Options for Integrating Your PE Portfolio Company’s Finance Tech Stack

What Are the Options for Integrating Your PE Portfolio Company’s Finance Tech Stack?

by Sam Kashy, Carmel Wynkoop
September 18, 2023

It’s an exciting time when your private equity firm makes a platform investment or add-on acquisition. The potential to build portfolio company value using your firm’s cumulative expertise can lead you in many strategic directions: Where should you invest limited time and resources? Which customers are ripe for expansion? What can you cross-sell to current clients? What geographies or adjacent industries could you expand to?

Close on the heels of these strategic decisions are these important considerations: How will you know if what you are doing is delivering the impact you expect? And what is the current and potential profitability of these strategies?

Build Value With the Right Data

Each of these decisions can be enhanced or hindered by data availability. You need accurate and timely data that is both consistent and standardized. This visibility provides critical insights, such as margin by customer, that you can apply to make choices that build value.

However, if the portfolio company has grown through a series of acquisitions, it is likely operating on a variety of different technology solutions. In such a complex environment, gaining visibility to those data-driven insights is a challenge.

In this situation, you have a foundational decision to make about how you’ll get the information you need to make operational improvements that will build the company’s value. Do you get everyone on a single enterprise resource planning (ERP) platform, or do you decide that you can live in a hybrid world?

Option 1: Standardize on a Single ERP

Sometimes, standardizing the portfolio company’s tech stack on a single ERP is the best way to unlock value. However, major technology implementations are typically complex and resource intensive.

So, when does an ERP overhaul make sense? These key factors can make this option the right move:

  • It’s still early in the hold period. For example, if the ERP selection, implementation and go-live take place within the first three years of a nine-year hold period, it could provide years of performance data and efficiencies that help improve the valuation at the end of the hold.
  • Operational efficiency is a key part of your investment thesis. If consolidation of processes and teams is already part of the plan, a holistic ERP can create the foundation to unlock the next level of growth. For example, suppose your portfolio company consists of a roll-up of medical offices. Expecting an accounts receivable specialist who manages dozens of offices to live in two or more different systems would leave an opportunity for efficiency on the table.
  • The portfolio company has dated or homegrown technology that may impact its valuation at exit. As investors scrutinize potential risks and valuations, technology due diligence has become more prevalent. A tech overhaul now may protect the exit value, even if that exit is still a couple of years away. (Not all ERPs require six-digit budgets and a one-year-plus implementation timeline. Some less expensive options are relatively light to implement.)

Option 2: Live in a Hybrid World

Sometimes, investing significant time and capital resources to standardize on a single ERP doesn't make sense. If you're pursuing a vertical acquisition strategy, for example, maintaining separate ERPs is not a barrier to efficiency. However, you do still need timely and insightful information that is delivered in a consistent way.

In this case, consider a lower-risk, higher-return strategy that doesn’t change the underlying system but does change how you get and use the data through automation and analytics.

Rather than investing in an ERP overhaul, you can wrap a layer of data analytics around the diverse tech stack. That layered strategy typically involves a master data management effort and a data repository (a data warehouse or data lake), along with machine learning and other analytic tools to digest and rationalize the data to produce valuable insights.

Not only is this option faster and far less disruptive than a full ERP implementation, it also enables you to invest in the most important parts of the business without overpaying for functionality you may not use.

4 Steps for a Successful Tech Stack Integration

Following these key steps will help you choose and execute a successful tech stack integration:

  • 1. Define the strategy

    Before you go down the path of selecting new software, revisit your vision for the portfolio company. This builds the foundation and ensures all decisions around technology support the strategy.

    Be sure to get key stakeholders involved in this phase, including portfolio company leadership, other PE firm operating partners and board members. Ask each key stakeholder group what they need to operate effectively to realize the vision.

  • 2. Assess and prioritize options

    Next, prioritize based on key factors that are important to the organization. These often include factors such as cost, required level of effort and access to capabilities to support the transition.

  • 3. Build team excitement

    No matter which option you choose, you can expect some pushback. You might hear something like, “Don’t rock the boat, our technology works just fine.” Or people may feel that they don’t have the time to dedicate to a technology implementation.

    To overcome objections, engage the portfolio company leadership and next-level managers in a discussion about their business challenges. For example, if the top challenge is employee dissatisfaction, remind operating managers that investing in an updated tech stack can give employees more time for value-added strategic thinking and will be a competitive advantage in attracting and retaining talent.

  • 4. Provide support

    Assure operational leaders that no matter which strategy you pursue, you will support them with the necessary expertise to make it successful. Projects fail when the team members who will be using the system do not have time to learn it.

    If your firm needs more resources to facilitate a technology implementation, bring in an experienced technology strategy advisor to help execute the chosen path. Also consider bringing in interim resources to do the internal team’s “day job” during the transition so the team can invest time to master the power of the new tools.

    Successful portfolio acquisitions and integrations are critical to building the value of your portfolio company. Remember: You have options to deliver the outcomes that are right for your specific situation — whether you’re looking for scalability or access to information that will help you assess business performance in real time and make decisions to optimize it.

Which Finance Tech Stack Option Is Best for Your Portco?

Selecting technology that provides the right data for strategic decisions without overspending for functionality your portfolio company doesn’t need can be challenging. But there’s no need to go it alone. Armanino has helped hundreds of growing companies find the best technology strategy to build value. Reach out to our award-winning Business Application experts today for a consultation to define the requirements for your future state and weigh your finance tech stack options.

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Sam Kashy - Consulting | Armanino
Carmel Wynkoop - Partner, Consulting - San Francisco CA | Armanino
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