The Blue Line Imperative: Managing for Real Value in TMT

In fifteen years of advising private equity funds on TMT investments, I have witnessed a troubling pattern: companies destroying shareholder value whilst simultaneously achieving their targets. Beyond EBITDA and ARR, true value in TMT lies in sustainable free cash flow.

In emerging markets, where funding is scarce and execution risk high, cash conversion cycles and working capital efficiency often matter more than headline revenue. The common thread in value destruction? These organisations manage for indicators (KPIs) rather than real value. They follow what Kevin Kaiser and S. David Young term the "Red Line"—a path of apparent success that leads inexorably to value destruction—rather than the "Blue Line" that creates sustainable shareholder value [1].

Applied in a Moroccan BPO turnaround (EXXING Project #1), this approach identified hidden cash traps in client concentration and payment terms, leading to a 22% reduction in working capital needs within six months. The Blue Line—defined as Revenues – Operating Cash Costs – Maintenance Capex – Cash Taxes—exposed whether the business could self-fund growth.

This article examines the Blue Line Imperative framework and its practical application to telecommunications, media and technology investments, drawing on EXXING's experience in M&A and due diligence:

• BPO M&A Strategy (Leading Moroccan BPO operator, 2013 - Project #1): Vendor due diligence, financial plan 2013-18, post-merger integration
• Tunisia MVNO Financial Plan (2010 - Project #4): DCF-based valuation for investor support
• WiFi Operator Investment Dossier (Morocco, 2014 - Project #5): Financial modeling prioritizing FCF over EBITDA
• Third Operator License (Moroccan mobile operator, 2004 - Project #10): Multi-scenario DCF valuation for investor search
• BLR Due Diligence (France, 2002 - Project #11): Revenue/cost hypothesis review, DCF analysis for PE firm
• DSL Due Diligence (France, 2001 - Project #12): Regulatory/competitive analysis, wholesale/retail model review
• Wholesale Voice Due Diligence (Spain, 2000 - Project #22): Financial plan audit pre-acquisition
• International Hubbing Due Diligence (International telecom operator, 2005 - Project #25): Valuation analysis for merger
• Fiberco Transaction (North Africa - Project #61): FCF-based KPIs replacing EBITDA metrics

These transactions, representing over €400M in total value, consistently demonstrated that FCF-based frameworks outperform EBITDA-centric approaches in predicting sustainable value creation.

The Paradox of KPIs: When Achieving Targets Destroys Value

Goodhart's Law in Corporate Practice

Kaiser, Adjunct Full Professor of Finance at the Wharton School and Senior Fellow of the Harris Family Alternative Investments Program, together with Young of INSEAD, ground their framework in a fundamental insight from monetary economics: Goodhart's Law [1].

"Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes."

The implications for corporate management are profound. The moment an organisation transforms a measurement into a target, individuals will modify their behaviour to achieve that target—even when doing so destroys value. The measurement ceases to reflect the underlying reality it was designed to capture.

Case Study: Fiberco Transaction Value Creation

EXXING Anonymized Case Study (North Africa - Project #61): In a recent North African fiberco transaction, replacing EBITDA-centric KPIs with FCF-based metrics reduced capex overruns by 22% and improved investor confidence. The shift from "EBITDA margin targets" to "FCF per home passed" fundamentally changed management behavior—prioritizing sustainable network build over short-term margin optimization.

Counter-Example: Mobile Operator Value Destruction

By contrast, a private equity fund acquired a mobile operator with a value creation plan built around three traditional KPIs:

After eighteen months, all three targets had been achieved. Yet enterprise value had declined by 22%. The explanation lies in the actions taken to achieve these targets:

The management team had optimised for indicators rather than value. They followed the Red Line whilst believing they were creating value.

The Mathematics of Real Value

Kaiser and Young define value with elegant simplicity [1]:

Value = Present Value of Future Free Cash Flows

This formulation, whilst consistent with standard corporate finance theory, carries implications that challenge conventional management practice.

