3 MINUTE READ

One of the biggest private equity threats right now is increased competition.  To overcome increased competition, you can try the same solutions advised by other consultants like holding your portfolio companies longer, add-ons or you can kill the choke point in your performance.

The most efficient way to identify hidden choke points is through Lean Six Sigma and DMAIC process improvement.  It’s why +80% of the Fortune 100 use Lean Six Sigma to scale their performance without scaling process choke points.

We performed a data analysis on the current state threat of increased competition to root cause and remove these choke points within the industry.

WHY COMPETITION IS A SERIOUS THREAT

 

More Private Equity Firms

Increasing competition isn’t a fad; it’s a trend.  One that started in 2013 and is going strong through 2018 According to Preqin,

At the start of January 2018, there are 3,484 private capital funds seeking investment, 2.5x the number of funds that closed in the preceding 12 months. This is twice the proportion that it was five years ago.

 

Corporations

Not only are there more firms to compete with, corporations starting to play in the investment/private equity/merger and acquisition sandbox.  The irony is corporate organic growth process is broken so it’s easier for them to merge or acquire taking deals away from your deal supply.

PE firm uncalled capital

 

PE Returns

Finally, investors go with returns.  As long as the private equity industry continues to beat the public market, it’s going to attract more capital.  With more capital, there’s more pressure on your process to performance.  This is why we see firms who are average or bottom quartile performs, starting to amass a mountain of dry powder or uncalled capital.

 

WHY WE FOCUS ON PROCESS

 

More wealthy individuals providing capital means more increased demand on your PE firm’s processes.  We know from operations management, the more demand on a process, the faster it breaks. Processes have a finite capacity.  Outside that capacity, they stop working.

 

If you focus on key performance indicators (KPIs) you miss the insight into what are your capacity needs.  It’s a common mistake to focus on the outcome instead of figuring out WHY we got the outcome.

Michael Maubossin investor decision marking

If you know Michael Mauboussin’s investor decision making matrix above based on Winning Decisions then you know we’ve been talking about focusing on process overcome for investments for almost two decades.

If you can’t describe what you are doing as a process, you don’t know what you’re doing. – W. Edwards Deming

 

HOW IS COMPETITION AFFECTING OUR PROCESS

 
You can’t improve until you know what process you’re improving.  Most people would read that line and think, “I don’t have a process”, but you know they’re probably wrong.

Because if they’re a PE firm, venture capitalist or corporate investor who’s sourced and grown an investment, they have a process.
 

STEP 1: SCOPE THE PROCESS

 
We mitigate the risk of scope creep by setting process bookends. There’s more detail on how to scope a process in our internal rate of return case study so we’re going to try a different tool: a SIPOC diagram.

This is a brainstorming tool because we use it to brainstorm what our process is, who’s involved, what we need to get the process done, who’s paying for all this nonsense and what’s the finished product or service.

A SIPOC diagram stands for:

  • Supplier – Provides inputs into a process
  • Input – Materials, information and other resources needed to complete a process
  • Process – Verb/noun steps used to convert inputs into outputs
  • Outputs – Final products or services resulting from the process
  • Customer – Paying (external) or receiving (internal) outputs

Like everything in Lean Six Sigma, we don’t like to waste time.  Time is money and we’re all about making it, not giving it away.  I don’t use a lot of the templates out there because they don’t tell you HOW to use it.

SIPOC Diagram Template

STEP 2: PROCESS MAP

We’ve gone into great detail on how to efficiently map a process after scoping so we’ll focus on this process.  SIPOCs limit your total process steps to 5-7 because you only need the macro-level process.

private equity business process SIPOC

Your process map might look a little different but that’s ok because whatever you miss this time – you’ll get in the next iteration of improvement.
 

PRIVATE EQUITY SOFTWARE

 
DMAIC supplements Agile product development well because they both it focuses on what to remove not add.  They both focus on refining the 1% of value added features consumers gladly pay for.

So far all we’ve done is process map and the tool we use for that is Lucidchart.  We’ve tried many others but landed here but if you used post-its instead of software you’d be just fine.
 

WHAT’S NEXT

 
If a PE fund or find implements the same solutions as the rest of the industry, then the fund managers and principles shouldn’t expect anything over than average returns.  We all know you can’t fix problems with the same thinking that caused them.

They only strategy I know for growth hacking which actually works is by optimizing your people’s creative problem-solving through data analysis process improvement better known as DMAIC.

Stay tuned for the next phase: Define.

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.