Private equity-backed CFOs who lack an accurate fact base struggle to provide the deep management information required to drive top-quartile returns.
While establishing a reliable data set is often considered table stakes among sponsors, many finance chiefs find it to be a prodigious obstacle.
A recent roundtable sponsored by McKinsey and the Financial Times polled 50 portfolio company CFOs on a variety of “pulse check” questions. When asked to assess their greatest challenge, the results were striking.
- 48% of portfolio company CFO respondents cited “data fragmentation, enterprise-resource-planning and other systems” as the top challenge they face in the role.
The next most popular choices, “acquiring and managing talent in the finance team” and “aligning with rest of top team on business priorities,” received 20% of the vote apiece.
Data scattered across disparate systems and spreadsheets creates tremendous headwinds for a CFO and team. The time required to execute vital finance and accounting tasks often grows exponentially when an organization relies on highly-fragmented data.
Portfolio company CFOs who quickly establish a single source of truth inside the business accelerate these fundamental processes and create the bandwidth and capability for a higher level of value creation.
While the above McKinsey report states a “multiyear rollout of a new enterprise-resource-planning system” is not feasible in a PE-backed environment due to the investment time horizon, many lower-middle market deals feature ERP implementation or substantive upgrade as a fundamental objective of the investment thesis. In other cases, the acquired entity has an ERP system already in place but could greatly benefit from enhanced utilization and more robust controls.
“Strong portfolio company CFOs consistently speak about the importance of reducing data fragmentation across an organization. Many high-impact executives will create models and dashboards, often in concert with the organization’s IT team, to pull together data,” says Lindsay Guzowski, Partner at Falcon. “While a lengthy ERP rollout can be on the agenda depending on the requirements of the sponsor, a lot of the systems designed to decrease fragmentation are implemented within a CFO’s first 200 days.”
CFOs who lead successful exits tend to live by the mantra of “no surprises.” The transparency required to succeed in a sponsor-backed environment is rarely attainable in the absence of a unified set of facts.
Falcon provides C-suite talent solutions for middle-market private equity firms across North America. Follow us on LinkedIn.