring good cross company communication. Leveraging data analytics systems and tools that can automate data collection leaves more time to review, interpret and act on the data.

• Investors

With investors, particularly in a private equity (PE) context, the COO should be prepared to emphasise the quantitative progress being made and demonstrate that results are being achieved at pace. If issues arise, PE investors will appreciate openness and transparency, as long as there is also a clear plan to solve the problem. If the COO has a good grasp of the numbers and the fundamental aims of the transformation, PE investors will be constructive and engaged partners, who offer operational specialists and funds to invest in attractive capex programs

• The workforce

Keeping the workforce engaged in the transformation’s progress means being proactive with communications. Getting out in front of structural shifts, rather than waiting to justify changes once they have already happened, helps to keep teams motivated and ready to work to deliver productive change for the benefit of the whole organisation. From our experience this openness and clarity has been key to accelerating and sustaining the transformation timeline and subsequent results.

Through this process, remaining focused on the numbers underpinning cost-out and subsequent improvement efforts can help COOs keep the transformation moving at the required pace, supporting the work of the CEO and board by enabling greater cohesion and collaboration across all functions.

Summary: relationship management and communication help deliver operational excellence

The COO occupies a pivotal role in executing PE-backed transformations. Any transformation focuses on improving operations and realigning the organisation around the target operating model. For the COO, this means understanding and implementing the CEO’s agenda and communicating progress across workstreams and functions to all key stakeholder groups. In this, it is critical to balance knowing the numbers without being too detailed in any one initiative. Along the way, proactive and candid communications will give the transformation the best chance to succeed.

A&M: Leadership. Action. Results.

A&M’s private equity-focused professionals understand the need for agility and the importance of speed to execution to prioritise the key areas of improvement that will positively impact EBITDA and ensure sustainable cash generation at the portfolio company level. Ensuring a successful transformation requires strong leadership at the top that can then be exemplified and reproduced throughout the organisation. Leadership requires definitive action, which then leads to positive results for all.

About the author

Steffen Kroner is a Managing Director with Alvarez & Marsal Private Equity Performance Improvement and has more than 18 years of transformation, operational performance improvement, c-suite interim management (CEO, CTO, COO, CFO) and operational due diligence experience.

Mr. Kroner specialises in the design and delivery of holistic value creation programs and interim management. He has worked in Europe, the Americas and Asia with a focus on diversified industrials and packaging.

Mr. Kroner’s notable recent engagements include leading operational due diligence and carve-out of Thyssenkrupp Elevator, which has €8 billion in revenue and 54,000 employees globally, and leading the operational and IT due Diligence for Bosch Packaging Technology, which has €1.3 billion revenue and ~ 6,000 employees and co-led a comprehensive operations excellence program across Engineering and Assembly together with Syntegon.

Previously, Mr. Kroner served as interim VP Operations (COO) Europe, Middle East & Africa for Vertiv, a large electrical assembly company with $1.3 billion in revenue and 4,500 employees, overseeing seven production sites and their supply chains and driving a large operational improvement program including several plant relocations.

If you have any questions regarding issues covered in this article, please get in touch with our key contact.