Business intelligence: critical insight for private equity.

• Author: Stiffler, John
• Position: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

In a challenging economic environment, managing at both the general portfolio and operating unit levels has taken on greater importance. Private equity firms and management teams must look at every possible avenue in order to streamline company operations and improve performance.

Business intelligence (BI) is a system for analyzing collected data, with the purpose of providing a better view of an organization's operations to ultimately improve and enhance decision-making, agility and performance. Contrary to popular belief, implementing or improving BI isn't necessarily expensive or time-consuming. It isn't only about tracking financial metrics, and it doesn't have to involve a wholesale replacement of existing systems and processes.

Regulatory changes, such as FAS 157 and the Dodd-Frank Act, are putting pressure on PE firms to manage themselves and their portfolios more effectively and efficiently. Focusing on leading and lagging metrics across portfolios can provide the insight necessary to do so.

But many firms struggle to develop timely and accurate metrics because they don't have the tools and processes in place to draw real-time data from across their portfolio companies and consolidate it into a forward-looking view of investment performance.

Keys to Better Performance

One of the keys to effective portfolio management is insight--in particular, establishing metrics and collecting and organizing information that enables private equity firms to make timely, effective decisions with respect to portfolio company operations, value creation opportunities and transactions.

Most PE firms use a simple application (such as Microsoft Excel) combined with manual processes to track financial performance. However, compiling and synthesizing data can be difficult and time-consuming and often produces reports that, by the time they are completed, are out of date.

In addition to understanding a single portfolio company's performance, PE firms also need to draw information from across companies in order to assess overall investment performance.

Despite their inherent need for performance data, many firms have not expressed the same level of interest in establishing the same BI capabilities as the corporate world at large. According to West Monroe Partners' research, more than 70 percent of private equity firms have not invested in BI solutions.

Benefits for Private Equity Firms

Private equity firms actually have many good reasons for improving their...