November 30, 2022
By Eric Bragg and Ben BaconHow organizations seek to create, measure, and communicate value remains both evasive and evolutionary. Traditional, ROI-based models are losing their luster. Firms are growing weary of the loose standard. While ROI-based value measurement has long been an accepted industry standard, it often delivers no more than a general sense of soft impact, while doing precious little to drive a tight correlation between digital initiatives and their bottom-line EBITDA impact. With a dizzyingly deep spread of technology options, which will have the most impact on the investment thesis underway? How do organizations avoid disruptive initiatives that do not produce top-dollar returns? How do they determine where best to place finite capital and resources?
With tightening markets and financial headwinds for the foreseeable future, firms realize that their ability to create, measure, and communicate digital value provides a wide net to capture precious support from their LPs.
Tapping into measurable sources of value
Gaining a clear view of the business en route to establishing an effective value creation plan (VCP) creates a distributed decision-making blueprint that can be owned and executed at every level—from the firm to the frontline.
- Determine the most important KPIs. Nearly anything can be measured, though fair few are worth measuring.
- Key question: What are the metrics my leadership team is hired and fired on?
- Establish drivers attached to each use case. Determine the top 5–10 elements of the business that contribute to success or failure for each KPI.
- Key question: “With the overarching desire to drive top- and bottom-line growth, what parts of the business will have a positive impact on the core KPIs?”
- Provide a laser-focused path to data-driven action. Deliver a clear view for all levels of the business to quickly analyze and act on a simple decision-making framework:
- Key question(s): “Am I seeing the desired outcomes? If so, what needs to be replicated to continue success? If not, what do I need to change immediately?”
Look for opportunities to utilize existing assets immediately, rather than blindly trudging forward with lengthy overhauls and upgrades. This will provide a roadmap to thoughtfully engage in the most effective business and technology transformation initiatives.
Private equity performance
Private equity firms take a very thoughtful approach to VCPs in their portfolios. They focus on identifying and executing against business initiatives that will maximize revenue growth and optimize spend levels. This targeted approach has helped lead us into an era of historic performance: private equity remains the top-performing private asset class, growing threefold since the economic downturn of 2007–08. It has outperformed even the historically-reliable S&P 500 by a staggering 350 basis points over the past two decades (A Year of Disruption in the Private Markets, McKinsey & Company, 2021)
Developing industry sector digital playbooks
The difference between luck and success is the ability to repeat it. As firms are maturing in their approach to digital transformation, those finding the greatest success are developing sector-specific digital playbooks aligned to their investment concentrations. This lays out an operational framework for the digital initiatives to be assessed during diligence and executed during the hold.
Having a repeatable plan to create, measure, and communicate value throughout the hold period is critical. All stakeholders should have access to actionable insights. They should be incentivized to create tangible value that can be continuously measured and managed. This will help ensure organizations undertake the most effective digital initiatives that have needle-moving impact on investment returns, and that firms can deploy a sustainable, repeatable plan of success.
Eric Bragg, Senior Managing Director, Infor Private Equity Practice
Ben Bacon, Managing Director, Infor Private Equity Practice