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We’re in the age of the private equity explosion. From the deals that merged Burger King and Tim Horton’s to Heinz and Kraft, private equity firms are constantly on the hunt to squeeze out additional profits, but they may neglect a major treasure trove: technology.
It’s a stone often left unturned as many industry professionals take the widely scrutinized “Chainsaw Al” approach, hinging deals on massive job cuts to lower operational costs.
“How do you generate cash flow (in newly acquired companies)? You can expand the company, but more likely you slash costs, close divisions, cut staff, curtail marketing, eliminate research and development and more,” writes former hedge-fund manager and author Andy Kessler in the Wall Street Journal. “In other words, cutting to the bone.”
Even Heinz downsized following its acquisition by 3G Capital in 2013, slashing more than 7,000 jobs over 20 months. The move boosted profits to more than $650 million, according to its annual report. It’s a move 3G Capital plans to replicate during Heinz’ merger with Kraft. Officials told reporters they hope to save $1.5 billion by the end of 2017 through operational efficiencies and cost reductions.
But with many industry professionals betting that 2015 will be the third year in a row of $400 billion-plus private equity fundraising – perhaps even beating 2014’s all-time high of $450 billion – cutting staff can’t be the only answer to cost reductions.
As organizations fight to become more digital, business leaders allocate more and more revenue toward IT. According to the 2015 Society for Information Management (SIM) IT Trends Study, which surveyed more than 1,000 senior IT leaders and CIOs, 63 percent of IT leaders say their IT budget is increasing. Reviewing IT’s expensive portfolio, especially during aggressive mergers or private equity deals, can reveal millions in unused and useless assets ripe for the picking.
Finding Treasure in the Corporate Office
Take a close and hard look at the applications and IT assets within an organization because chances are, business leaders are wasting millions of dollars – and in some cases, hundreds of millions.
That’s according to Gartner reports, which suggest that many organizations fall into an “application hole” because they fail to employ an effective application strategy or application performance monitoring process.
“Many organizations may try to take a more laissez-faire approach to governing these efforts, but they do this at a substantial risk,” writes Gartner analysts in the 2014 report How to Budget, Plan and Govern Application Rationalization.
That “risk” easily translates into real dollars and cents. For example, on average, organizations fail to use 28 percent of all deployed software, while every PC hosts $224 in wasted licenses, according to a study by software lifecycle automation services company 1E. A conservative estimate of the total cost of the deployed yet unused software within companies of 500+ desktops is $6.6 billion in the U.S., 1E reports.
If that amount of wasted capital is sitting on the desktop, imagine the cost savings associated with enterprise-level applications in the data center. This is where private equity firms may find buried treasure.
Firms can find the value here by differentiating the valuable software from the valueless, eliminating the applications no longer used by the organization, including those riddled with costly repairs, fees, or support requirements. CIOs spend 55 percent of their application budget on maintenance and support, according to Forrester Research. Shrinking that budget begins by consolidating applications.
Start the evaluation with an application audit. Pull together data on things like costs, subscription fees, maintenance fees, user base, number of times employees actually use the application, the infrastructure it sits on, the tasks the application accomplishes, and the level of risk associated with operating it.
With this slew of data, treat IT assets as if they were business divisions. Categorize each application into a “Buy,” “Hold,” or “Sell” group, classifying those in the Sell category as the most expensive and least valuable assets to the organization. Applications in the Buy and Hold groups are either propelling the organization forward or simply needed for essential daily functions. Think of these IT assets like different divisions of a business: Some are important gems driving business and profitability, others you’ll monitor, and some you’ll shutter or shed completely.
Do the math. The median Fortune 500 Company in 2014, Gilead Sciences – a medical biopharmaceutical organization – generates $11.2 billion in revenue. If Gartner estimates the medical pharmaceutical products industry has average IT budgets of 3.2 percent of revenue, Gilead’s IT budget would be roughly $358.5 million. That means Gilead Sciences spent an estimated $122 million on software, according to Forrester’s estimates. If maintenance and support usually consumes, as Forrester suggest, 55 percent of software budgets, then Gilead spends roughly $67 million to keep existing applications afloat.
However, if the CIO audits an IT application portfolio, they’ll likely find that valueless assets – applications no longer useful to the organization – consumed just 15 percent of the IT budget, the CIO could save more than $10 million in maintenance fees alone. That’s without even considering the annual subscription fees.
Using this method, corporate raiders can now take a more targeted approach to cutting 5 – 10 percent of costs from the organization. Private equity firms can suddenly stop sharpening their axes and look beyond rationalizing headcount.
The new question for private equity firms is, “How closely are you looking at IT?”
Bob Dvorak is founder and president of KillerIT, an IT program and portfolio management (PPM) software suite.
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