Driving Enterprise Value by Reducing Friction
Private equity firms traditionally focus on two primary levers to create value in their portfolio companies: reduce costs and drive revenue growth. However, a third critical dimension often gets overlooked – reducing operational friction. This organizational drag can significantly impact enterprise value by hampering efficiency, innovation, and growth potential.
Understanding Operational Friction
Operational friction encompasses any organizational impediment that slows down processes, creates unnecessary complexity, or prevents companies from operating at their full potential. In portfolio companies, these friction points often arise from legacy systems, misaligned incentives, unclear decision-making processes, and disconnected workflows.
For example, asynchronous ERP systems is one area where operational friction is common, particularly with roll-ups and bolt-on acquisitions. A water technology company completed five acquisitions in two years, inheriting numerous business processes and ERP systems. Multiple systems made it difficult to coordinate those processes, which led to compliance issues and duplicative costs across the rapidly expanding enterprise. A systems integrator was brought in to create an orchestrated operating model that synchronized the existing ERP systems. This approach took only six months–18 months faster than a conventional ERP implementation–and at approximately 25% of the typical investment, while standardizing business processes company-wide to reduce operational friction.
The Hidden Cost of Friction
The impact of operational friction extends far beyond immediate inefficiencies to direct impacts on revenue and even multiple expansion. For example, a VC-backed medical device company discovered that its complex approval process for new product features, initially designed to ensure quality control, was causing them to lose market share to more agile competitors. The average time from customer request to feature implementation was 14 months, compared to their competitors' 6-month cycle. This friction not only affected current revenue but also diminished the company's strategic position and, ultimately, its enterprise value multiple.
Strategic Approaches to Friction Reduction
Successful investors develop systematic approaches to identifying and eliminating operational friction in their portfolio companies to unlock value.
Technology Integration and Modernization
A family-owned building materials distribution company was struggling with inventory management across its 21 locations. Each facility operated semi-autonomously, leading to substantial inefficiencies in stock levels and fulfillment. By implementing a unified cloud-based inventory management system, the company reduced working capital requirements and improved fulfillment rates across their locations. More importantly, this reduction in operational friction has positioned the company to expand geographically through acquisition and organic growth.
Process Redesign and Decision Rights
A PE-backed company that sells, rents, and services logistics equipment found that its sales team spent only 25% of their time actually selling, with the remainder consumed by administrative tasks and approval processes. By redesigning workflows and implementing clear decision rights frameworks, the company increased selling time to 45% and saw a corresponding increase in new business.
Cultural Transformation and Incentive Alignment
An enterprise software vendor discovered that its departmental silos were creating significant friction in product development and customer support. Mapping customer experiences led to restructuring teams around customer journeys–rather than functional departments–and aligning incentives across these new teams. The customer upgrade process was restructured to reduce total touchpoints by 37%, resulting in 20% reduction in the internal costs to upgrade a customer.
Measuring the Impact on Enterprise Value
The value creation from friction reduction often manifests in multiple ways:
Direct Financial Impact - improved operational efficiency leads to better margins and working capital utilization
Growth Enablement - reduced friction allows companies to scale more effectively and capture market opportunities more quickly
Multiple Expansion - companies with streamlined operations and demonstrated scalability typically command higher valuation multiples
Implementation Considerations
Successfully reducing operational friction requires a nuanced approach.
First, the sequencing of initiatives must be carefully planned. Quick wins that demonstrate value can build momentum for more substantial transformations.
Second, change management becomes crucial. Employees often develop workarounds for friction points that become embedded in company culture. Clear communication and demonstration of benefits help overcome resistance to change.
Third, maintaining reduced friction requires ongoing vigilance. Portfolio companies should implement regular friction audits and establish continuous improvement programs to prevent operational drag from creeping back in.
Fourth, while the source of friction typically involves a combination of people, process, and technology, the cure requires implementation of new technology to alter processes and empower people. A portfolio company enabled by AI can identify and reduce friction faster and more aggressively than was possible before the advent of AI chatbots and agents.
Conclusion
Reducing operational friction can unlock substantial enterprise value. The companies that successfully identify and eliminate these friction points not only perform better during the holding period but also command premium valuations upon exit. As competition in the private equity market intensifies, the ability to systematically reduce operational friction becomes a key differentiator for successful firms. If you would like to learn more about how you can help your portfolio companies reduce operational friction with AI, NextAccess can help. Please contact me to schedule a complimentary consultation.
NextAccess Authors: Scott Kosch and Valerie VanDerzee
NextAccess is an advisory firm of experienced operators with deep experience running top-performing organizations and delivering exceptional results. We help executive teams and investors build stronger, more valuable companies through a powerful mix of operational expertise, strategic insight, and data-driven solutions.
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