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Working on big, expensive, complicated technology problems.

Private Equity

What is the cost per user?

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Until you fully understand the impact of cost per user, IT cost reduction or investment decisions are like playing roulette

When technology teams are asked to think about costs the first thing they think of is how to get them to come down. As important as this is It’s only half the story.

The other half is understanding what technical resources need to be targeted. How to deliver the greatest return without negatively impacting growth. How to manage the cost per user.

This example might help explain more…

Let’s Imagine you have a Portco that is a SaaS company

You have 1000 customers, annual revenue of $1m and EBITDA of 50% and sell 3 different SaaS products with an average revenue per customer of $1000.

It’s reasonable to assume that the bulk of the cost is in supporting the customer with technology. The technology cost that is reported to the board is $300k p.a.

To service an average customer from a technology perspective it costs $300. Each customer either uses one or all of the different products and has between 1 and 10 users licenses per system.

Product A is sold for $200 p.a

Product B is sold for $700 p.a

Product C is sold for $100 p.a

With an average cost per customer of $300 then a customer who uses only Product A or C becomes unprofitable. Or do they? Using the cost and revenue per customer you can’t really tell.

But If you knew how much each user cost…

If you knew that …

Product A, a single user cost $20 p.a

Product B a single user cost $600 p.a

Product C a single user cost $100 p.a

You might change your licensing model for product B or you might look to make product C more efficient. You might look at Product A and look at further increasing the margin.

What if your planned digital transformation could increase the revenue per user by $100 p.a without increasing the cost per user?

Or that cloud migration you’ve been hearing about would reduce product C’s churn by 5%.

Or users thought that product A was too expensive compared to competitors.

Those are valuable insights you’d probably want to know…the cost per user can help you…

What results does your Private Equity firm get from technology product reviews meetings?

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I’m coming to the end of my mid-length vacation in Italy. This year, on the beach, I’ve been re-reading ’The Phoenix Project’. It’s a novel about tech jargon, delays and re-prioritisation that limit technology value creation.

Here’s a short synopsis.

‘Bill is an IT manager at Parts Unlimited. It’s Tuesday morning, and on his drive into the office, Bill gets a call from the CEO.

The company’s new IT initiative, code named Phoenix Project, is critical to the future of Parts Unlimited, but the project is massively over budget and very late. The CEO wants Bill to report directly to him and fix the mess in ninety days, or else Bill’s entire department will be outsourced.’

This should be a familiar story.

Part of the solution they find is introducing a structured way for tech and non-tech teams to work together. One in particular that should resonate is the ‘Product review meeting’.

What is a product review meeting, and why should Private Equity be involved?

Technology teams can seem random, unorganised, and slow to make change. As a private equity operator, you’ve probably found yourself frustrated by tech teams. The product review meeting is your chance to work with your tech leaders. Your chance to influence the technology roadmap. Your chance to align this to the value creation strategy.

There are 5 key elements to agree at a great product review meeting.

  • What we will build and why we will build it.
  • How long we think it will take.
  • How much we think it will cost.
  • The value will we create as a result.
  • How confident we are with those estimates.

Great PE firms run product review meetings with their tech leaders twice per year.

The best PE firms are running product review meetings quarterly. Including leaders and doers from tech, sales, marketing, operations and support. Bringing together small teams of 5-8 people at most.

Product review meetings, not board meetings, are where the success of businesses is decided in 2021.

Until next time.

Thomas

If you are interested in the book, the ‘Phoenix Project’ you can find it here.

https://www.amazon.com/Phoenix-Project-DevOps-Helping-Business/dp/0988262592

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A nice story, but what does it have to do with technology value creation?

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For the first time in a long time, I took an international flight. In 2021, you need to complete some new forms…

A passenger locator form, this lets people where you are going and why. A negative COVID-19 test certificate 48hrs before departure. A copy of your vaccine certificate, 0 1 or 2 doses.

The airline I flew with had a handy portal when checking in. The portal ‘associated’ these records to your digital boarding pass via an upload tool.

Seems simple enough.

However, when you get to the airport and try to check in, it turns out that the upload portal was merely a facade.

The airline operator doesn’t have the technology to access the uploaded info. You needed to remember to print a paper copy just in case for manual checking.

It’s not over yet.

