Maximizing Private Equity portfolio value with process improvement

For private equity firms that invest in their portfolio companies, the question is this: What investments will generate the best ROI with the lowest risk?

In 2011 The Wall Street Journal quoted Marc Andreessen of Andreessen Horowitz explaining why “Software is eating the world.” Time has proven Marc correct. For the reasons cited in the article, it behooves PE firms to examine the enterprise software used by their portfolio companies.

A relatively easy way to identify inadequate software is to look at the number of spreadsheets used by the company. In the absence of other process management tools, people tend to use spreadsheets to manage processes, but the flexibility that makes them so easy to start with is also their biggest weakness. Spreadsheets are inherently manual, error-prone, and do not scale with growth. Processes managed with spreadsheets in a $10 M company will struggle to cope when that company grows to $50 M. Where a company makes extensive use of spreadsheets there is invariably a significant opportunity for process improvement, e.g. by replacing an old ERP system. That process improvement is the key to unlocking portfolio value by reducing costs and increasing revenue.

Where new enterprise software improves processes, time is saved and errors are reduced. Repetitive and tedious work is done by the software which frees up employees to focus on more interesting problems like improving customer satisfaction. Employees get more enjoyment from their work and happier customers lead to repeat business. 

While CFOs might focus on cost savings that can be achieved with new software, PE firms also look at how that software can drive up the value of a company. Increased customer satisfaction is one driver but others are things like the ability to scale up the business and expanding into related markets that were previously impractical.

Enterprise software has great potential for realizing value by improving processes but as a look at our Software Failure Gallery page shows the risks can be considerable. Prime causes of enterprise software failures are things like:

  • Lack of detailed requirements. Things that should have been found earlier only get discovered during implementation. This leads to projects taking longer than expected and sometimes even total failures. The devil is always in the details!
  • Lack of user buy-in. When software is foisted on users without their involvement the result can be disastrous. Users must be involved with the software selection.
  • Mismatched expectations. No software is perfect. When management and user expectations are not aligned with what is being delivered buyer’s remorse sets in and it is downhill from there.

While private equity firms can realize significant value from their portfolio in terms of cost savings and revenue enhancement by upgrading enterprise software, there are significant risks. Those risks are first manifested in slipping implementation schedules and excessive costs, and then in production when the software doesn't meet expectations and fails to deliver the anticipated benefits. The key to minimizing those risks lies in the process used to select that software.