4 MINUTE READ

In the last post, we talked about how 82% of Fortune 100 companies currently use Lean Six Sigma to scale and innovate their processes.  You do this using DMAIC (Define, Measure, Analyze, Improve and Control) – the iterative cycle of data-driven improvement.

We’ve already defined our process as:

private equity investment process

And defined our process’s performance gap as:

21.1 – 15.2 = 6.0 net IRR
Since we’re in the second phase of DMAIC, the Measure phase, we’re going to answer the question:  “What do we do now to find insight into why this gap exists?”

 

Resist Mediocre Insight

Humans are innately poor problem solvers because we’re biased to our own experiences and opinions.  In addition, most corporate cultures incentive you to fall in love with solutions, instead of falling in love with the problem.

There are two types of corporate cultures:

  • Type 1 – does not use data to solve problems.
  • Type 2 – graphs data to define and measure gaps in performance.

 

As a Type 2 culture, your first step is to graph the data.  Graphing your data is the most efficient way to insight because it shows 3 things: your target performance, actual performance and the gap between the two.  The insight comes from the performance gap.

 

For the sake of this case study, we’ve defined our gap as 6.0 net IRR.  This was our first piece of actionable insight which came from looking at industry research.  From here we know the next step to gain more insight is to dig further into the average gap of 6.0 IRR so we can find out how it behaved over time.

 

STEP 1: Analyze Performance Gap Overtime

This insight is incredibly important but often overlooked by problem solvers because they break the link between defining the gap and analyzing it.  They stop letting the data lead them which means they’re sub-optimizing with opinion-based solutions.

If you skip to solutions, you miss out on what the data are telling you about your gap over time.  Nothing is static in your business so even if you haven’t been paying attention, your data has hidden insight waiting for you.  The key takeaway from seeing how your gap behaved over time, is when the gap has gotten better or worse without your intervention.

In our example, we’re looking at a period of 12 months since the Bain research we’re using is for 2017. So what is the data telling us to do next?

 

private equity internal rate of return performance analysis

The answer is to drill into June. Why? Because the gap, between our target and actual performance, is the largest.

If you were thinking about drilling into April, you’re also correct because your gap significantly improved.  The rule is to dig into extreme behavior in either direction to keep analyzing.

 

private equity internal rate of return gap analysis

 

You could dig into any month you see above and that’s a common mistake for most people.  We’re trying to solve this gap efficiently so that means we need to find the “best” path to take to gain the most insight to drive continuous improvement action.

 

The extreme behaviors show you where to analyze next because there’s “something” in your business significantly affecting your gap.  If you can find the “something”, you can turn your problem off.

 

STEP 3: Keep Drilling

Normally you can start to drill down from the monthly data view to a weekly, daily or even hourly views to further analyze.  In this case, that’s not going to work.  Your IRR measures how well you’re sourcing investments, performing due diligence, growing and exiting your investments.

 

Because we’re measuring how well we do this, we have to examine the “things” flowing through the private equity process from sourcing to exit.  In this process’ case, the “thing” is an investment or portfolio company.  Therefore, our next step is to slice the data by company instead of by time.

 

private equity IRR performance analysis

 

STEP 4: Drill, Drill, Drill

You’re going to keep drilling until you stop gaining insight.  From the company slice, you’ll dig into companies B and D to understand the extreme gap behavior here.  You’ll dig into the specific facts of these companies, looking at CRM data, emails, interviewing the process owners, customer, etc.

Return on Investment

 

We already mentioned, your gap should be tied to a statement of operations line item so you know how it’s affecting your bottom line.  For now, ask the people who were involved in the process what they saw as financial consequences of this gap.

With all investments, you’ll get a greater return if you limit how much you’re investing in the front-end.  The critical path for improvement is action but the Measure phase is only planning.  Don’t get stuck in data collection or analysis paralysis or you’ll slowly eat into your return.

 

Do-It-Yourself

 

OPPORTUNITY COST

We’ve hit on a few common mistakes but it’s important to understand these are so common it’s almost a guarantee.  This shouldn’t stop you from trying but empower you to create countermeasures to minimize the damage.  You can’t avoid it because the root cause is that you’re emotionally invested in the problem.

Even the most advanced Lean Six Sigma professional hires other professionals as countermeasures to this problem because you can’t see what’s in front of your face when you’re blind to it.

PRIVATE EQUITY SOFTWARE

 

Software is just a process that’s been branded and sold to you in one package. In order to define your gap you’re going to need the tools

  1. Industry or market research software to grab target for benchmark performance data
  2. Private equity accounting software to get your actual performance data
  3. Excel or Google sheets

At the highest level, all you need to do this is data and a way to scrub and graph it.

Better Tomorrow Than Today

Continuous improvement means progress over perfection; being better tomorrow than you were today. So what can you do today to ensure you’re better tomorrow?  Start creatively slicing your data.

 

Brainstorm with the process owners and other fresh eyes before investing the time gathering the data.  Once you have everything, begin the Measure phase by slicing the data but make sure you never lose your data-based link between each slice. You’ll find the insight needed to start the Analyze phase in the next post.
Ashley Asue Guerrilla Analytics Private Equity Consultants
At 26, she was asked to create a new department to grow their Fortune 300 company using Lean Six Sigma continuous improvement.
While working with consultants and experts, she saw a common thread among their challenges and failures.
With this insight, she created a custom process to create a high-performance company.
As the only CPA and business architect in the US, she helps others use creativity instead of cash to efficiently build their businesses.