With investment firms still looking to deploy large amounts of money, competition for deals continues to be fierce. For firms actively looking for new investments, displaying true value add is becoming paramount as a differentiator in the deal cycle. Additionally, with deals becoming more expensive, firms need to find ways to improve total return once an investment is made.
One way in which more and more firms are looking to provide value in both of these areas, is in the creation of shared services for finance and accounting (F&A) for their portfolio companies. When deployed effectively, firms are seeing value creation at the investment level in multiple areas including: more robust and timely information for enhanced management decision making, improved revenue capture, reduced churn and lower operating expenses.
Historically, getting timely, insightful financial information from portfolio companies can be challenging for reasons that include:
- A shortage of affordable high quality finance personnel
- Disparate and immature systems that don’t allow for critical drill-down and analysis
- Lack of proper internal controls affecting accuracy of numbers
- Process inconsistency across companies that leads to questions of methodology vs. the message of the financials.
By combining accounting and finance best practices with advances in cloud technology, investment firms can now leverage a shared services model as a value added component of their investment model. Centralizing formerly distributed company specific finance activities creates leverage and increases value in several areas.
Consistent & Insightful Financials – Having a defined software platform, processes and methodology for compiling financial information across different entities enables more timely and insightful financial information than would be possible with companies attempting to each develop these components independently. A robust platform of integrated applications also allows for more dimensional reporting and deeper analysis than can typically be achieved through the piecemeal application structure typically found at most small companies. This combination allows management and investors to spend time analyzing the message of the financials and making adjustments in the business vs. questioning the underlying methodology or accuracy of the numbers.
Improved Controls – Through the application of systems and processes with the proper checkpoints, critical performance metrics of revenue and churn can be positively affected, increasing enterprise value. Especially valued by firms who have experienced a fraud event, consistent control points applied across companies, along with better segregation of duties between accounting transaction processing and the business can significantly reduce potential for errors and the opportunity for fraud.
Reduced Expense – Large organizations have reduced expenses by centralizing transaction processing for decades but smaller companies haven’t had that option due to lack of scale. By creating consistent processes for sets of standard activities across portfolio companies, private equity firm shared service models aggregate work across entities and thus create scale with similar leverage. Centralization reduces expenses by improving the utilization of resources which would otherwise be distributed across companies less efficiently. The shared service model also opens up access to a global labor pool, eliminating dependency on higher cost labor markets and further reducing expenses. The same leverage point can be applied to technology where investment in automation can produce an ROI in a centralized model where the automation only has to be done once, while it would not make sense for any one small company to make such investment.
For more information on how leading investment firms are leveraging shared service models in accounting and finance to improve performance across their portfolios, contact us for a no-charge consultation.