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by Paul de Janosi, Managing Partner, and Nick Kramer, Vice President, Digital – Analytics, SSA & Company
Private equity firms have an unprecedented opportunity to unlock new sources of value and revenue in their portfolio companies through digital tools underpinned by advanced analytics. In our experience, portfolio companies that fail to seize this new potential will leave an average of 15-20% EBITDA on the table. The question is no longer “if” but “how” and “where first” portfolio companies can apply data, automation, and other new techniques to drive efficiencies and innovation for growth.
Even middle market companies can drive step changes in performance through these advances, as previous barriers to entry no longer hinder them. For example, the cost to collect, store, and process data has never been cheaper. Additionally, new automation tools allow companies to easily integrate data from disparate systems. And companies can gain significant capabilities at manageable cost by upskilling business practitioners with data analyst tools, rather than hiring an army of data scientists.
Yet, few firms have a systematic, disciplined approach to help their portfolio companies apply data and disruptive technologies to their operations to drive performance. Fewer still are the portfolio companies with the wherewithal to develop and leverage digital capabilities on their own.
We previously introduced the concept of a shared digital analytics platform for private equity firms to build, scale, and embed in their operations teams, helping portfolio companies maximize the value of an underutilized asset – data. This model particularly benefits middle market companies, delivering the expertise and scale to build robust analytics and automation capabilities to drive growth. Here, we delve deeper into where and how to initiate data-driven approaches and new tools to swiftly generate substantial benefits for portfolio companies.
While each firm will have its own set of unique opportunities, our work with large and small private equity firms has revealed several key patterns for growth to consider to drive short-term returns.
Analytics and nontraditional data sources have revolutionized how companies identify, measure, cascade, and manage to the KPIs that reliably improve financial and operational performance. We partnered with a critical infrastructure manufacturer to develop a system of KPIs to enable leaders to improve engineering ROI through smarter, faster decision-making. Through an analysis of data across all units and regions, we distilled down the KPIs that impact product velocity, enabling the power unit to be more responsive to the “voice of the customer,” reduce time to market, and drive engineering excellence. Our team then designed a KPI “tree” and closed-loop analytics engine to embed fact-based decision making and proactive monitoring into the organization. This included tailored dashboards for executive oversight, product portfolio management, and individual products. The KPI framework allowed executives, regional leaders, and project managers to predict challenges based on real-time data, developing and measuring actions to continuously drive improvements. The work resulted in a focus on the key profit levers, stronger customer relationships, improved fact-based decision making at all levels which allowed the client to improve EBITDA by ~40% over three years.
By using advanced analytics and mining existing data, companies will reveal significant opportunities across the operational lifecycle, including customer engagement, pricing optimization, supply chain, sourcing, and product innovation. Portfolio companies can realize immediate returns and position themselves for longer-term growth.
For a luxury goods company, our analytics quantified the impact and modeled the causal relationships of competitive benchmarking, shipping policies and various transportation modes on customer behavior and sales. We then used these insights to develop pricing and promotional programs (such as free shipping “specials” that coincide with specific dates within holiday seasons) to trigger the desired customer response. Finally, we equipped the company with a digital decision-making tool, enabling management to implement new data-driven shipping promotions as needed. The work led to revenue growth from enhanced customer experiences driving higher average order volumes and cost reductions (through increased efficiencies in supply chain and logistics)—ultimately growing EBITDA by 11%.
Providing portfolio companies with the ability to use their data to accurately forecast future business performance provides tremendous value for the private equity firm and the portfolio company. Too often, forecasts rely on an often overly-optimistic ‘gut,’ historical data, or department-based anecdotes. In other cases, portfolio companies are using out-of-the-box forecasts, whose narrow perspective result in inaccuracies, waste, and missed opportunities. Applying advanced analytics models to a variety of internal and external data sources allows for more precise forecasting, better risk management and mitigation, and a clearer view of the future. The techniques common to different forecasting applications can be prioritized to address the portfolio company’s highest impact pain points, whether that be sales forecasting, inventory forecasting, or financial forecasting.
For many private equity firms, the process of preparing monthly financial and board reports remains excruciating. Often, an analyst from the private equity firm must work with the portfolio company’s management to collect, analyze, and manually prepare these reports—a process that we’ve seen take up to 20 days. This is the perfect bookend to establishing KPIs in our first example. Control reporting and governance are what turn measurement into action, to drive continuous improvement through rigorous and frictionless attention to detail. A shared digital platform is one way to reduce the entire process to just a few days through automated data ingestion that improves data quality and allows for predictive modeling. Private equity and portfolio company leaders can then make better decisions from accurate, timely insights aligned to their performance expectations and objectives rather than hearsay or irrelevant data from lagging reporting.
To deliver the greatest ROI from data analytics, private equity firms should consider creating shared data analytics platforms across their portfolio companies, much as they do with other aspects of portfolio company operations. The platform requires a team with the appropriate skills (such as data analysts and scientists, digital technology experts, etc.) and experience (operations and management) to guide the portfolio company’s executives and front-line leaders through the process of gathering and leveraging data and embedding its usage into decision-making. All too often, acute pain points delay the application of digital analytics, capping short and medium-term growth and long-term upside.
A private equity firm’s investment in building analytics and automation capabilities for their portfolio companies will be returned many times over in increased performance and value. Additionally, the platform provides firms with the structure to continuously build talent, leadership, and organizational capabilities in their portfolio companies for long-term sustainability. This acuity can differentiate private equity firms’ offers at a time when there’s more capital than investment opportunities.
In the digital economy, we see the shared analytics platform as one of private equity firms’ greatest opportunities to thrive, not only by delivering more value from the portfolio, but by using the shared analytics platform throughout the deal lifecycle, leveraging historical data for benchmarking, and applying analytics to accelerate diligence, close and operationalization. We will continue to explore the topic in subsequent pieces, including how private equity firms can get started, further details into key opportunity areas, and more.
Paul de Janosi serves as Managing Partner at SSA & Company
Nick Kramer serves as Vice President, Digital – Analytics at SSA & Company