Why Will Private Equity Funds Turbocharge the Adoption of Performance Management?

One question you may be asking is this: What actions do private equity funds take that produce incrementally higher financial value in such short periods of time? The answer is simple. The managers of the private equity funds do three things:

1. They hire talented senior executives to transform the acquired businesses.
2. They have relatively higher performance targets and higher investment hurdle rates.
3. They equip these executives with the technology and tools that constitute and support the performance management suite of methodologies.

The third item is where the turbocharging is occurring. Both the private equity managers and their hired guns who operate the businesses - who have compensation reward packages tightly linked to improved financial and non-financial performance goals - are adopting progressive managerial methods. These include strategy maps, customized balanced scorecards, advanced managerial accounting systems to accurately measure and manage product and customer profitability and future value, rolling financial forecasts, customer relationship management systems, analytics-powered business intelligence tools for better employee decision-making and much more. All of these are mounted on an integrated enterprise information platform.

To be clear, the boards of directors of companies listed in public capital markets are not ignoring performance management. They are making the transition from a ceremonial role to a new era of activist boards that more seriously accept their corporate governance responsibilities to represent shareholders.

Today, a building contractor would never manually excavate a foundation with shovels; they equip their employees with industrial-strength power tools. The same goes for most companies - at least those aware of the shortcomings of spreadsheets and other non-integrated information systems that are limited in supporting control, analysis and decision-making.

References:

1. In 2006, private equity funds accounted for 35 percent of global acquisitions, which was double the prior 10-year average of 17 percent (PricewaterhouseCoopers study).
2. To learn the basics about the performance management framework, read "The Tipping Point for Performance Management" at http://www.dmreview.com/article_sub.cfm?articleId=1027292.
3. For more information, Google Professor Jayanth R. Varma, Indian Institute of Management, Ahmedabad, India, who inspired this article.
4. See http://usmarket.seekingalpha.com/article/22629.