Published: Oct 05, 2017
Focus:
Insights
In part 3 of his 4-part blog Stuart Kerr, CFO at Incremental Group (a Maven portfolio company), discusses the importance of overcoming the barriers of legacy culture and systems in order to achieve success.
Successfully providing robust financial stewardship in an organisation that has taken on PE investment is invariably not straight forward. Two fundamental obstacles that often exist for a CFO to overcome - the legacy culture of the organisation and the suitability of the incumbent systems and processes.
Many small to mid-sized PE backed deals morph out of family owned or owner managed businesses. In many cases, such businesses have operated historically with limited measurement against financial budgets or targets and if there has been, there has been no real consequence of not achieving them. There are typically no external stakeholder pressures to continuously grow the business and the associated cash generation; the key requirement is generating enough cash to service the owners’ lifestyles. In addition, formal financial control environments in such businesses are either non-existent or rely mainly on verbal approvals that do not offer any audit trail or accountability. The introduction of PE ownership pressures and the demands on the CFO to deliver to the expectation of the funding partner often requires a seismic shift in the culture of the legacy business; a culture in which there is clear accountability with a continuous drive towards achieving ambitious targets and understanding financial performance inside out.
Secondly, the supporting financial systems and processes are often basic at best. Systems tend to be simple bookkeeping packages that struggle to cope with the necessary depth and quality of information outputs required in a PE environment. To compound the system constraints, many businesses have evolved numerous manual intervention and data manipulation processes over their lifecycle that sit outside the main financial systems (e.g. within spreadsheets) and these are incredibly time consuming and prone to human error.
Where businesses already have the benefit of more advanced financial systems being in place, these are often old legacy versions. So, while an improved level of reporting may be available, the stability of such legacy systems can often be a risk for the business, particularly with many of these systems being outside of the vendor support windows.
Stuart Kerr, CFO at Incremental Group
Enduring a PE backed journey with such limitations and risks being placed on the CFO from a reporting, control and overall financial stewardship perspective is a significant burden and one that could backfire on all stakeholders. The inability to scale through a significant growth journey can place significant strain on basic or old legacy systems and processes; inviting such business risk into a PE backed journey can be detrimental to the overall fulfilment of the journey and the ultimate exit potential.
That being said, many PE backed businesses make the decision not to invest in suitably advanced and scalable systems and processes, primarily because of the financial investment required to achieve the change; a headline capex investment requirement in the hundreds of thousands rarely makes it past the first approval gate. Why does the investment request fail? Typically, the underlying costs of existing process inefficiencies and overstaffed or misdirected finance teams are not factored into the business case. Furthermore, the request to invest can also come too late in the hold period. Deferring the decision to invest until the absolute limit of business risk can often result in the required return on investment not being achievable within the PE hold period.
With the financial stewardship accountability firmly at the core of the PE backed CFO role, the key question is what can the business do to ensure the investors’ expectation of the CFO and the overall journey are both successfully delivered?
The CFO and the wider finance team will likely feel additional pressure from their investors for information. 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.
.....
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.
About Incremental Group
Digital technology provider, Incremental Group, is one of the UK’s longest established Microsoft Gold ERP Partners with over 20 years’ experience of designing, implementing and supporting mission critical Dynamics 365 for Operations and Dynamics AX projects in both the private and public sector.