You then get a small slip of paper to be presented at the boarding gate to say you’ve been ‘checked’. The number of people I saw who lost this piece and had to go through this process again was significant.

You might be thinking, well, that was a nice story, but what does that have to do with technology value creation?

I’ve been having an increasing number of conversations with firms looking to speed up digital transformation.

The first step most teams want to take is building a facade similar to the example shared here. Technology teams can forget that their applications help real people do real things. If they don’t work as expected in the real world this has a real impact to peoples lives.

Instead of asking how quickly can I do this transformation programme, the best teams ask…

What can I help our client do now that they couldn’t before? What’s the most value we can deliver within our current limitations. What will people see and think when they see this.

These same teams will monitor the impact positively and negatively.

Looking at technology related churn, NPS changes and customer survey results.

How often do your tech teams actually use their product they are building? Have you seen changes to NPS after a recent software change?

How would you value the benefit of getting this type of change right or wrong?

Until next time.

Thomas

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Why data science is fast becoming the competitive advantage in Private Equity

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When you talk to PE firms about Data Science. Some will talk very openly about what they are doing. Others will prefer to talk about anything besides Data Science. Very few have little to no capability in this area.

Some PE firms have built large teams of data scientists to compete against their rivals. Who can find the best deal. Who can find the most value. Who can drive the fastest portCo revenue growth.

First, what do we mean by Data Science.

Taking data, either publicly available or private data. Analysing that data, using automation (AI/ML) or not. Using that data to create insights. Using those insights to make business decisions.

There are three areas where data science is giving PE firms a competitive edge

  • Pre-deal due diligence
  • Post deal value creation
  • Portcos own industry-specific usage

When it comes to Pre-deal due diligence, the challenge is getting data

The best PE firms get around this by sharing the gaps and assumptions they are using for their data models. They give their internal teams the opportunity to challenge these assumptions. This process helps build confidence in their data science capabilities.

Post deal value creation has less of a problem with data but a greater problem with consistency

The best firms have created data science toolkits that they give to their PortCos. These toolkits include data capture templates, value creation models and reporting guidelines. These toolkits are consistent, repeatable and easily deployable. All things that build confidence in the output.

Portcos can often have immature data science capabilities

The best PE firms bring with them sandbox data science models. These sandbox models will allow teams to grow their data science capabilities. They can start to bring insight to the decision-making processes sooner.

How would you benchmark your firms data science capabilities?

Do you get a sense that data science is delivering insight to help you make decisions in your portCos? What do you see the biggest area for improvement? Where does data science on your PE firm’s agenda?

Until next time.

Thomas

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Putting a dollar value on Cloud Cost Optimisation

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Picture this, each day your PortCo tech teams are provisioning more cloud services. Each month your cloud infrastructure bill is growing. There are rumblings of setting up a new data centre in Austin and South Africa. Something doesn’t feel right.

You suspect that your PortCos might be spending too much money in the Cloud. You might be wondering how much is too much?

This might be a good time to introduce you a simple but effective cloud cost model. This model is based on the idea that enterprise firms typically over provision infrastructure and services.

In the cloud between 50-70%.

With a physical data centre this is more like 70-90%!

There are a number of reasons why this is the case, we can explore the why in another post.

For Private Equity firms there can be a significant amount of ebitda left on the table at exit.

Let’s say your PortCo is a SaaS service provider. They have an annual revenue of $100m. We’ll call them PortCo A.

It’s not uncommon for a firm like PortCo A to spend at least 20% of their revenue on Technology. This cost includes licensing, people, services and infrastructure.

For PortCo A this would be $20m p.a.

If we assume that 30% is allocated to technology infrastructure and services this would be $6m p.a for PortCo A.

Using the cloud over provisioning assumptions (50-70%). The optimisation opportunity for PortCo A would between a reduction of $3m-$4.2m p.a. If PortCo A had a physical data centre this would be a reduction of $4.2m- $5.4m p.a

You can easily see what this might look like at exit with a 5x, 10x or 15x multiplier

Not to mention that if PortCo A’s annual revenue was $1bn…. you can do the math.

How will you use this information with your PortCo tech teams? What do you think their objections might be? How long do you think they would need to take this cost out of their business?

We’ve turned this into a simple excel model you can use yourself, drop me an email and I’ll send it your way!

Thomas

thomas@themarkethill.com

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