The COVID-19 crisis has caused significant disruptions to social and economic systems, posing a threat to livelihoods as well as lives. For business leaders, the required management decisions range from significant to shocking. This is especially true for private equity (PE) firms, who often own businesses in industries susceptible to economic downturns.
As PE operating groups work to support their portfolio companies through this crisis and reposition to emerge successfully, they need to focus on shoring up liquidity and optimizing cost structures. This is particularly relevant from an IT perspective.
How can PE firms reduce costs, enhance efficiency, and shore up their portfolio companies during these troubled times?
Evaluating IT Spending Patterns
The first step towards addressing cost optimization is evaluating the current IT spend situation.
PE firms would be well advised to carefully assess a number of areas:
- Spend vs. business need – With 80% of IT budgets typically spent on “keeping the lights on,” companies are seeking to “do more with the same” so they can not only weather the impact of this pandemic, but also be prepared to meet evolving business demands and be in a position to successfully emerge from the crisis. Assess whether the current portfolio of applications and supporting infrastructure match reduced business levels.
- Procurement costs – Existing IT procurement practices may be suboptimal and result in phantom cost savings. For example, we often see higher spending on IT infrastructure with companies that are navigating economic uncertainty, as management teams typically don’t have the bandwidth to rationalize server, storage, and network assets to lower operating costs. Assess and validate procurement costs.
- Vendor costs – Vendor management is another area of concern, as companies may be prone to higher vendor costs due to lack of strategic partners for various IT spend areas, as concentrated spend is often directed towards one non-strategic vendor. In addition, service level agreements with vendors may not be favorable to support changing business requirements and operational criticality. Assess choices of vendors, current agreements, and true service need.
Optimizing Cost and Efficiency
Carefully assessing current IT spend in the areas described above will likely reveal multiple arenas where costs can be reduced, and efficiency can be improved.
In working with PE portfolio companies, we often suggest focusing on the following optimization areas to mitigate the uncertainty associated with economic downturns and periods of extended business slowdown:
- Procurement/Sourcing – It’s critical to establish and maintain IT service relationships as part of a comprehensive sourcing strategy, which includes renegotiating large vendor contracts during times of distress. An initial notification to vendors can often result in immediate savings.
- Applications and infrastructure optimization – We recommend mapping your business capabilities to your applications and infrastructure, to make sure that volatile and high-value business functions are engineered to adapt, while less volatile or valuable functions are designed to minimize maintenance and cost.
- Organizational and process maturity – During times of business uncertainty, it’s important that companies have a robust resource planning process in place, as well as the ability to identify metrics and provide reporting on IT performance. Additionally, a rigorous process should be established for budgeting and for project initiation and authorization, which will ensure transparency between IT spending and value generated.
- Enterprise architecture – We recommend evaluating the current business climate and macroeconomic pressures that are impacting companies and developing a roadmap for IT that maximizes agility based upon the ways the business is changing. This exercise may also involve eliminating enterprise applications that provide limited business and technical capabilities.
- Governance and funding – Our experience confirms the importance of an effective governance and funding model that ensures new and ongoing projects align with strategic priorities, identify opportunities to reduce costs where applicable, and allow for funding transformational technology initiatives once the crisis is over. We also recommend periodic comparison of IT spend with peers/trade benchmarks to quantify planning assumptions and to better understand niche or industry competitive drivers, inhibitors, conditions, and trends.
- Third-party guidance – We also encourage our PE clients to seek out third-party guidance on these cost optimization assessments in the event that IT management lacks the resources or time to analyze and implement any cost savings opportunities.
Emerging from the Crisis
The COVID-19 crisis, shocking and painful as it is, will subside. PE firms would do well to navigate these difficult times with a keen eye on reducing IT costs and enhancing efficiency for their portfolio companies.
Carefully assessing current IT spend, procurement costs, and vendor use are great starting points. Following that, actively optimize spending in sourcing, applications/infrastructure, processes, architecture, governance and funding. Finally, seek out expert guidance.
Following these cost optimization guidelines will help PE firms and their portfolio companies emerge from this difficult pandemic with strong economic health and in good shape for a vibrant and successful future.
How ACA Aponix Can Help
ACA's Portfolio Company Risk Services team can help assess overall cost management and help companies drive maximum value from their technology investments. Utilizing the latest predictive analytics and benchmarking tools, we can also provide advanced cost modeling and unparalleled insight into the critical factors affecting risk. We help management teams make the right tactical decisions in an uncertain market.
ACA is actively monitoring the developments related to COVID-19 and producing resources to help your firm address operational challenges created by this pandemic. Visit our COVID-19 Resources page to access all of the resources we've developed that may help your firm navigate through the restrictions in place to curb the pandemic.
How We Help
ACA offers the following solutions that can help firms enhance their cybersecurity in light of COVID-19 related cybercrime.
- Free Online Cybersecurity Training for Portfolio Companies
- Pandemic and Crisis Portfolio Monitoring Service
- Threat intelligence
- Cyber incident response planning
If you have any questions, please contact your ACA consultant or email us at firstname.lastname@example.org.