Post PE investment, the CFO and the wider finance team will very quickly feel pressure from their information-demanding investors. A common temptation and mistake is to simply recruit extra staff to deal with the increased demands and requests. Whilst this can alleviate the short-term pressures, it can lead to problems later in the journey as the risk of manual intervention and human error becomes more elevated.

From personal experience (and mostly hindsight) in different PE backed situations, an obvious solution is ensuring the appropriate systems and processes are in place and in place early enough in the PE journey to realise the maximum benefit. As part of any 100-day plan in a new PE backed business, the CFO should be responsible for a full and frank assessment of the existing financial systems and control environment, together with a decision on whether they have the suitability and scalability to deliver what is expected by the PE investors through the hold period. 

If the decision is that the legacy system is not what is required for the duration of the journey then a decision on replacing this is best taken within the first 100 days.  Taking swift action to address shortcomings in systems and processes enables the business to maximise the return on investment and the wider benefit on the eventual exit potential.

The historical barrier to new system implementations of upfront capex investment has now been widely removed with the introduction of monthly subscription models, making the process of system change easier than ever before.  Organisations can now implement sophisticated finance and ERP systems to support a growth journey across multiple locations with little or no upfront costs. The speed of deployment for such new systems is also considerably quicker than it has ever been historically.

If system replacement is the path of choice, then there are a few key areas that need to be considered in your ERP system evaluation to ensure that there is alignment with the expectation on the CFO elements discussed above.

1. Cloud Platform

Most technology applications are now cloud-based to provide anytime, anywhere access. Many businesses have already made the switch to cloud based applications such as Office 365 and SharePoint and are used to accessing emails and documents quickly and easily on any device regardless of location. However, shifting the crown jewels of the IT estate, the ERP system, to a cloud platform is a more challenging proposition for some organisations mainly because of concerns and challenges around data security and connectivity.  Working through these initial concerns it is eminently possible to demonstrate that there is a cloud-based solution that can work for most organisations.

ERP vendors are now shifting away from on-premise solutions at pace and therefore, to avoid any future obsolescence in your chosen ERP solution, it is a must that it is cloud enabled.  A monthly subscribed cloud-based ERP solution provides many benefits over a traditional on-premise version, including:

  • the eradication of the need to purchase and maintain local hardware
  • evergreen back up of all data being held securely offsite
  • continuous upgrade of ERP system to latest version – no costly one-off upgrades
  • the ability to quickly scale and flex to match ever changing business needs
  • a shift towards flexible and remote working patterns – a useful tool in recruiting within a growth business

2. Flexibility and scalability

With pace of growth being a significant factor in most PE backed businesses, choosing an ERP platform that can align with the size and needs of the business at the outset but have the underlying structure and ability to scale quickly with the organisation is a key consideration.   Scaling can manifest itself in many forms, whether through the establishment of new services, opening of new locations, addition of new currencies or through bolt-on acquisitions.  Implementing an ERP system that is designed to cater for multi-entity, multi-locational, multi-currency organisations can therefore be an important future-proofing factor at the outset.  Of added benefit, having such functionality in a cloud-based solution facilitates even easier and quicker expansion into new locations and territories and also speeds up the deployment into and adoption of the primary ERP system by newly acquired bolt-on businesses.  This is a key driver in reducing operational risk and cross-organisation integration, together with reducing overall costs.

3. Ability to integrate

When implementing a new ERP system, it is not always appropriate for a business to discard and replace all of the systems that it has used historically.  Many businesses operate separate payroll, HR or specific industry packages and, assuming these packages have the scalability for a growth journey, these systems can play a central role in the continued success of the business.

Accordingly, a primary consideration when selecting a new ERP system must be its ability to integrate with existing systems.  Such integration should be in the form of fully automated interfaces as relying on semi-automated interfaces that retain an element of manual intervention hampers scalability and introduces manual error risk.

If continuing with certain legacy systems, it is of benefit to select a new ERP platform that can be implemented (and paid for) in a modular approach.  It is a costly mistake to implement an all-encompassing new ERP system if there are certain elements and functions that are not required.  Instead, being able to build up your new ERP by selecting key modules that are required to work in tandem with any retained legacy systems, will be a far more cost-effective solution.

