FINANCE

Why private equity needs performance management

March 24, 2008

There are public companies and there are private companies. But don’t mistake a privately held company for a company owned by a private equity investment firm

Privately held companies are often models of calm and stability, patiently managed for long-term growth. Companies owned by private equity firms, however, are run in a manner that is anything but patient.

Companies owned by private equity firms are run in a manner that is anything but patient.

At companies owned by private equity firms, the pressure to perform is fierce.

A BusinessWeek cover story about the CEOs of private-equity-owned companies described an environment in which leaders face “constant accountability to private equity bosses, near-impossible timetables, ever-increasing financial goals, and grueling board meetings in which standout numbers are met with blank faces and on-target results are disappointing.”¹

The title of the story, “Perform or Perish,” suggests the unforgiving atmosphere in these organizations.

“You have to constantly drive returns... Time will kill you,” said one CEO.

“Time will kill you”

The constant pressure to perform requires that CEOs and other leaders of these organizations look for efficiency in every corporate nook and cranny, especially in the office of finance.

If time is the enemy, then fixed annual budgets and slow, spreadsheet-based processes are not to be tolerated.

Fast, flexible financial performance management (FPM) systems are your ally.

If time is the enemy, then fixed annual budgets and slow, spreadsheet-based processes are not to be tolerated.

Here is an example of a how the speed and flexibility of FPM helps companies meet the aggressive targets common to the private equity environment.

A manufacturer signs a major new contract for products to be delivered over the next six months.

Production managers need to adjust their schedule to provide the additional output at the right time and cost while still meeting existing customer commitments.

Management then decides to increase sales and marketing efforts to drive growth in new market segments associated with this customer win.

As part of the effort, department managers decide to increase headcount over the next two quarters.

Forecasting demo

Rolling forecasts

HR sees a revised headcount requirement and starts seeking candidates.

Finally, the office of finance needs to update its forecast to include revenue from the new contract into its overall P/L forecast.

"Best guess estimates"

In the past, a typical company might need weeks or months to complete such a process.

And important decisions about reallocating capital or resources would be made with “best-guess” estimates of their impact on the financial plan.

In the private equity world where business managers are grilled for details on their progress towards meeting targets, best-guess estimates won’t do.

When “best guess” won’t do

Using a solution such as IBM Cognos 8 Planning, the company can rapidly synchronize its financial and operational planning processes with no guesswork.

The planning solution turns strategy into discrete plans and budgets for every relevant employee and external partner.

It communicates plans—and the actions required— through a hierarchy of cascading budgets, measures, and reports that flow from corporate objectives to tactical plans across departments, divisions, and locations.

It relies on the input of hundreds of managers who must execute against constantly rising performance goals.

It stays constantly up to date, providing real-time visibility and a focus on the value-driving activities that affect performance against stated goals.

Analytics and mobile access

Financial performance management also includes powerful analytic applications that can help companies find operational efficiencies and drive better performance through the supply chain, and in workforce decision making.

To be useful, of course, all that valuable performance information must be available to those who need it, whenever and wherever they need it.

In the private equity world where business managers are grilled for details on their progress, best-guess estimates won’t do.

Fortunately, applications such as IBM Cognos 8 Go! Mobile offer wireless access to operational and strategic performance information, delivered along with reporting, analysis and metrics capabilities .

Executives on the road or front-line workers can use their hand-held device to securely view and interact with details on their company’s performance.

While financial performance management solutions we can’t eliminate the pressure of ever-increasing performance targets, they can make it easier to track the progress toward those targets, and enable managers to see obstacles and opportunities that lie ahead.

As one CEO quoted in BusinessWeek said, “I’d much rather be looking forward than looking over my shoulder.” Cognos can help give you a clear view.