Private Equity: The Invisible Force in ERP Selection and Implementation

Written By: Adam Cheatham
Date: December 30, 2019

Managing the balance between reward and risk during a digital transformation is a serious responsibility requiring a clear strategic plan, vision and objectives - especially when the transformation has an ERP implementation at its heart. This is achieved by identifying and addressing any misalignments in the highest executive levels of an organization. CEOs, CFOs, and COOs with a coherent strategy and complementary goals help start an ERP selection off on the right foot by creating a guiding mission.

However, there can be a level above the C-suite that also has substantial input for any large expenditures (such as new tech) that could become a disruptive force in an implementation. Behind-the- scenes this force comes from private equity (PE) ownership and provides a sense of accountability and different objectives driven by financial returns. Ensuring that these objectives are identified, and the digital strategy is aligned with them is critical to a successful digital transformation.

There are three ways private equity can either support or disrupt a strong digital strategy. A PE firm’s exit strategy, level of involvement and potential software biases are all factors that must be taken into consideration. These are important considerations when considering any of the industry’s top ERP systems.

PE firm’s exit strategy and the impact on ERP selections and implementations

A friend recently gave me his perspective on PE firms. His take was that private equity firms typically do two things – they buy things and they sell things. This clarity of purpose may seem to support simplicity in aligning a PE exit strategy with a digital strategy, but this is just as dangerous of an assumption as assuming all C-suite executives have the same goals because they all want to grow the business profitably. Alignment between digital strategy, executive objectives and PE firm expectations should not be assumed when determining what your private equity firm may want from your digital transformation.

Private equity may purchase a business with the intention of plugging gaps and/or cutting overhead with the intention of flipping the business by emphasizing efficiency gains. Other PE firms may target a full ERP implementation of a sophisticated, modern ERP and the selling point is that the hard work is done, allowing the new buyer to reap the benefits of more accurate reporting, inventory management, etc.

Others may not even expect an ERP implementation at all, and target ERP readiness as the selling point. In this last example, the benefit is that the business is ready for the buyer to come in and plug in an ERP of choice. PE firms can take credit for some dramatic transformations as well as ugly failures. PE had a hand in the demise of Toys “R” Us related to too much debt orchestrated by multiple private equity owners.

Level of PE firm involvement in ERP selections and implementations

While PE firms oversee businesses from afar, it is common for carefully chosen personnel to be placed within the business to ensure ERP success. The level of involvement can vary. Sometimes a new CFO is brought in to be the main connection between the PE firm and the business, shepherding the ERP implementation along a path that is driven by assignment. In this scenario the digital transformation is tied directly to the bottom line.

In other cases, when acquired assets need an overhaul or significant improvement, additional personnel are placed. Production planning specialists may be brought in for analysis on how efficiency gains can be multiplied. Or supply chain experts brought in to expand a growing distribution model beyond its current reach. When “placed personnel” have a direct connection to the PE Board of Directors, a digital transformation is likely to be more successful, and the PE firm becomes an asset to the transformation. It can also help optimize an ERP project’s total cost of ownership.

PE firm ERP software bias

Just as common as having an exit strategy, a PE-backed ERP implementation can have a bias for or against a particular software. The result is either by cutting out the selection process and going with a software favorite or conducting an ERP software selection which is expected to yield the ultimate choice of the software favorite.

However, as consultants we recognize that not all businesses have the same needs and requirements. Careful and independent software selection ensures the best software is put in place, magnifying the benefits of the implementation. In the most aggressive biases, software is dictated to a user base and risks low user adoption, making the whole digital transformation a money pit that never bottoms out, leading to the perpetuation of workarounds that were causing problems in the first place.

Skipping or overshadowing this important step has a significant “opportunity cost” and eliminates an important ERP readiness step. Money ends up being left on the table at least. At the worst, the implementation is endangered and rising costs from rushing the process leads to ERP cliff diving. Important decisions are delayed or rushed, both of which could lead to increases costs or even ERP failure.

Conclusion: Driving alignment with your PE firm

Private equity firms that have strong experience in ERP know that these steps are all critical to success. When alignment in strategy is not achieved, conflicting direction leads to scope problems and deadline challenges. Having the right experts engaged and supported by the PE firm allows for the PE firm to leverage its assets in a clear strategic direction while reducing risks that the business does not know how to mitigate.

Bringing in the right software through purposeful fit with business requirements supports operational success as well as user adoption, creating a culture attractive to the next buyer. These all go hand in hand. Working with your PE firm to ensure these challenges are identified will help ensure ERP success and the highest possible returns.

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