Posted: 25 May 2023 10 min. read

The private equity technology paradigm shift.

Software development at private equity/portfolio companies presents new challenges.

Authors: Girija Krishnamurthy, Vishveshwara Vasa, Amador Marin

To remain competitive, private equity (PE) and portfolio companies across a variety of industries are working hard to cut costs—and to outflank rival firms—by providing value in new ways beyond conventional operational and financial improvements. To make that possible, they’re investing in technology solutions that enhance their efficiency, but may also increase dependency. The more technology a PE firm relies on, the more software development staff it needs to design, deploy, and maintain systems that will deliver a return on investment (ROI). For portfolio companies and private equity firms, software development creates five critical challenges:

  1. Embracing innovation
  2. Competing for top talent
  3. Achieving a growth-oriented cultural mindset
  4. Aligning development, security, audit, and compliance
  5. Keeping costs under control

1. Embracing innovation
Many portfolio companies are rooted in traditional processes and workflows. As they begin to see the competitive advantages technology implementation can bring, digital adoption has been taking hold… but slowly. One major challenge for private equity firms that pursue software development is talent: It’s hard to attract new talent, or hold onto existing people, with the skills to drive technology change. Attrition from mergers and acquisitions can cost a firm key employees and institutional knowledge. That doesn’t make new technology any less attractive, but it makes the path to using it steeper.

In many firms, there is also a lack of emphasis on improving the technology they already have. Without clear road maps for systems and services, product offerings can become stale and lose their competitive edge. “Just maintaining” can introduce risks when extended support becomes costly and limited. If the personnel skill sets and the technology stack don’t stay current today, the eventual result may be costlier “rip-and-replace upgrades” later on. A technology roadmap that incorporates cloud strategies, artificial intelligence such as ChatGPT, and efforts to streamline portfolio company software catalogs can all help ward off these risks.

2. Competing for top talent
In the battle for skilled software developers, private equity firms are competing with not only top-tier software technology companies, but also employers in other sectors. Reaching out to candidates while they’re still in college can help them steal a step.

Aspiring developers may also be more receptive than experienced ones, who often demand opportunities to work with leading-edge technologies that aren’t normally available at PE firms. The prospect of working with dated legacy code, for example—the kind many firms inherit via portfolio acquisitions—might turn developers away. But a firm that offers software developers the opportunity to deploy emerging technologies, and challenges them to improve systems at multiple portfolio companies instead of working on a single project or stack, may raise their eyebrows.

Company culture and diversity may also make recruitment harder. Many people have an image of private equity firms as traditional corporations that may not value things like work/life balance the way other employers do. Instituting that flexibility, as well as promoting diversity, equity, and inclusion (DEI) programs, can help reassure software developers that PE is an environment that values people and teams.

It can also help to show developers you value growth as much as they do. Private equity firms can provide dedicated software development career paths that incorporate technical training, vendor conferences, and team-based knowledge transfers to show the firm’s dedication to career development matches its hunger for software development.

3. Achieving a growth-oriented cultural mindset
Private equity firms that want to be competitive technology employers should create a spirit of growth and agility that permeates the workplace. You’re part of the technology industry now. The way you evolve to remain relevant and adapt to that market’s ever-changing needs will have a direct effect on your ROI.

That evolution might involve steps like implementing an agile approach in the software development life cycle (SDLC), fostering a site reliability engineering (SRE) culture, and positive action from leadership that demonstrates a commitment to growth and change. The agile methodology in the SDLC has demonstrated its effectiveness at creating faster and more efficient releases, which results in quicker feedback that generates artifacts with more quality. An SRE culture means developers take responsibility for their code and feature enhancements, and understand how they will perform in production environments.

Leadership plays a critical role in driving change and promoting growth mindset throughout the organization. Leaders must be trustworthy, embrace inclusiveness, lead with purpose, and celebrate wins and failures equally. Two things can make that real: Go all in and influence without authority.

4. Aligning development, security, audit, and compliance
Most portfolio companies under private equity firm management must adhere to industry-specific policies, audit processes, or compliance standards. Failing to adhere to regulatory compliance requirements can open a private equity firm up to risks beyond just fines—among other things, it can harm brand reputation. For example, security regulations are there to help protect against data breaches and financial regulation violations, not to make life more difficult (although they often do). Compliance is a benefit for portfolio companies, not a burden. As you embark on technology development, it’s crucial to understand the governance controls that apply to—or might be affected by—your new initiatives.

You also need to keep pace with periodic regulatory revisions that update areas of evaluation or criteria. Automation pipelines allow for a DevSecOps approach to managing infrastructure and software deployments. Leveraging DevSecOps pipelines allows for automated scanning for vulnerabilities, approved standardized deployments, and gated approvals to ensure the landscape is compliant. It may seem overwhelming to stay on top of evolving security threats, but private equity firms must allocate resources to monitor security issues with preventive and proactive approaches.

One of the latest solutions to end-user access security is zero-trust architecture—a cybersecurity approach that secures an organization by continuously validating each layer of a digital transaction. All developments efforts that keep security, audit, and compliance awareness in mind can contribute to a protected outcome.

5. Keeping costs under control
Technology is changing more frequently. Software lacks standardization and deployment automation. License management spans portfolio companies. For these reasons and more, tech costs for private equity systems are hard to keep under control. The move toward investing in hybrid and multi-cloud environments adds even more difficulty to budget forecasting. Project management teams need to work with development teams to clearly define minimum viable product (MVP) requirements and follow an agile methodology to achieve them.

One thing portfolio companies should consider is a vendor’s location: When laws permit, using talent in another geography may bring better hourly rates. A careful look at consolidation can also help. Because of the way firms grow, a portfolio company’s software catalog may have either duplicate or overlapping functionality. Consolidation and automation can help keep you from paying more than once for the same product. In addition, consolidation of licensing across the portfolio companies might roll up to the private equity, which could drive additional savings with vendors and potentially allow a move to a utilization-based billing model. A centralized software catalog can also help manage automated deployments with integrated approvals to prevent any shadow IT deployments.

The misconception that cloud is always less expensive than on-premises is wrong. Private equities and portfolio companies should set up budget guardrails and monitor their cloud expenses frequently. Open-source communities have won widespread acceptance in the market by providing good solutions for managing this challenge.

Rewards worth the effort
Amid shifting market conditions, revenue pressure, and a highly competitive job market, private equity firms need new approaches if they are to realize the benefits of software development. Reducing costs is only one dimension of the challenge. It is also essential to develop a holistic vision. Only by seeing the whole picture can a firm enact software development strategies that create business growth and trim cost. One way forward is to work with an advisor that has proven experience and the ability to innovate in software development through end-to-end solutions—preferably, one that has faced these challenges before.

If you’d like to talk more about the benefits of software development and how your organization can succeed, let’s connect.

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