Redesign of Computer Services Company Portfolio
See how BCG helped a U.S. computer services company create a new vision and restructure its corporate portfolio.
HighTech Ltd. was a U.S. multi-business company whose core business, computer services, was underperforming compared with its peer group in terms of growth and multiples amid increasing commoditization and competition in the industry.
Further, the company had made acquisitions in various areas and was operating both service and product businesses—with strongly differing performances.
BCG's mission was to conduct a portfolio review to identify the strategic shortcomings leading to the underperformance.
The starting point of BCG's portfolio assessment was gathering customer feedback and conducting market analysis of the specific needs that were not met by the client's offerings. Assuming the customer's point of view, we performed a "gap analysis," defining what changes in the client's offerings would create the most value for end users.
Building on the market research, we performed a value-creation x-ray diagnosis of all business units. We assessed cash-on-cash operating returns, business health, and the ability to create forward-looking relative total shareholder return (rTSR). In addition, the business units' TSR was benchmarked against that of external industry peers.
The analysis showed that the core business units (E and F) performed weakly compared with the other segments. While the smaller segments earned cash-flow return on investment (ROI) above their capital costs, the core business units destroyed value. Furthermore, the analysis of prior acquisitions revealed that top management representatives were pursuing competing goals, and an integrated approach to managing the acquired business units was missing.
Based on the portfolio analysis, BCG recommended four key initiatives to create a value-focused strategy from formerly unaligned, fragmented components:
- Prioritize goals by value impact and communicate the strategic intent and associated portfolio priorities, framing the agenda overall and for each business.
- Set up a turnaround plan and restructure the poor-performing businesses.
- Replace accounting-based incentive plans with simple, market-focused metrics (such as TSR and cash-flow value added).
- View the active integration of acquired businesses as an integral part of strategy, organization, and business systems.
The client implemented BCG's recommendations and conducted a portfolio transition toward a healthier mix.
After a share-price rally following the BCG strategy project, the company was sold at a considerable premium.
Because of the stringent alignment of strategy toward value creation, the client's share price outperformed the S&P 500 after the project.
One year after the portfolio work, the company was sold at an 80 percent premium compared with benchmark performance.