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An interview with RSM Partner Rich Davis, published in the October 2020 issue of Private Equity International's Operational Excellence report.

What kinds of demands are being placed on portfolio company chief financial officers?

There was an immediate focus on cashflow and liquidity when the pandemic hit. Most of the portfolio company CFOs and operating partners we spoke to were trying to become laser-focused on cash, and that meant looking at cash projection modelling, examining the assumptions that were built into P&L from top to bottom, and rolling that forward to understand the impact of covid-19 on overall liquidity.

Those exercises highlighted the importance of having the right data to refine the key business assumptions that were going to have a major impact on their ability to project cash through the downturn and understand sources and uses of cash. Covid-19 caused CFOs to take a hard look at how to make data effective for their organizations. Moreover, there was a clear need to step beyond accounting and drive business insights that could be pushed back to functional teams to partner with the business more closely. We have seen teams become more glued together around this, because even though the liquidity risk may have passed, many organizations are now asking much more detailed questions of their CFOs.

What dynamics typically exist between the CFO, sales, operations and IT, and how are these teams organizing to drive value creation?

In most mid-market portfolio companies, the IT team has either a direct report into the CFO or a tight linkage. Where the CFO role continues to evolve is that connection between business performance and the underlying technology that supports the business.

From the front office perspective, a chief revenue officer at a portfolio company is always looking to understand how to drive core relationships and opportunities for the business, and how to ensure existing customer base and organic growth opportunities are not missed. Now, the CFO often sits between sales and operations as a real arbiter of profitability in customer relationships.

From an operations standpoint, there is this dynamic between what is being sold and how quickly it can be satisfied. A CFO armed with data can look at that and what it means from a margins perspective, helping the operations team understand the opportunities in terms of delivering on the customer mandate and reducing the overall cost to serve.

The toughest gains, with the most scalability, are the ones hiding in the corners of operational synergies and the CFO with the right data can identify those. Having that ability to drive the top line by working with the chief revenue officer on the one hand and with the operations team on the other is key.

How can a portfolio company executive team best position the business to drive the investment thesis and use data to inform that decision making?

For a portfolio company operating partner working to create a platform to grow beyond organic growth, the real challenge comes around M&A. With covid-19, opportunities are being presented and there are deals to be done. To realize the value of those deals, you have to understand how to integrate an acquisition into the portfolio company without missing a beat on servicing existing customers or capturing the benefits of combining. An executive team focused on understanding the data and the systems coming with that acquisition can help enhance value creation.

What role can external advisors and industry expertise play at portfolio companies?

The managers and portfolio companies we work with rely on a wide variety of service providers. It is difficult to provide a lot of exponential and accretive value to a portfolio company executive team that is already very knowledgeable about its industry. We have to assume the private equity firm has significant depth in the industry vertical, talented operating partners and an incredibly knowledgeable executive team, so it is hard for an external advisor to move the needle when the client is already out ahead.

Firms like ours are putting a lot of emphasis on demonstrable industry depth. That means that if we are working with 10 portfolio companies, we can bring 10 perspectives from portfolio companies operating in that industry to a client that may benefit from hearing those experiences. We can build relationships with portfolio company executive teams and provide that industry lens and benchmarking that clients can use to drive value.

Assuming a portfolio company could capture any and all operational and financial data, should everything be measured?

That is where the industry perspective becomes so critical, because in any portfolio company there is a handful of key performance indicators that matter most. A lot of the time we find ad hoc reporting where clients are trying to go deep on analysis but have not got the basics to understand how to take that information and identify what the best initiatives are going to be to help drive additional value, so the initiatives fall short.

In our experience, those portfolio companies that have the critical view established at a management team level can drive specific and targeted organizational initiatives that have an impact on sales, customer acquisition and churn, all the way through to P&L. Portfolio companies are looking for systems that really help them tell the story. A good team that understands sales and operations, armed with the right data from the right systems, is going to be the most successful.

What is the best way to accelerate the process of making the right investments in infrastructure, technology and business processes with the most operational payback?

In most portfolio companies we look at, unless there has been tremendous under-investment in technology, usually the technology has been under-leveraged. It is not about the transformation of a portfolio company’s enterprise resource planning platform; instead, it may be as simple as looking at the available data and modelling performance over time to help understand how that platform can be better employed. There are so many CRM systems out there that are under-utilized.

Companies have focused on making lots of requests to try to understand where the business performance opportunities lie, or they install an expensive analytical tool to solve a problem. In reality, they may already have the right systems but lack the understanding of how best to use them. The biggest opportunity usually comes from taking a fresh look at the systems and technology already in place to see how it can work better to drive performance.