By: Jennifer Johnson, Founder and Principal at Moreton Bay Advisory
Executive Summary
Organizations experiencing rapid growth, especially from merger and acquisition, face a variety of challenges. This includes the need to scale and realize synergies quickly while simultaneously managing the complexities of organizational restructuring. Unsustainable growth compounds inefficiencies particularly within non-core business areas. By focusing cost management initiatives in these often-overlooked areas, organizations can uncover significant hidden value to enhance long-term profitability.
Hidden Potential
As companies scale or integrate post-merger, they inevitably encounter growing pains in the form of knowledge silos and/or process gaps. Over time, these inefficiencies snowball especially within non-core business functions. In the case of one organization I worked with, inefficiencies cost the equivalent of over $31M in annual recuring revenue (ARR). How does this happen?
Non-core operations are not directly tied to the company’s competitive advantage; however, they still play a crucial role in overall efficiency. For merchant processors, and other payment technology companies, non-core activities may include areas like hardware operations. As these types of activities do not give the company its competitive edge, they may receive less strategic focus and investment (Table 1).
Table 1 – Drivers Behind Non-core Operations Underperformance
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Less Strategic Focus
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Lower Investment
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Lack of Expertise
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Many merchant processors outsource non-core business activities like hardware injection and distribution. Benjamin Gomes-Casseres, alliance strategy expert and Harvard Business Review author, emphasizes that “with every outsourced task comes a responsibility of governing that task properly.” Without proper management expertise from within the organization these non-core areas underperform causing a drag on the overall business.
The Solution
A strategic approach to cost management aimed at non-core business activities stands potential to unlock substantial hidden value. Connecting the dots between financial patterns, key metrics, and other data sources allows business performance leaders and consultants to identify gaps derived from inexperienced decision making, incomplete processes, and other operational missteps. Once identified, stakeholders can prioritize and move forward to deliver operational and financial improvements.
“Cost savings are a force multiplier”
The financial impact of these cost management initiatives is compelling. For example, a company that resolves $2M in recurring costs may realize a benefit equivalent to $20M in annual recurring revenue (ARR). This is because cost savings are a force multiplier. Said another way, this example company would need to generate $20M in sales to realize the same $2M in operating profit (based on a 10% operating margin). This is the profit-leverage effect which amplifies the financial impact of cost management initiatives.
Conclusion
Payment technology organizations that have faced rapid growth may have an opportunity to uncover significant hidden value within non-core business activities. The example of recovering $20M in ARR from $2M in recurring costs illustrates the financial impact of strategic cost management. By focusing cost management initiatives in these overlooked areas, companies can realize significant cost savings to enhance long-term profitability.
About the Author
Jennifer Johnson is the Founder and Principal at Moreton Bay Advisory, a consultancy dedicated to helping payment technology companies streamline operations growth. Jennifer is successful former global operator and consultant with experience spanning new venture, Fortune 200, and start-up environments.
