As private equity firms are increasingly focused on adding value to portfolio companies, key performance indicators (“KPIs”) have been growing in importance. KPIs are quantitative measurements that allow users to continually assess a company’s performance; examples include Revenue per Client, Client Retention Rate, Customer Acquisition Cost, etc. These KPIs are often leading indicators – so rising Customer Acquisition Costs may foreshadow falling revenues, and so on.  Buy-side M&A lawyers can guide their clients to successful transactions by understanding the impacts of KPI reporting systems and what is required to transition from limited or no reporting to enhanced KPI reporting.  Understanding the advantages of enhanced KPI reporting can assist with valuations and factoring in opportunities for value creation to justify acquisitions.  Additionally, knowing what data is necessary to implement enhanced KPI reporting systems (post-close) can benefit the due diligence process as there is a better understanding of crucial data available to support the applicable KPIs of the company in question.

Rob Hong, Co-Founder and CEO of Sapling Financial Consultants, has been working with PE firms for several years to enhance KPI reporting for their portcos. Sapling started with Microsoft Excel-based dashboarding in 2017 before migrating to newer tools since.

Excel, of course, has many strengths, and is at the heart of investment bankers’ training and day-in, day-out. The ubiquitous piece of software is used to model LBO deals, compile comparables, reconcile financials, and just about everything else. It should be of little surprise, then, that private equity Associates bring their passion for Excel to their new PE employers, where they then deploy the software to portfolio companies, building internal budget models and developing KPI dashboards.

The issue is that Excel is a poor tool, and possibly a terrible tool, for KPI dashboarding. For one thing, KPIs are usually based on large data sets that drastically exceed Excel’s capabilities (> 1 million rows). This means that any Excel-based analysis has to be focused on a small subset. Moreover, often reports have to be pulled from several systems through a highly manual process. This leads to hours of unnecessary work and possibly significant divergences between the source system and the Excel report, as well as the likelihood of errors. Finally, it is difficult, if not impossible, to have more than one person using an Excel file at any given time, reducing the possibility of coworkers working together.

Evaluating a company for purchase that utilizes Excel-based reporting shouldn’t deter interest, but instead can be looked at as an opportunity.  If the data exists to support relevant KPIs, that should drive the transaction, as there is an opportunity to enhance the reporting system post-close, without having to pay a premium for a company that has already implemented a system.  By understanding what is required for accurate reporting, M&A lawyers can simultaneously identify value creation opportunities for PE firms during the due diligence phase.

So, what are these better KPI reporting tools? Programmers like to distinguish between a “front-end” and a “back-end” in the KPI-centered discipline of “business intelligence”, or “BI”. The “front-end” is what the typical user sees and works with – like the beautiful charts, graphs, and tables of a well-formatted dashboard. The most common front-end analytics tools on the market are Power BI and Tableau, though there are also other products such as Zoho Analytics, Sisense, IBM Cognos. They can do everything that Excel (and especially Pivot Tables) can in displaying and slicing and dicing data, and much more. The “back-end” is more like the large “table” spreadsheet tabs that store (but do not display) transaction lists. For most midmarket businesses, the classic database systems like MySQL and SQL Server are more than up to the task. For heavier loads, though, newer products like Redshift, BigQuery, Hadoop, and Snowflake have distinct advantages for data warehousing.

Using a proper BI system instead of a dashboard spreadsheet has many advantages:

• Data is available in (close to) real-time and is automatically updated
• There is a single “source of truth”
• Different dashboards can easily be created, and automatically maintained, for different users (e.g., one for CFO, one for COO, one for each Regional VP, etc.)
• Entire data sets can be analyzed at a time, instead of, e.g., just the previous month’s data
• Executives can interrogate the data themselves with “drill through” capability, rather than asking a portco Analyst and waiting weeks for a response

So, if BI systems are so vastly superior to Excel, why aren’t they used more? According to Hong, who has one foot in the investment world and one in the IT world, there are likely several reasons. One is simple lack of awareness – he explains “a Harvard MBA I know was analyzing a data set with millions of rows, feverishly trying to build KPIs off half a dozen Excel spreadsheets open all at once.” Despite some improvements, typical business training is falling behind the leading edge of technology. Many of the decision-makers at private equity firms are also far removed from Excel, let alone cutting-edge data analytics. This means that most IT vendors that could help don’t “speak the same language”. Cost – or at least an outdated impression of cost – can also turn people off. Finally, PE firms like to control data flow; Associates understand Excel and can control it, but without training will struggle to supervise portco BI projects.

As advisors to a transaction, understanding the shortcomings of Excel-based reporting and the alternatives available provides greater insight into what to look for during the due diligence process.  Attractive acquisition opportunities should have value creation opportunities post-close, such as the ability to implement BI systems without having to pay premiums for firms that have already taken this step.  This can ensure that not only is reporting up-to-date, visual, customizable, and dynamic, but the process is efficient by having an automated database back-end.  Guiding transactions while outlining future checkpoints for PE firms to add value is key to successful deals, and implementing BI systems can inform decision-making to grow a company.

The solution to execute this effectively is twofold: first, PE firms need to level up their staff through the plethora of cheap and high-quality training that is available at continuing education schools or even online. And second, find trusted vendors who can help navigate both the PE firm, and their portcos, through the process of digitalizing their dashboarding. PE is an industry that is premised on bringing best practices to companies that can benefit from stronger management. Consequently, it’s critical that PE firms become fluent users of the BI new tools that are increasingly becoming the norm in well-managed businesses, or risk falling behind.