In the race to increase portfolio company value through add-ons, improved gross margins, and operational efficiency, private equity managers and their operating team colleagues often find themselves too busy chopping wood to stop and sharpen the axe.
Successful companies that are attractive to future investors need actionable data and clear KPIs to provide transparency and focus.
Management teams are selected for the expertise needed to usher their companies to a liquidity event. Without clear visibility into performance, deal teams can't responsibly give their management teams the latitude they need to apply their efforts and talent to their highest and best use.
Lacking a firm grip on the company’s financial and operating metrics, managers become constrained. Similar demands placed on deal teams exacerbates the problem and can cause both to become frustrated and reactionary.
“Through data analysis, business operators can get a clearer view of what they are doing efficiently and inefficiently within their organizations. When a problem is identified, professionals are capable of answering crucial questions.” - Michigan State University
When executives become lost in unverified, inefficient operations, there is little time left to define and operationalize the KPIs needed to identify issues and spur behavioral change. As a result, the executive’s role may devolve into a balancing act between managing the business and managing the board.
High-stakes investments, short realization horizons, and the disruption of new business units, systems, and personnel make the pressures of private equity investing acute.
According to MIT Technology Review, 95.5% of business data is never used, resulting in lost insight and clarity. Left unsolved, the lack of actionable data leaves deal and management teams resigning themselves to a suboptimal level of controlled chaos and confusion. Searching for answers, PE managers often end up beholden to Excel and its limitations in their efforts to understand the data and shape strategy.
For most portfolio management professionals, Excel frequently emerges as the analytical tool of choice. Excel is familiar, but can also further disperse data, fragment visibility, and create noise when clear signals are needed. Excel files require manual assembly and updates, and the clock starts on obsolescence the moment they’re produced.
These lagging indicators distance the solution from the root issue and force reactive, high-pressure management. Data in these spreadsheets is typically in tabular form, making it difficult to understand and analyze.
Getting a handle on the tidal wave of data may seem to be an elusive process, but it doesn’t have to be.
Increasingly, savvy private equity firms are utilizing purpose-built data warehouses and data visualization systems as a cost-effective method to overcome the obstacles and inefficiencies of Excel.
Data warehouses tame the clutter created by silos of unconnected, out-of-sync data. Business-intelligence systems like Power BI and Tableau deliver reports and insights automatically, without the manual effort required in Excel.
With newfound clarity comes team alignment, relief from frustration, and transformation of performance issues into strategies for growth.
Below are four steps portfolio companies can take to immediately shape strategy and improve outcomes using the data they already have.
Start by defining your business objectives and the framework where business intelligence can take hold and have an impact.
Without clear direction, your efforts to operationalize data will meander and lose impact. Articulate the business case for BI by answering the following:
Next, identify the personas responsible for those those metrics. For each functional area of the business (i.e., Finance, Sales, Production, HR, Inventory, etc), what are the top 1 or 2 roles responsible for results?
Once you have your goals, personas, and key metrics, you only need to identify the data sources from which those metrics can be sourced, and you're ready to put the data to work.
Example:
The VP of Sales is responsible for delivering a 20% YoY revenue increase. In order to achieve that goal, the VP should focus on the following KPIs:
“The starting point for realizing the potential of data and analytics is selecting the use cases that offer the greatest potential for value creation—and using those use cases to generate quick wins that create momentum for broader business transformation.” - Boston Consulting Group
With efficient planning and implementation, companies can achieve fast ROI from BI solutions.
Start small. There’s no point in trying to boil the ocean--you’ll waste energy instead of producing results.
For example:
Start where you can derive immediate value. Then iterate.
Your BI only produces value after being adopted and acted upon. This important last step is the true deliverable of your BI program, yet is overlooked by most companies. Don’t stop your drive at the 10-yard line.
“Don’t leave business users to figure out the commercial value of analytics on their own. Show it to them instead, via a network of advocates across the organization. Through these advocates, companies can proactively introduce the capabilities available to the business and provide expert support for those finding their way.” - Harvard Business Review
Employee buy-in is synonymous with becoming a data-driven organization. If the payoff from using the system isn’t crystal clear, they may fail to embrace data and regress back to ad-hoc prioritization.
Identify 2-3 people who understand the connection between data and progress.
If you need to sell the concept and value of BI, have your selected champions read The Dashboard Effect.
Shameless plug from the author:
This book outlines why and how data assets can be put to work to improve company culture and get everyone rowing in the same direction. Drop me a line and I’ll send you a copy.
Consider outsourcing your BI development.
Gaining early support from your champions and having them gain buy-in from others in the organization, is a crucial step to successful BI implementation that will pave the way for the future success of the project.
Working in shorter time frames to accomplish smaller sets of deliverables (often called sprints), offers a systematic way to understand your data, saving you time, headaches, and frustration. When you start with tangible quick wins, you’re focusing on data that can be understood quickly and easily.
Rather than thinking of this as a one-time project, BI implementation is an ongoing, iterative process.
Here are some keys to utilizing sprints in your BI implementation:
Relying on this framework and seeing its success is another important aspect of shifting a company’s mindset toward a data-driven culture.
Private equity firms that use business intelligence to manage their portfolio--from core financial metrics to actionable operations data--have a decided advantage.
In addition to being more attractive to companies they want to acquire, PE firms who understand the value of data and how to mobilize data in portfolio companies can help their portfolio companies achieve significant transformation in tight investment windows.
Power BI Dashboard Case Studies for Private Equity Companies: See how Private Equity uses data intelligence and Power BI dashboards to drive performance and profit.
Private Equity Turns to Business Intelligence to Maximize Investments: Private Equity is turning to data intelligence to maximize investments. See how.
How To Implement Portfolio Analytics To Manage Your PE Portfolio: Learn four steps portfolio companies can take to immediately shape strategy and improve outcomes using the data they already have.
Private Equity Advantage: Data Intelligence Strategies You Can Steal - Learn the data optimization strategies PE firms can use to differentiate themselves through digital transformation.