August 2023 | Point of View

How chief financial officers elevate value for private equity-backed companies

The first in a series outlining how and where CFOs can make an impact during the transaction lifecycle

How chief financial officers elevate value for private equity-backed companies

CFOs of private equity-backed companies continue to navigate the complexities of the current economic environment—among the most important tasks include the ability to create and track value across the portfolio company organization while also focusing on delivering greater value within their organization. 

To empower CFOs in navigating this challenging environment, West Monroe developed a comprehensive three-part series that serves as a practical "playbook" for driving value throughout the transaction lifecycle. This series will cover the following key aspects: 

  • Importance of developing a value creation narrative that follows an asset throughout deal cycle 
  • Unique challenges facing CFOs, including the shifting nature of private equity transactions and high turnover rates, and practical strategies for addressing these challenges 
  • Critical role of quantifying actionable insights and leveraging accelerators 
  • How to properly set value creation metrics, source and expose those metrics, and action those metrics

CFOs face significant challenges during a portfolio company’s deal cycle, one of which is to ensure a core finance and accounting foundation is defined and quickly implemented to ensure the Office of the CFO can produce reliable and accurate insights. 

This process is often tempered by the requirement by the sponsor to accelerate the transition period and manage separation costs. This often leads to decisions that defer improving or optimizing certain elements of finance and accounting processes in favor of lower costs.  The functional foundation for finance and accounting that provides consistent, accurate and reliable data is a leading principle enabling a value identification and creation pathway.

Value identification starts with enterprise value tracking 

Identifying value during the transaction lifecycle typically begins long before a deal has been completed. Many private equity sponsors, bankers, consultants, and portfolio company executives use the value narrative to drive the “why” behind the transaction. And while all parties align to the value creation story upfront, this is immediately in the spotlight and carefully tracked following deal closure. To prepare for this heightened focus, CFOs should consider the following steps. 

  • Ensure the investment thesis is fully comprehended: An investment thesis often has quantitative and qualitative goals, which should be accompanied by a set of KPIs and metrics that will be used by all involved stakeholders to benchmark progress. 
  • Align the organization on KPIs responsibilities: While each value creation goal should be aligned with a KPI and metric, not all are identified at the onset. The CFO is the steward of value tracking for the organization and it’s their responsibility to proactively ensure that all executives and groups are aligned on the specific KPIs/metrics that are their responsibility. 
  • Establish tracking frameworks: A process needs to be developed to ensure progress is made toward the investment thesis and how this progress is communicated to the private equity sponsor. This goes beyond the technical aspects (like how KPIs/metrics will be sourced and surfaced)—the CFO partners with the CEO to determine how often executives will meet to discuss value tracking and what accountability looks like among the cross-functional parties.

If an organization struggles to understand current state and prioritization of value creation activities, we recommend mapping out end-to-end processes to identify bottlenecks, then tying those bottlenecks back to a gap in technology, people (i.e., capabilities or resourcing), or processes. Another valuable exercise is to hold a “vision and value” session to develop a shared vision for future growth potential—including applicable KPIs.

Looking Introspectively at the Office of the CFO 

The CFO is the steward of value identification and tracking at the enterprise level—and they’re also responsible for examining the people, processes, and technologies within their own organization to identify opportunities for efficiency and extract incremental value. 

This balance of duties is where we see many CFOs struggle—not only with prioritization but also in having an approachable framework to complete such a self-reflection. It’s sometimes easier to start with the biggest and/or brightest asset—but this doesn’t always equate to the greatest value. We recommend a structured approach to self-assessment, similar to the following: 

Core accounting operations:

By starting with operations and business processes linked to other cross-functional groups, a CFO can understand their partnership model and where they can do more (or often ask for more) from other teams. After looking at cross-functional dependencies, they can dig deeper into processes to evaluate their speed to insights and identify areas of optimization. This should also include evaluating the Office of the CFO’s ability to maintain appropriate levels of liquidity, working capital, and cash management. This can help free up cash for investing in other value-add initiatives and incremental areas of organizational leverage. 

Finance/FP&A enablement:

FP&A enables the Office of the CFO to act as the co-pilot of the business. Benchmarking your organization’s existing annual budgeting, recurring forecasting, managerial reporting, and strategic business analytics against industry standards can help uncover areas of necessary focus and prioritization. 

This will often have cross-functional dependencies as well, and this requires determining the detail, specificity, and frequency of data analysis. This will position the Office of the CFO to build the internal muscles required to deliver value.  

Technology & data management:

To be a CFO in the modern era means to be technologically literate. CFOs must have a strong understanding of how technology is a critical enabler of efficiency and scale, not only for their office but for the organization as a whole. Assessing data availability, quality, and overall management is a fundamental requirement—we have often seen challenges where an organization invests significant capital on new technologies but does not address this fundamental core, leading to a substantial waste of capital and time. 

This also includes reviewing the current suite of core and enabling technologies and ensuring they are scalable to meet the investment thesis and last throughout the hold period. This will ensure the organization views finance as a leader of value creation, not a detractor. 

Organizational effectiveness:

This is often an area that comes with a heightened amount of sensitivity but is as important (if not more so) than the other areas. The Office of the CFO must be able to support growth and scale with the business. This is determined by thoroughly reviewing the organization's existing layers and benchmarking the resource model against industry best practices and anticipated growth needs. 

It’s also important to determine where there may be functional and technical gaps in skills and deciding if these can be bridged with hiring or upskilling. We also recommend performing a time allocation exercise on the Office of the CFO—this entails having a conversation to truly understand where your employees at all levels are spending their time. Compiling this data and designating tasks as transactional, operational, or strategic creates a visualization of how time is being spent and can be a very powerful tool in helping to prioritize value-based initiatives. 

By taking the time to align your organization on value creation metrics and understanding how you will contribute to value from your own organization, you'll be in a better position to drive value throughout the lifecycle of the transaction.  

In Part 2 of this series, we'll provide an overview of how to measure and track value creation to ensure that you're achieving your goals.

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