Laying the Groundwork with Strong Product Strategy
Over the past few years, the long hold environment in private equity has given firms time to evaluate their original deal thesis and identify key revenue and margin gaps. Which is why Gartner, a research and consulting firm, reported a nearly 55% increase in companies focused on digital transformation.
These efforts included comprehensive overhauls of operations and substantial financial investments, a strategic shift in focus and a deep commitment from employees at all levels. Such an evolution in value creation strategy starts with a focus on product strategy alignment, cloud-enabled product architecture and code-level quality.
Product Strategy
SITUATION
Portfolio companies often fail to align their product strategy to the business transformations outlined in their initial deal thesis. In fact, most portfolio company chief investment officers indicated in recent interviews that they failed to meet their goals due to inadequate upfront planning and a lack of clear objectives. Poorly aligned product strategies can derail value creation initiatives, delay key milestones and reduce overall return on investment, especially if current and future market or product trends are not reflected in those strategies.
IMPACT
To address this issue, private equity firms should implement an annual strategic product development and transformation plan, especially during large transformational acquisitions, initial public offering preparations or prior to their exit. Beyond this annual review, both technology and non-technology portfolio companies should continue to adopt quarterly product roadmap reviews to keep up with the rapid speed of customer and technology innovation.
Cloud-Based Architecture
SITUATION
Many portfolio companies struggle with hybrid cloud systems that lead to inadequate product architecture. Or they have rapidly shifted to the cloud without changing their underlying architectural design, causing lower gross margins against peers. Without a scalable cloud architecture in place, portfolio companies are facing pressure to reduce cloud costs while having a weaker baseline to adopt advanced tech like AI/ML that are key to long-term product differentiation.
IMPACT
By assessing their current architecture, portfolio companies can make sure they adopt best practices including serverless, open-source code to improve margins and scalability. This scalable, cloud-based architecture helps transitions during merger and acquisition activities or technology overhauls. Cloud architecture modernization can reduce infrastructure costs by up to 50%, allowing portfolio companies to respond faster to market changes with increased resilience.
Infrastructure / Software Design Quality
SITUATION
Inadequate attention to software design quality is common among portfolio companies undergoing transformations. Maintaining high standards of software design is essential to prevent backend issues that can cause significant technical debt and hinder scalability. According to a report by the Consortium for Information and Software Quality, an IT industry standards group, poor software quality in the US cost companies at least $2.41 trillion in 2022. Quality due diligence should entail a thorough evaluation of the product/software source code and underlying architecture to make sure these elements are supporting current operations and future growth.
IMPACT
Poor software design quality creates significant risks as portfolio companies scale or integrate new systems. Issues like inconsistent coding standards, unaddressed bugs and insufficient testing can lead to technical issues that can absorb 20 to 40% of a company’s technology portfolio value. By incorporating rigorous code reviews and best practices during product development, portfolio companies can better prepare for a successful product execution strategy, ensuring the organization is well-positioned to capitalize on future opportunities with fewer technical setbacks.
MorganFranklin Consulting 2025 Expectation
As private equity firms prepare for the second half of 2024 and early 2025 exits, we expect a stronger focus on assessing and correcting product roadmap gaps and driving cloud architecture improvements to propel top-line growth and improve gross margin growth. We also expect private equity firms to invest in target state improvements and go-to-market strategies to boost cross-selling and upselling opportunities, bolstered by the improvements made to product and cloud capabilities.
