Data-driven decisions are at the heart of today’s fully connected, complex business world. Yet some of the most significant strategic decisions made at the C-suite and private equity level are fueled by under-powered analysis tools that often fail to uncover the most important insights in the data.
Potential misses are particularly concerning during mergers and acquisitions (M&A), when strategic decisions involving the fate of companies and investments of millions of dollars might hinge on a complete and nuanced assessment within a compressed window of a buy-cycle timeline.
“Historically, these data-driven problems have been attacked with the closest and most comfortable tool at the analyst’s disposal, like [a basic spreadsheet program],” says Doug Schrock, managing principal of the manufacturing and distribution services group at Crowe. “What we’re seeing today is that selected, critical problems are being addressed with much more powerful business intelligence (BI) tools as well. Within hours, ad hoc analysis of millions of records through BI have revealed insights that a spreadsheet approach would have missed.” The power of these tools is further amplified when someone who knows the industry knows what to look for.
Modern business intelligence suites can help the CFO and equity investors realize more value from M&A, improve earnings before interest, tax, depreciation and amortization (EBITDA) in short order and gain more value through stronger positioning when exiting a business. In less time than building an analytical spreadsheet or database would have taken five years ago, BI can produce a multi-faceted and powerful analysis.
“The opportunities to apply today’s BI tools aren’t just theoretical or relevant only for companies with big IT teams. There are low-cost, high-impact applications that just about anybody can use,” Schrock says.
Here, Schrock shares four key points in the lifecycle of an investment where BI’s potential is often underutilized. If your plans include any of these activities, talk to your financial organization, your IT group, and a trusted partner about opportunities to add BI to the process.
1. Better Buy-Side Due Diligence
Generally, pre-close due diligence requires the buying company to assess a large collection of data within a limited window of time. It’s impractical at times to flow potentially massive amounts of data into a typical analyst spreadsheet, so historical due diligence efforts on a particular issue either took significant effort or required extrapolation off a small sampling of the full data set.
BI tools are designed to quickly ingest high-volume and extremely granular data and discover new relationships through visual dashboards. They can help an acquirer better understand hidden pockets of opportunity and identify risk within the revenue and profitability profile of a target and prepare the buyer with data-driven operating decisions as soon as the deal closes.
Why bring new tools for a deeper dive into the due diligence phase? As an acquirer, your success with the investment can be improved through spotting revenue and margin opportunities that were missed by former ownership. These opportunities are most often waiting to be found when the target has grown through a history of acquisitions. The varying practices of the different business units and the disparate IT systems are often covering a wide range of performance improvement opportunities.
“When we worked with a private equity firm considering a manufacturing purchase, our BI analytics revealed inconsistent pricing practices as the source of variable item profitability across the target’s eight facilities,” Schrock says. “We uncovered over $350,000 in strategic pricing opportunities by looking at the data across a variety of data sources, all combined within a BI tool.”
2. Faster Synergies After The Close
In due diligence, improvement opportunities uncovered by analytics are merely potential. As soon as the deal closes, you’re free to make changes. Instead of waiting for months or quarters before slowly rolling out value-generating changes, BI can help deliver the acquisition’s potential almost immediately.
“When the company transitions from a target to part of your portfolio, the right BI analytics should have set a model for change on day one,” says Brent Warren, senior manager in advisory services at Crowe.
BI can also keep the investment thesis projections honest, providing detailed accounting of whether, where and how the transaction is generating savings and additional value the deal was in part predicated on. For example, BI can show how effectively the combined companies are reducing the total number of suppliers and whether purchasing operations are becoming more effective as a result.
Crowe worked with a $2 billion global manufacturing company following a series of acquisitions. A combination of BI and performance consulting spotted immediate opportunities to secure significant discounts and improved commercial terms on production materials, general supplies and services of more than $2 million annually. BI insights into freight and shipping uncovered more than $3 million in logistics savings.
“All told, BI enabled us to deliver more than $5 million in annual run-rate savings in just 25 weeks,” Schrock says.
3. Improved Operations And Higher Returns
Once the initial surge of acquisition excitement is over, the operating teams need to deliver a sustained series of improvements during the years of the hold where transformation and scaling are taking place. CFO and financial teams can apply BI on an ongoing basis to gather deeper intelligence and locate opportunities to boost EBITDA.
“Everyone agrees the company should understand profitability by factors such as item, customer, and geography, but generally people aren’t doing enough about it,” Schrock says. “The right BI delivers dashboards to enable leaders to see the anomalies in your margins and to allow for immediate change in pricing.”
A $300 million food manufacturer with numerous manufacturing facilities and more than 50 retail and distribution centers asked Crowe to help reduce costs and increase EBITDA. Crowe analysis revealed opportunities in SKU-level profitability optimization as well as outsized costs associated with freight and product returns. With minimal involvement from internal IT, Crowe implemented new analytics and operational improvements that led to $14 million in EBITDA gains.
4. Exiting And Attracting Potential Buyers
Investment realization becomes the ultimate measure of success when judging your effectiveness in any deal. Sellers compete for investment dollars, and BI-derived dashboards can highlight a wide variety of impressive trends to help the company stand out as a great target for the next buyer. Not only is there power in showcasing the company’s best attributes, but the speed and depth you can apply to a buyer’s request for more information could make the difference between losing interest or creating more through the strength and speed of your response to their questions.
“With strong BI, you can turn answers to complex questions around in a day. Being able to do so shows that your management is on top of the company and evidences that your underlying IT systems are strong,” Schrock says.
When a large, private equity-owned distributor was preparing to sell its business, it didn’t have a good answer on how to position its fragmented operations running on multiple ERP systems. It had not consolidated to a single ERP in the past, and to try to tackle this in the period nearing sale would prove risky and disruptive. Instead, Crowe developed BI dashboards on top of feeds from each ERP that demonstrated the distributor’s production, sales and finance functions, consolidating the data from multiple systems into a single, cohesive system. The distributed ERPs were positionally demoted to localized transaction-capture systems, while the company was run through a consolidated set of overarching dashboards that were quickly built on top. The return for this low-risk investment was high as it greatly strengthened the company’s face to the market.
Making BI Part Of Everyday Operations
BI and data analytics projects don’t need to be viewed with the same level of risk and cost that have historically plagued other IT investments such as ERP. The BI software and service delivery landscape is a competitive space, so the cost of BI tools and expertise has decreased considerably in the last two years. Further, the need for a company to staff in-house IT resources to support the systems is minimal, particularly after initial setup.
“IT teams and business users get excited about BI because they love to see the power of their new technology in the organization,” Warren says. Once a data-driven environment is created, the IT staff will have delivered self-service solutions to the business users that offer on-demand insights into the organization and elevate informed decision-making.
To rein in large data sets, make the most of pending transactions, and deliver on the promise of attending every acquisition, BI can help turn numbers into strategic results.