Critical questions private equity fund managers can ask in software due diligence:
- Is the company’s roadmap of planned and new product features mature and clearly aligned to management’s stated product strategy and market needs?
- How does the company develop its R&D investment plans and align development priorities with customer priorities?
- How can the company improve predictability of software delivery timelines and ROI by tracking metrics on R&D progress and velocity?
- Will the company be able to increase portfolio integration and cross-selling by improving collaboration across software R&D teams, especially as part of an inorganic growth strategy?
2. What software R&D metrics can do for private equity portfolio companies
Of the 180 deals analyzed, two-thirds involve companies that did not have KPIs in place to track performance in the R&D organization, which can be an opportunity for private equity investors to build higher quality software faster and improve time to market by investing in developer infrastructure, tooling and testing processes.
PE portfolio companies can push for greater adoption of various tracking metrics, such as roadmap delivery history, scrum team velocity, defect escape rates, automated tests and other metrics. These can be highly correlated with predictable software delivery and software development lifecycle (SDLC) processes, the EY-Parthenon team’s analysis shows.
Proactively and quantitatively tracking development progress can help R&D leaders better align software development timelines with commercial plans to develop new features for customers. Automated tracking of KPIs can inform personnel allocation decisions to mitigate delivery risks, support initiatives to reduce development costs, and help plan and prioritize future roadmap initiatives based on existing capacity and developer velocity. Similarly, tracking performance metrics can help R&D teams proactively prevent incidents tied to reliability, performance and security, which can improve customer satisfaction and potentially mitigate customer churn.