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With increased competition in the private equity industry, continuously improving with Lean Six Sigma is critical to outperforming your competition and the public markets.   About 53% of Fortune 500 companies and 82% of Fortune 100 companies currently use Lean Six Sigma.

Lean Six Sigma is a competitive advantage that transforms corporate culture so you’re innovating and scaling your processes daily.

An average Lean Six Sigma project is estimated to add $175k – $250k to the bottom line.

 

Don’t Be Average

 

Lean Six Sigma is the set of principles “the vision” but how do you transform your culture from average to high-performance?  The “how” lies in the problem-solving methodology of DMAIC.

DMAIC stands for Define, Measure, Analyze, Improve and Control.

It’s an iterative, daily habit to optimize business process efficiency.  Before we can start innovating, we need to benchmark or set a target.

 

Define the Gap

 

STEP 1:  GET RID OF PROBLEMS – TALK ABOUT GAPS

In a high-performance culture, we call problems “gaps”.  Problems” have a negative connotation but gaps can be either from a deterioration in performance or raising the bar.  In order to transform your business culture, you need to get rid of the bias of “problems”.

Problems are people focused but gaps are process focused.  Your language expresses your culture – your values and beliefs – so make sure you’re sending the right message.

 

STEP 2:  SCOPE THE PROCESS

You can’t have a process gap if you don’t scope or define the process you’re working on.  The process we’re going to focus on is:

private equity investment process

This is a very high-level view of the private equity value stream but it works for the purpose of our case study.

 

STEP 3:  SET THE TARGET

21.1 net internal rate of return (IRR) 

We reviewed several market research reports (Pitchbook, McKinsey) for 2017 but landed on Bain’s Global Private Equity Report.   

 

STEP 4:  Measure Actual Performance

15.2 net IRR

We calculated the average performance based on the research below:

private equity IRR and PME 2017

The gap appears to range anywhere from 4-6% net internal rate of return (IRR) or 1-6% modified public market equivalent (mPME).  If you use PME to measure how you’re sourcing and growing investments, then use that instead.

The critical step here is to set a key performance indicator (KPI) to measure your process’s performance.   It also doesn’t matter if these numbers aren’t 100% accurate.  We’re investing our time into defining the gap not getting the gap 100% accurate.

STEP 5:  DO THE MATH

 21.1  – 15.2   = 6 net IRR (GAP)

Return on Investment

 

The gap you’ve defined should always be tied to a statement of operations line item so you know how this gap impacts your profit margin.  When you know what not improving costs you, you can more easily create a business case for improvement investments.

In the later phases, we’ll talk about how to do this in more detail but for you know where to start looking.

private equity profit loss statement gap analysis

 

Do-It-Yourself

 

Opportunity Cost

You’re perfectly capable of doing Lean Six Sigma on your own.  It’s been designed so you could. But the question is not if you can, but do you want to?  Nothing is free so what’s does it cost you to do this yourself.  These are the questions, I and every business owner has to ask themselves:

  • Longer timeframe to improve – can you survive long enough before you bleed out?
  • Missed investments opportunities – what are you missing because you’re stuck in the weeds instead of strategically growing your business?
  • Is your competition innovating better or faster because they’ve hired someone?
  • Which customers (or employees) are you going to lose because you aren’t focusing on using their feedback to improve?

Private Equity Software

Software is just a process that’s been branded and sold to you in one package.  Software “features” are just process steps.  Good software is a process which has been designed with the goal in mind.  Bad software is when the features have been added, removed or changed without considering the goal.

In order to define your gap you’re going to need these tools:

  1. Industry or market research software to research and set a target for benchmark performance
  2. Private equity accounting software to get your actual performance data

We’ll be reviewing top private equity software in later posts so we’ve kept this general.  Either way, this should be a pretty fast exercise to grab both sets of data.  If it’s not, consider what it’s costing you by getting stuck in the weeds instead of strategically growing your firm.

 

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?

Grab data to understand your actual process performance and set your target. You’ll need this data in order to do the next post’s homework: measuring the gap.

 

 

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.