When it comes to creating value and driving growth for private equity portfolios, SaaS management is becoming an increasing priority.
In pre-Great Recessions times, financial creativity could satisfy most private equity investor demands. But as sales multiples balloon, leverage, earnings growth and other financial engineering sputter as stand-alone tactics. The traditional private equity playbook no longer works.
In response, firms have intensified efforts to grow operational capabilities. Today, the size, skill and functional depth of operating teams are connected to maximum value extraction.
While a Deloitte study shows that over 70% of funds are maturing their operational capabilities, results also suggest that just 10% of funds have a structured plan to add cross-portfolio operational capabilities. Over two-thirds of funds surveyed recognize the potential to add enhancements across multiple portfolio companies, but were just not effective.
In this article, we discuss how focusing on operating effectiveness – specifically around IT and technology processes – can generate new value and protect against financial risk. As well, we feature SaaS optimization as an improvement that can be simply, broadly and cost-effectively applied inside an operational diligence plan.
Operating effectiveness to drive company value
To understand where value creation actually comes from, Capital Dynamics and the Technical University of Munich took an in-depth look at over 700 deal exits from around the world. The study considered data around sales, EBITDA, enterprise value and cash flows between investors and portfolio companies.
The study found that operational improvements accounted for more than half of all transaction value, while leverage made up less than a third. When exploring these findings, one industry consultancy points to reducing costs, eliminating waste and streamlining processes as focal points. The study also featured asset utilization optimization (with software licenses, for example) as an area to improve return on capital
Similarly, Financier Worldwide published a perspective on the role that maturing IT and operational due diligence plays in creating additional value from portfolio companies’ operations. The article notes that:
“Those that successfully perform operational diligence have more insight into what operational value they can add, thus warranting a higher multiple. As for IT diligence, its role is becoming more critical due to the ever increasing role of technology... [The role] is to identify if the IT systems can scale to meet the PE firm’s investment thesis, coupled with providing insight regarding the opportunities to better leverage technology to streamline processes, reduce costs, or increase customer loyalty.”
Follow on observations show that leading PEs are shifting toward “closer operational monitoring, including 100 day plans”, to better realize upside value potential. This includes addressing certain IT commodities and using technology to reduce costs and “drive more informed decision making”.
But timing is critical
TriVista, a private equity advisory firm, warns that timing is everything when considering broad portfolio improvements. In eras past, operations were considered in early diligence phases, within a bigger risk-avoidance conversation. Now, successful firms are pushing for more post-deal institutionalization of processes and protocols. That is, they are looking for improvements that can apply portfolio-wide, regardless of the industry or offering of a portfolio company.
They are making these improvements rapidly, too. In many cases, these firms are establishing operational plans for each portfolio asset in less than one quarter. To this point, financial consultancy Plante Moran finds that “elimination” is an especially useful differentiator for successful PEs within the first sixty days of an acquisition. Specifically, “developing and implementing process change to eliminate redundancies in work processes.” Driving productivity and being cost-conscious are key facets in the early stage, as well, according to TriVista.
This early promotion of operational excellence creates a new dynamic dubbed, ‘operational velocity’. Simply put, it means reducing business cycle times because of fewer forecast errors, reduced costs and streamlined processing.
Operating effectiveness to reduce financial risk
In the last two years, one operational area undergoing scrutiny is software license management. SAP’s £60m and $600M licensing suits against Diageo and AB-InBev, respectively, highlight the challenges that corporates’ IT, finance and legal teams face in identifying and managing software deployments.
In both of these cases, according to ITAM Channel, even inadvertent and trivial licensing discrepancies proved costly. But this begs an important question for license management and compliance. Can M&A parties establish financial certainty?
For LPs, addressing this area of latent risk across a portfolio is important to reduce future contractual penalties. Even if protected by seller warranties, these are always for a limited time and often subjected to fixed caps.
Because of license visibility and contract complexity issues, ITAM Channel offers this guidance to sellers:
“...commision an internal software license audit, remediate under-licensing at lowest cost and be confident that warranties and indemnities can be given with confidence.”
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SaaS management improves risk and value for private equity companies
INSEAD research shows that adding operational value drivers that are cheaper and faster to execute than others creates an advantage. In particular, the research guides PEs to improvements in optimizing financial reporting and management information systems.
The findings also support the idea of a cost-complexity-value tradeoff for every improvement initiative. Thus, PEs are wise to consider optimizing return versus level of effort. Of course, judging an operational improvement’s contribution to return is hard to gauge. But one area in particular proves meaningful: software license management.
Optimizing SaaS is an improvement step sitting squarely in that complexity and cost sweet-spot that INSEAD references. At Cleanshelf we understand its benefits based on four dimensions:
Discover: Automatically identify all your SaaS services, see every user license, and understand how much your enterprise spends on SaaS subscriptions.
Assess: Measure software utilization, determine your risk exposure, and identify wasted spend across all deployed SaaS subscriptions.
Optimize: Using AI, learn which licenses owned by your enterprise are unused, underused, or duplicated so you can automatically right size your SaaS subscriptions.
Control: Maintain CIO or CFO visibility, intelligence, and actionable insights to control your enterprise SaaS.
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BCG confirms that top fund performers value operational efficiency. For these companies, margin enhancements in areas like SG&A expense reduction are first-order priorities. With Cleanshelf, cost savings joins improved productivity and cybersecurity and compliance risk reduction as immediate benefits.
Moreover, the platform proves effective for companies preparing for M&A and sale. In particular, SaaS management improves the speed of financial due diligence (e.g., better visibility equals better forecasting), the quality of the HR experience (e.g., tools required for new team onboarding) and the simplicity of IT integration (e.g., addressing software redundancy).
LinkedIn case study
In the case of one CFO whose company exited to LinkedIn, Cleanshelf helped accelerate the deal process by providing instant access to material software agreements. This CFO noted how easing the acquirer’s IT due diligence by clarifying what assets could be wound down was a key benefit area.
Private equity firms and their portfolio companies tangle with unpredictable markets, technology, fraud and regulatory threats everyday. Confidence to take these on grows when the right technology, visibility and data are in place. Given how software-centric people and processes are today – these factors are improved with streamlined SaaS management.
Cleanshelf supports hands-on PE operators and their companies to optimize decision making, save money and align software processes and tools. With its easy-to-use, flexible platform and simple buying experience – plus built-in integration for PE’s future investments – firms are prepared to capture future operational value, today.
Based in San Francisco, Cleanshelf is the best way for enterprises to monitor and manage their SaaS spend. Our SOC 2-compliant and AI-powered technology saves our customers up to 30% on fees. Cleanshelf already helps businesses like Hilton, AT&T, CoStar and Jamf, among others. Join them now and gain control of your enterprise SaaS.