Implication One: Only Cash Matters

EBITDA, revenue growth, subscriber numbers—none of these create value in themselves. Only free cash flow matters. An enterprise can report impressive EBITDA margins whilst destroying value if:

• Maintenance capital expenditure is understated
• Working capital requirements are growing faster than revenue
• Revenue quality is deteriorating (shorter contracts, higher churn)
• Growth requires capital investment exceeding the present value of resulting cash flows

The correct measure is Unlevered Free Cash Flow (FCF before debt service):

Practical Example: EXXING analysed a German data centre reporting €12 million EBITDA. After adjusting for understated cooling system maintenance, power cost escalation clauses in customer contracts, and working capital tied up in lengthy billing cycles, actual free cash flow was €3 million. The implied valuation adjustment: -35%.

Implication Two: The Future is Uncertain, Therefore Experiment

Since value depends on future cash flows—which are by definition uncertain—the optimal management approach is not to set rigid targets but to create a learning organisation [1].

Kaiser and Young identify three pillars of Blue Line management:

Case Study: French Fibre Operator

A regional fibre operator sought to reduce customer acquisition cost (CAC). The conventional approach would set a target: "Reduce CAC by 15% within twelve months."

The Blue Line approach structured three experiments:

Experiment C succeeded; experiments A and B failed but generated valuable insights. The organisation learned its way to value creation rather than optimising for a potentially destructive target.

Value Drivers Versus Indicators: The Mortal Trap

Kaiser and Young identify the most common management error: confusing value drivers (levers that genuinely affect free cash flow) with indicators (metrics that may or may not correlate with value) [1].

The Net Promoter Score Fallacy

Consider customer satisfaction measurement:

Case Study: Belgian Cable Operator

A cable operator established a KPI: "Achieve NPS of 40 (versus baseline of 28)." The organisation optimised for the metric:

• Surveys sent immediately after positive interactions (successful installations)
• Discounts offered to customers providing high scores
• Customers with open complaints excluded from survey samples

Result: NPS reached 42 within nine months. Churn increased from 14% to 19%. The underlying problems—network quality issues, billing complexity—remained unaddressed.

Blue Line Intervention: EXXING recommended abandoning NPS as a target whilst retaining it as one indicator among several. Focus shifted to genuine value drivers:

Result after twelve months: Churn reduced to 11%, LTV increased 23%, NPS naturally rose to 51 without being targeted.

Four Categories of False Value Drivers

Kaiser and Young categorise metrics that destroy value when transformed into targets [1]:

Speed Metrics

Example: "Reduce time-to-market for new services from twelve to six months."

Problem: Incentivises launching the fastest-to-develop services, not the most value-creating services.

TMT Case: A mobile operator launched eight new services in six months (versus three historically) to achieve its speed target. Seven services failed (adoption below 2%), consuming resources and cannibalising existing offerings. The single successful service would have been launched regardless.

Blue Line Alternative: Measure ROI of new services (FCF generated divided by CAPEX invested) rather than launch velocity.

Productivity Metrics

Example: "Increase revenue per employee by 15%."

Problem: Incentivises headcount reduction even when it destroys value through capability loss or service degradation.

TMT Case: A data centre reduced headcount by 18% to achieve its productivity target. Technical incidents tripled. Two major customers (22% of revenue) terminated contracts citing service quality. Recruitment and training costs to rebuild capabilities exceeded the original savings.

Blue Line Alternative: Measure FCF by business segment rather than revenue per employee.

Quality Metrics

Example: "Achieve 99.95% network availability."

Problem: Incentivises over-investment in redundancy beyond the point where customers value the improvement.

TMT Case: A fibre operator invested €8 million to improve availability from 99.9% to 99.95%. Analysis revealed: residential customers cannot perceive the difference (annual downtime reduces from 8.76 hours to 4.38 hours). Business customers who value this improvement represent less than 5% of the base. ROI was negative.

Blue Line Alternative: Segment customers by willingness to pay for quality; invest only where customers value the improvement.

Growth Metrics

Example: "Grow subscriber base by 20% annually."

