In 2020, the private equity landscape has become increasingly crowded. Aggressive growth over the past five years has resulted in fierce competition as dry powder piles up and more players enter the deal-making game, pushing asset prices skyward and margins inward. General partners (GPs) have had to become practically surgical when it comes down to strategy: fund managers are getting increasingly granular when it comes to determining exactly where they'll invest, whether they'll bid and when they'll walk away.
Increasing efficiencies in portfolio company operations is nothing new in terms of preventing margin erosion, but it's certainly taken on a new sense of urgency in a market where entry prices are up. PE players have to look elsewhere for opportunities to maximize EBITDA (earnings before interest, taxes, depreciation and amortization), and one way they're finding them is by streamlining asset processes for cost-reduction and efficiency.
Why Increasing Staff Numbers Doesn't Increase Productivity
Frequently, back office operations provide the most opportunity for cost reduction and are usually targeted for improvement, especially when the asset has undergone mergers before or has multiple business units. A company that otherwise has a well-built chassis may have issues with disparate accounting systems, convoluted workflows and messy processes.
Putting these into good working order can present a dilemma, however. What's in place often isn't working, or not working well enough, and adding the skilled manpower to double the elbow grease gets expensive fast, especially in the bookkeeping department. Slow closings and poorly documented processes, as well as leadership that spends much of its time on transactional rework instead of growth strategy divert revenue toward internal value-neutral tasks. These tasks are necessary, however, and realigning them by bringing skilled talent means that growth vehicles like research and development (R&D) go unfueled.
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Then there's the opportunity cost. Sourcing, training and retaining accounting clerks and CPAs can delay exits and arrest the growth required for the desired valuation. Eventually, a more streamlined accounting department can be achieved, but it comes at a steeper-than-necessary price, and with the turnover rate of CPAs at a breathtaking high, better performing bookkeeping departments are hardly a guarantee.
Driving Innovation Depends on Frictionless Back Office Performance
It's clear that the way toward growth is in the "soft stuff" – the behind-the-scenes daily operational procedures that divert money, attention and time away from business-critical functions that make innovation possible.
For private equity funds that need to streamline these processes as nimbly and quickly as possible, business process outsourcing (BPO) is a powerful tool, but not every provider is created equally.
BPO providers that create a box and then insist on shoehorning portfolio company processes into it can create frustratingly slow onboarding procedures. Enterprise resource planning (ERP) software constraints that require lengthy – and even risky – migrations onto unfamiliar technology are common. So are full-time employee (FTE) minimums that make buy-and-build impossible, and churn rates that burn through human capital at breakneck speed can be breathtakingly high at some provider sites.
In short, whatever cost reduction can be gleaned from models like these end up accounting for very little when the end result is lackluster efficiency improvements. The new strategies that give funds a competitive edge require a new way of doing business when it comes to outsourced talent.
There's a Better Way to Scale Back Office in Private Equity Portfolios
Skilled talent that can scale rapidly and deliver returns in the form of both efficiency and cost savings is the answer. It just doesn’t need to be in-house. Providers that are able to disrupt the usual outsourcing model make ideal partners for private equity firms. They come to the table with boutique offerings. Partnerships with BPOs that can source and train skilled FTEs that follow generally accepted accounting procedures (GAAP) that work within the portfolio company's existing technology give private equity firms a competitive edge.
Additionally, the shift away from enterprise-sized teams of overseas accounting employees mean that organizations can start with just one FTE and grow from there, making buy-and-build a viable strategy. With each FTE assigned to a single client's processes, cybersecurity risk mitigation and consistent, high-quality work is built in. Essentially, this model provides employees without the accompanying employee burden, resulting in cost savings that don't erode other areas of opportunity cost.
This model is highly scalable, too: in a buy-and-build model, it allows for the addition of synergistic portfolio companies onto the initial platform with a FTEs that can be trained during the bidding process for day one efficiency improvements in everything from accounts payable and receivable to treasury and tax.
Meanwhile, in-house portfolio talent is free to pivot toward strategic and judgement-based accounting strategy and away from expensive transactional rework.
Personiv has been offering these customized solutions to stateside clients for over thirty years, delivering quality teams of highly skilled professionals that function as an extension of their own. As a tech agnostic provider, we're able to work within our clients' preferred ERPs or provide our own. By heavily investing in the talent we recruit, we're able to provide unparalleled quality that delivers real efficiency improvement with tangible cost savings.