Assessment of a Company’s cloud maturity has become a critical component of investor due diligence. Investors expect their potential portfolio companies to have a set of “must-have” cloud technologies, such as data analytics and collaboration tools because they can have a positive impact on many aspects of the business. In our experience, investors perceive the lack of an adequate set of cloud technologies to be a competitive disadvantage that could impact enterprise value.
How Cloud Maturity Drives Transaction Value in Private Equity Transactions
Cloud-based technologies, when implemented properly, significantly accelerate technology transformation in private equity (PE) portfolio companies, improve operational performance and generate a high return for investors. Over the last few years, we have witnessed many PE portfolio companies implement cloud technologies to reduce cost and rapidly improve their financial and operational reporting, back-office efficiency and internal collaboration, including:
- A mid-market manufacturing company realized savings of over 25 percent on recurring IT costs and improved their on-time fulfillment by 20 percent within six months of migrating their back-office functions from expensive on-premise systems to cloud solutions.
- A clothing retailer increased revenues by over 10 percent and reduced ongoing system maintenance costs by 15 percent by moving from legacy point-of-sale (POS) systems to cloud POS with omnichannel and mobile sales capabilities.
- A software vendor improved their uptime and reduced overall infrastructure cost by 15 percent annually and moved their hosting infrastructure from an internally-managed, on-site data center to cloud hosting.
Due in part to the benefits of cloud maturity mentioned above, investors now seriously consider a company’s effective use of these technologies – or the lack thereof – as a critical component of their due diligence.
Enhancing Transaction Value Through Cloud-Enabled Technology Transformation
Private equity investments are frequently accompanied by the need for technology upgrades. Post-acquisition, investors demand significant improvements in efficiency, better analytics and higher productivity, which frequently requires migration from legacy on-premise technologies to more modern and flexible technology platforms. Based on our experience working on multiple technology transformation initiatives, below we highlight five key technology trends that have emerged in the last few years:
- Self-Service Data Analytics as a Platform: Rapidly deployable data analytics tools such as Tableau, Qlik and Domo, which if implemented properly, enable portfolio companies to analyze large amounts of data and perform numerous ad-hoc analyses without reliance on IT staff. Management, investors and operational staff gain better visibility into sales, margin and operational metrics as a result.
- Back-office Business Functions as a Platform: Cloud-based back-office solutions, such as ADP payroll, UltiPro HR, Workday and NetSuite ERP have become mature, full-featured solutions and a viable option for mid-market companies. These technologies offer majority of back-office functions out-of-the-box at a reasonable cost and, if implemented properly, can improve back-office productivity.
- Collaboration and Communication Platforms: Cloud-based communication and collaboration tools such as Slack, Microsoft Teams and cloud call centers provide robust features for remote collaboration and communication with a measurable impact on workforce productivity.
- Machine Automation, AI and IoT: Developments in machine automation, artificial intelligence (AI) and Internet of Things (IoT) are improving operations in manufacturing and asset-heavy industries. These technologies are also becoming more mainstream.
- Third-party Digital Security Platforms: Use of third-party platforms for information security management, integration with payment platforms and intrusion detection services enable access to industry standard services with strong service level agreements.
Portfolio companies that have paid attention to these technology trends often have better visibility into operations, have higher productivity per staff and can find more opportunities to grow revenues.
Key Drivers of Cloud Adoption
The key drivers that enable businesses to evaluate and eventually adopt cloud solutions include:
- Not wanting to manage hardware or software internally (maintenance, upgrade, etc.);
- Not wanting to pay a large sum upfront resulting in overbuilt/under-utilized capacity;
- Not wanting to pay for features they do not use;
- Not wanting to continue investing in technologies that are quickly made obsolete;
- Their business is scaling up or down; and/or
- A desire to pay for services as they are consumed.
Several mid-market reputable cloud solution vendors have emerged over the last few years, with back-office, customer service, sales support and infrastructure solutions now available to its customers. Below is a list of the key benefits:
- The solutions are highly usable and encompass a comprehensive set of features and functionality
- The solutions are highly reliable, with zero to minimal downtime and fast performance
- The solutions are accessible anywhere and anytime
- The solutions are properly sized to support the middle market
Adoption of cloud technologies can significantly improve operational efficiencies within a given business and are increasingly a major consideration for investors during the pre-deal due diligence.