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Key technology considerations for private equity boards

March 19, 2020 Article 4 min read
Evan Honour Doug Hockenbrocht
Portfolio companies that are proactive about technology can create competitive differentiation. Consider integrating these four technology questions into your next board meeting.
Inside a conference room with a large table and chairs

For better or worse, near-complete technology dependence has become the norm for most businesses. When done well, it can enable fast growth and even become a competitive differentiator. When poorly managed or improperly implemented, it can hold your business back. It’s not difficult to be proactive about technology and the benefits can be significant.

Boards should avoid getting mired in the technical weeds and focus on how technology could enable or inhibit a company’s growth plans and strategic initiatives. If selling, general, and administrative (SG&A) costs are swelling, for example, you might consider automating more back-office functions. If your goal is to reinvigorate engineering or product development, you may need to upgrade design tools.

Here are four technology questions to raise as you discuss strategy at your next governance meeting.

1. Is this strategic growth initiative supported by any technology enablers?

Make sure your technology roadmap aligns with your investment thesis and growth strategy. If not, you’ll need to develop a technology plan to support it. Perhaps you want to expand a distributor or dealership’s sales to include more service parts. Do you need an e-commerce platform through which buyers can purchase? Will you need to expand your CRM (customer relationship management) platform or call centers? Also consider whether current technology is hindering growth now or can be expected to in the near term. Are legacy systems up to the task of handling the kind of growth you envision?

Make sure your technology roadmap aligns with your investment thesis growth strategy.

2. Are we planning on standardizing systems and business process across the platform?

Pay close attention to potential IT investments within the context of your particular timeline. If you’re pursuing a buy-and-build strategy, will you standardize technology and business processes across companies? That may make sense over a five-year time frame. But if you plan to acquire six more add-on acquisitions in the next year, it may not. Will the IT department be ready to assimilate all those businesses that quickly? What happens when sales increase by 20% in the first year? What happens if those sales are mostly online rather than the traditional brick and mortar?

Weigh how much and what types of tech investment are merited to produce efficiencies and cost reductions within your time horizon. You may want to consider investments in technologies, like cloud, that can help you scale technology capabilities very quickly. Such decisions can determine whether you will get a good return on your tech spending within your time frame.

3. Do we have enough IT talent to support not only current systems, but also to help select, implement, and run new technology?

Ensure you have the right talent. You can’t do technology well unless you have well-qualified people. And well-qualified IT professionals can be hard to find in a competitive job market. If you don’t have enough internal talent, will you be able to hire new staff? If not, can you hire or expand an existing relationship with a reputable IT service provider?

4. Is our cybersecurity better than before we closed?

Pay special attention to cybersecurity, which is an increasingly important risk management factor that deserves special board-level examination. Nothing can derail a strategic plan faster than a cybersecurity breach, so a cyber resilience strategy is essential. Sometimes family-owned businesses haven’t kept up with the latest protections, but as a private equity firm grows the business, cybersecurity risks and attack surfaces are amplified.

Hopefully, your due diligence gave you a good look at the company’s cybersecurity posture before the purchase. Take a closer look post-close. Are the IT systems at least as secure, ideally more secure, than competitors and industry peers? Do you have firewalls? Anti-virus software? Are employees trained on security? Do they know a phishing email when they see one? What are your disaster recovery and business continuity plans for data? More and more private, midmarket companies are getting hit by ransomware. Do you have backups and other protections that would help you recover?

The challenge for board-level technology discussions is keeping them strategic rather than tactical. Depending on the type of business, you may need to get a bit into details, but in general, it’s best to keep it at a higher level — where are there opportunities that the portfolio company may wish explore further. Once the board settles on a broad strategy, trusted technical experts can be brought in to work out those choices.

The point is to weave IT-related topics into high-level strategy discussions so a business plan doesn’t get torpedoed by some under-the-radar technical issue. With the right perspective and planning, boards can leverage technology as a key driver toward reaching business goals.

The point is to weave IT-related topics into high-level strategy discussions so a business plan doesn’t get torpedoed by some under-the-radar technical issue.

Plante Moran has a team of IT professionals, including cybersecurity specialists that conduct penetration testing and security assessments, dedicated to serving the private equity market.

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