- For Students
Value Creation Anyone?
The importance of IT Operations Partners
By Sean P. Epstein `04
In a recent survey of all kinds of funds, ranging from local to mega funds, more than 63% of respondents suggested that they have, will have, or would like to have more operations partners on their team full time.
It used to be that only large firms had the resources to staff these individuals with several subject matter experts in a portfolio management or operations team — procurement, pricing, supply chain, sales & marketing, etc; or by industry expertise.
With all the focus on value creation, operations partners have seen the tide turn with their role becoming more integral. In today’s world, operations partners cannot simply look at the individual lines of business (LOBs) or processes in a company without talking about technology.
Why is technology important? Here are a few value creation levers and how IT impacts them.
Conventional wisdom is this: buy a mid-sized manufacturing company, open new markets, scale revenue, multiple expansion follows, and “boom,” higher valuation on exit, right?
However, take into consideration these global challenges: How does one open new markets without being able to conduct business processes in multiple languages? How does one price and sell to all those new customers in their local currency if your systems can only handle the currency of the original market; let alone understand what the market pricing even ought to be? How do you bring new factories online quickly and integrate their raw material demands into your global requirements to actually get scale efficiencies? How do network in the digital enterprise commerce network?
None of this is very effective without some technology backbone. Hence the need for someone in an operations team who really understands the investment thesis and what technology needs will enable vs. thwart it; less important to be a technology expect, but more important to be able to holistically connect the dots.
The Game has Changed: Efficiency vs. Effectiveness
With longer hold times, higher valuations and more demanding investors, private equity funds have to do more than the "old standard" of debt restructuring, blanket cost saving programs, and forced short-term growth.
All good executives recognize the importance of finding the balance between the effectiveness and efficiency of core business processes and teams. After a transaction closes, you will often see workforce rationalization, and therefore a lot of attrition, voluntary or not.
In most mid-market companies, the existing ways of doing business – payroll, inventory management, pricing, sales and marketing processes, etc. — are horribly inefficient (or immature) and will not scale. If those processes are not broken or don’t seem so, it is likely due to the Herculean efforts of a few individuals in each area; lets hope they don’t leave.
Finding the right Technology – not just any technology – considerations for the business users in the age of Internet natives
By the end of 2015, a super majority of all technology decisions will be made by line of business (LOB) executives and users, or at least with their vigorous input. This is both a blessing and a bane.
It is a blessing for all the obvious reasons – Internet natives expect things to just work so good to have them in on the decision-making. Business users know best how they will use the application daily and LOB leaders must ensure investments in technology align with their functions (and owners) mandate.
What makes the excess of user input difficult? The proliferation of cloud technologies means that we can now literally get on to the Google Enterprise app store, download the apps you need as a process user, and poof — CRM up and running in 30 days or less, Finance system in place, and all my HR needs taken care of. But there are some issues with the democratization of technology.
This pastiche of technology solutions/providers looks and acts a lot like a Kandinsky painting. You have too many different vendors, partners, license and maintenance costs, user compliance, etc., to monitor and maintain, and, at the end of the day none of them talk to each other without a whole lot of effort.
What does it take to evaluate technology required to support an investment thesis?
Historically the most cited failure point for IT investments is a lack of executive ownership and guidance outside of IT. One practice to consider is the formation of a Value Creation Program Office that manages the key operational improvements required to deliver the expected returns.
These small SWAT teams generally report to the CEO or CFO of the portfolio company and ensure that the funds goals, the company’s needs, and the enabling technology solutions are prioritized, business cases are developed and investment in technology is followed to ensure value realization.
Evaluating which technology is needed and should be invested in during and after a transaction is not a job for a pure technologist. Many funds have had to write off millions in poor technology choices driven by IT “experts" and portfolio company IT teams.
This is not to say that these individuals are not competent. But, IT professionals should not be leading investment decisions in technology, they should be supporting the analysis and decision making with either the deal team or cross functional executives/board members (CEO, CFO, COO).
I am not advocating to the PE community to go out and dive into long and costly implementations of technology; thankfully, for the most part these historical expectations can be easily averted with properly vetted and placed operational teams.
In Conclusion – why Ops teams bring value
Technology is one of the opportunities for operations teams to really bring value to the table. The question has to be – which business competencies must be top quartile and which processes must work harmoniously together (and what is the risk of them not)?
The world of technology is unlocking so many value creation opportunities for Private Equity investors. It is critical to be aware, educated, and then harness those powers effectively in order to generate the returns your investors expect.
Sean Epstein heads SAP Private Equity for Europe, the Middle East & Africa. Prior to SAP, Sean was an executive advisor and business leader at CEB. He started his career in merchant banking, strategy consulting and venture capital. He has an MBA from Columbia Business School and a Bachelors Degree from the University of Virginia. He and his wife have 3 children and reside in Arlington, Virginia. See Sean's article on the impact of technology on M&A He can be contacted at [email protected].
 2014 SAP Global Private Equity Operating Council Survey