4. Insightful and actionable outputs

Of key importance to the PE backed CFO is the quality, depth and integrity of the data outputs that a new system can generate.  Understanding the full extent of the out-the-box reporting suite of a new ERP system is critical; many organisations rush to customise reporting at the outset without fully considering what is already available.  This can increase the implementation cost straight off the bat and is not always the best avenue to proceed down as there can often be a cost of maintaining a suite of bespoke reports to preserve alignment with latest releases of the underlying platform.

Instead of pursuing bespoke reports that are rarely flexible, the more sophisticated ERP solutions now offer interesting analytics tools that give companies the ability to drill down and interrogate their data in many different ways.  Linking to some impressive integrated dashboard and business intelligence tools can provide a PE backed CFO with insightful interpretation of business performance that was not previously available with such ease.  Having real-time access to such rich BI from anywhere and on any device, facilitates fast and decisive action across the business; this can often be the difference between meeting and missing EBITDA for the month.

5. Ability to realise efficiencies

A key driver of return on investment when implementing a new ERP system, is the level of efficiency gain that can be driven out of the new processes.  In many cases, small to mid-sized PE backed businesses have come from a background of manual control processes that are based on review of printed data and physical approval signatures; this approach is time consuming, can often be bypassed and generates huge volumes of paper that are stored on site in numerous lever arch files and dated filing cabinets.

Moving to automated workflows that are embedded in the ERP system and route approval requests to the appropriate people for electronic sign-off can realise enormous efficiency gains for the business.  Not only does this significantly expedite approval processes, it ensures there is no manual override or bypassing of approvals and, by shifting away from reams of paper approvals, frees up accommodation capacity to facilitate continued growth of the business.  However, possibly more importantly, by significantly reducing the process burden on staff, available time is released back into the business for billable operations and fuelling growth.

Coupling this with a cloud platform that enables access from anywhere on any device facilitates rapid workflow approvals and therefore avoids operational delays.  It also enables staff to access real-time, accurate data on customer projects, meaning appropriate conversations with customers happen sooner.  Early conversations deepen the customer relationship and build trust, which invariably leads to increased annuity revenue streams; a key exit valuation driver for PE backed deals.

6. Industry expertise and accreditation of implementation partner

With an ERP system being at the very core of a company’s organisational processes, it is imperative that the chosen implementation partner has appropriate deep industry experience; the additional value this can bring to the project is often not quantifiable but not having it is proven to be detrimental to the success and on-time delivery of the implementation.

7. Understand the impact on culture

ERP implementation projects can create massive change in an organisation, from changing day-to-day roles and responsibilities to eliminating certain jobs altogether.  Such changes impact the culture of the business and without careful control and communications they can very easily create barriers to the implementation and user adoption.  Organisational change management is therefore a critical component to the success of any ERP implementation project.

Having the right systems in place from the outset can help drive the required change in culture, particularly within the finance team of the business.  Rather than bringing in more people to cope with the added demands of the PE investor, the existing team can evolve and develop their roles into more interesting and rewarding work.  With new systems and processes from the outset, the finance team can quickly move from a focus on data entry and data manipulation on spreadsheets to review of dashboards, data interpretation and driving actions in the business that directly and positively impact EBITDA performance.

CFO-to-CFO-cover.pngCFO to CFO: Ensuring your Private Equity backed business has the right platform for growth

CFOs have a broader remit more than ever before. Our CFO, Stuart Kerr, takes his 20 years of experience and breaks down the core challenges and risks faced by CFOs, and suggests how to overcome them in our free whitepaper. 

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About the author

Stuart Kerr CA is the co-founder and CFO of Incremental Group and is responsible for the overall financial performance of the business and M&A.  Before co-founding Incremental Group, Stuart was Finance Director at Amor Group, a PE backed business, where he led the finance organisation through a period where it doubled its revenues to £60m over 4 years and successfully managed the sale of the business to Lockheed Martin.  He is a Chartered Accountant and spent 12 years with PwC focused on M&A.