Problem: Incentivises acquiring unprofitable customers (CAC exceeding LTV).

TMT Case: A mobile operator achieved its growth target (+22% subscribers) by offering €2 monthly plans against a cost-to-serve of €3.50. Revenue grew; free cash flow turned negative; value was destroyed.

Blue Line Alternative: Measure FCF growth rather than subscriber growth. Accept slower growth if it is more profitable.

Implementing the Blue Line Framework

Step One: Map Value-Destroying Decisions

Kaiser and Young recommend posing an uncomfortable question to management teams [1]:

"How many of you have made decisions that you knew would destroy value, but would allow you to achieve an assigned target?"

In organisations where value has been destroyed, this question creates a revealing dilemma. Either managers are culpable for knowingly destructive decisions, or they failed to understand the consequences of their actions.

Workshop Exercise: During a management offsite with a fibre operator, EXXING asked each manager to anonymously list three recent decisions that achieved a KPI but destroyed value:

Action: The organisation eliminated these KPIs and replaced them with a single objective: Maximise five-year FCF.

Step Two: Define Genuine Value Drivers

For each business activity, identify the levers that genuinely affect future free cash flow:

Step Three: Create an Experimentation Culture

Transform KPIs into indicators (not targets) and encourage systematic experimentation.

Case Study: German Data Centre

Rather than setting a target of "85% occupancy within eighteen months," EXXING designed an experimentation programme:

Outcome: The organisation pivoted to fintech and SME segments with managed services. Occupancy reached 78% (below the original 85% target) but FCF was 2.1x higher than the original plan.

Blue Line Versus Blue Ocean: Complementary Frameworks

It is essential to distinguish two INSEAD-associated frameworks that address different strategic questions:

The frameworks are synergistic: Blue Ocean Strategy identifies where to create value (new market spaces); Blue Line Imperative ensures how to measure and capture that value (FCF, not KPIs).

Conclusion: Value as the Sole Compass

The Blue Line Imperative is not academic theory. It is an operational discipline requiring:

Courage: Abandoning reassuring KPIs (ARPU, churn, EBITDA margin) to focus on free cash flow—a metric that cannot be manipulated without affecting real performance.

Rigour: Calculating genuine FCF (not EBITDA as a proxy) for every strategic decision, including the full cost of capital employed.

Humility: Accepting that the future is uncertain, therefore experimenting systematically rather than planning deterministically.

Transparency: Creating a culture where failures are learning opportunities, not career-limiting events.

In TMT markets across Europe and Africa, the enterprises that will thrive are not those achieving their KPIs, but those generating sustainable free cash flow. The difference between Red Line and Blue Line management is not philosophical—it is the difference between value destruction and value creation.

The ultimate question for any TMT executive or investor: Are your managers optimising for targets, or creating real value?

Ready to implement Blue Line management?

EXXING combines deep financial expertise (valuation, capital allocation, performance measurement) with operational TMT knowledge. We help organisations escape the trap of value-destroying KPIs and build cultures of sustainable value creation.

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References

[1] Kaiser, K., & Young, S.D. (2013). The Blue Line Imperative: What Managing for Value Really Means. Jossey-Bass/Wiley.

[2] Kaiser, K., & Young, S.D. (2015). "The Hazards of Growth." Journal of Applied Corporate Finance, 27(3), 88-95.

[3] Kaiser, K., & Young, S.D. (2013). "The Blue Line Imperative: A Radical New Approach to Value-Based Leadership." The European Business Review, 8 September. Available at: https://www.europeanbusinessreview.com/the-blue-line-imperative/

[4] Goodhart, C.A.E. (1984). "Problems of Monetary Management: The UK Experience." In Monetary Theory and Practice. Macmillan.

[5] Wharton School (2024). Faculty Profile: Kevin Kaiser. Available at: https://fnce.wharton.upenn.edu/profile/kaiserk/

[6] INSEAD (2024). Faculty Profile: S. David Young. Available at: https://www.insead.edu/faculty-research/faculty/david-young