What We Tell Portfolio Companies About Harnessing Technology
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What We Tell Portfolio Companies About Harnessing Technology

We work with a variety of private equity firms specializing in middle-market manufacturing companies, and although they’re all different, they all tend to begin our relationship with the same basic question: does the state of a company’s information technology (IT) really matter when contemplating a transaction?

In a word, yes. So when we were invited to participate in a recent Capital Roundtable Masterclass for middle-market private equity and mezzanine investors and lenders in a panel, titled “Enhancing Operations: What Four Leading Operational Advisors Are Telling Portfolio Companies About Harnessing Technology,” we enthusiastically agreed. Alongside KKR Capstone, Storm Lake Capital LLC, Profit Velocity Solutions, and moderator Plex Systems, Inc., we discussed why IT is so critical when considering a transaction, IT improvement opportunities to maximize value, and the benefits of cloud computing. Here is a brief synopsis.

Why IT Is So Critical

It wasn’t so long ago that IT was completely ignored in the due diligence process. Over the years, however, private equity has learned the hard way that IT is a critical consideration when evaluating a transaction.

Over and over, we’ve heard stories from companies that disregarded IT only to realize after deal close that IT prohibited real-time access to accurate operational information to drive improvements, may not be cost effective, and may not be a solid environment to ensure the continuity of the business. “If only I’d known, we would have sought expert advice in structuring and negotiating our Transitional Services Agreements and/or decreased our offer substantially,” some equity firms would lament. Therefore, IT should be a consideration during due diligence.

IT Improvement Opportunities
When purchasing a manufacturer, there are a variety of IT improvement opportunities to consider. These include:

  • Supply chain integration. Integrating suppliers into an existing IT system affords companies a variety of benefits; for example, suppliers can monitor inventory and automatically replenish when needed to optimize inventories. Customers can push material releases and manage supplier quality.
  • System centralization/integration. All too often, manufacturers have a number of incompatible, disparate systems running simultaneously, particularly if they have multiple facilities. In a perfect world, every company would run on one centralized, fully integrated system. This helps keep data standardized and accurate and accelerate problem solving and reporting.
  • Shop floor integration. Optimally, a manufacturer’s ERP system will “talk” to shop software and machines and use the data to optimize machine efficiency and monitor machine maintenance.

The Benefits of Cloud Computing

Employing a cloud computing model for IT can be beneficial to private equity firms in a number of ways. These include:

  • Cost savings. Often, when purchasing an on-premise system, manufacturers pay for the majority of that system in the first year and an ongoing maintenance fee annually thereafter. This means making a significant up-front investment. With cloud computing and a subscription-based model, companies pay the same subscription/cost every month.
  • Speed to get up and running. An on-premise system can take six-to-eight weeks to establish the necessary infrastructure to start the implementation. With cloud computing, that time is decreased to two weeks, enabling quicker time to benefit.
  • Ease of transition. When it’s time to sell the company, it’s easy to switch the name on the subscription, and the buyer assumes the monthly fee. The company data stays as is, and there’s no additional training or hardware/software purchases necessary.
  • No need to be an IT shop. Private equity firms typically do not want to establish a capital-intensive IT operation. If you’re using a cloud computing solution—like Plex Systems, Inc., for example—there’s no need to make/retain such a financial commitment. The cloud-based solution provider takes care of everything, including technology updates and security, while you focus on what you do best.

Taking a Long-Term View

The goal of all private equity firms is to maximize value on exit. Considering IT before and leveraging it after acquisition to drive operational improvements will better position private equity long term for the eventual sale. Opportunities like supply chain integration, system integration, and cloud computing present significant improvement opportunities.

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Doug Hockenbrocht