4 minute read 7 Jun 2018
photographer reviewing photographic slides

How PE firms can magnify operations transformation portfolio-wide

By

Gary Sturisky

Ernst & Young LLP Private Equity Advisory Partner

Supporting business transformation success across private equity investments through the deployment of impactful digital and emerging technologies.

4 minute read 7 Jun 2018

In this era of “buy and transform,” private equity firms need to reimagine operations across portfolio companies to maximize returns.

In this era of “buy and transform,” the key for private equity firms to maximize returns lies in driving operating leverage across portfolio companies.

It’s true, as a recent EY report outlines, that there are many ways to help improve operations – close old factories, expand into new regions, hire different types of talent. But you can forget about fundamental transformation if you don’t focus on technology.

Recent advances in this field promise to fuel efficiency, reduce costs and enhance transparency like never before, connecting supply chain, employees, and customers to help organizations grow faster and compete better.

First movers in implementing new technologies like artificial intelligence will gain a critical advantage over their competitors, and executives are only too aware of this. Eighty-three percent of PE firms are seeking out operating partners with digital or technology experience, according to our new PE Divestment Study. Further, 94% of PE firms say they will use more predictive (applied) analytics within the next two years.

Yet with so much change going on, company executives often aren’t sure how to proceed. EY’s Growth Barometer Survey found that only 6% are currently using new technologies such as robotic process automation.

That dynamic poses both risk and opportunity for private equity firms. Risk, because left to their own devices, companies may take years to enact disruptive technologies – years that PE firms, on a timeline to exit their investments, do not have. And opportunity, because there is clearly room for PE firms to implement change that will position their companies to become the disruptors in their industries.

Four keys

Truly transformational change isn’t always sexy or cutting edge – but these days, it’s essential. Here are four areas that PE firms should focus on to achieve it. One caveat: of course cyber security is important, and should be considered in conjunction with all of the below.

  1. ERP systems. Many targets are operating with legacy systems that don’t adequately drive efficiency and the ability to adequately manage the business in real-time. PE firms will want to consider systems that are simple so that they can be implemented rapidly and easily integrated later with add-on deals or with a new owner when the company is sold.
  2. Cloud technologies. Cloud technologies -- software as a service, platform as a service, and infrastructure as a service -- can help a smaller business punch above its weight when it comes to tech. By using resources that reside in the cloud and pay-as-you-go subscription models, companies can, say, crunch big data to be more forward-looking or run AI training algorithms without big upfront costs. But figuring out what should go on the cloud, and what should not, can be a waste of time. PE firms can help bring a standardized approach to that decision-making process.
  3. Artificial intelligence. This next big area of disruption encompasses everything from crunching data, to training robots to perform tasks, to using chatbots to answer customer queries. The window for being an early adopter is still open, but it will close rapidly as early adopters report on the benefits, like lower shipping times from using robots (Amazon) and lower customer turnover due to improved search recommendations (Netflix).
  4. Collaboration and engagement tools. Organizations may want to think about collaboration tools as “productivity apps that emphasize and enable teamwork,” as PC Magazine puts it. The current proliferation of such “apps” is bewildering, and private equity firms and their portfolio companies should carefully consider what they need. Answers may range from simple tools that tackle a specific problem like one team’s workflow management to all-encompassing, enterprise-wide systems like Slack.

Rocket Fuel

After an industry-wide push to add operating resources, PE firms are now well-equipped to partner with management on the challenges of technology transformation. Many firms now count among their operating partners top leaders from specific sectors, with a deep understanding of the tech challenges facing those sectors. PE firms also now employ operational resources with deep functional expertise in the IT area. Working hand in hand with portfolio company leadership, these operating resources can quickly assess a company’s technology status and needs, implement solutions, and work to drive employee and user acceptance. Indeed, 76% of PE firms we surveyed say digitalizing the portfolio company ahead of an exit helps demonstrate a stronger value creation story.

There’s an additional effect if operating resources have a portfolio-wide view. To the extent that technology solutions implemented at one company can be replicated elsewhere, there can be a powerful additive effect across the portfolio. Imagine the change that could be fueled by a customizable technology scorecard that private equity firms could use to grade portfolio companies, helping push businesses to achieve their goals proactively, rather than reactively. 

Of course, private equity firms could do even better. While many companies, even in the mid-market, have added the position of “chief digital officer,” the PE industry has been slow to do the same. Having someone on staff to help firms think about both their portfolios and themselves in terms of their strategy in a digital world, as opposed to their digital strategy, would be of immeasurable help in these rapidly changing times. For instance, some have suggested that PE firms could implement artificial intelligence to start doing their investing for them. Imagine how much time they could spend on operational improvements then!

Summary

For PE firms, having someone to help them think about both their portfolios and themselves in terms of their strategy in a digital world, as opposed to their digital strategy, would be of immeasurable help in these rapidly changing times.

About this article

By

Gary Sturisky

Ernst & Young LLP Private Equity Advisory Partner

Supporting business transformation success across private equity investments through the deployment of impactful digital and emerging technologies.