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Opinion

Replacing Excel for KPI Analysis?

Contributed by Sapling Financial Consultants Inc.

As private equity firms are increasingly focused on adding value to portfolio companies, key performance indicators (“KPIs”) have been growing in importance. KPIs are quantitative measurements that allow users to continually assess a company’s performance e.g., Revenue per Client, Client Retention Rate, Customer Acquisition Cost, etc. Understanding the advantages of enhanced KPI reporting can assist with valuations and factoring in opportunities for value creation to justify acquisitions and benefit the due diligence process. 

Excel has many strengths, this ubiquitous piece of software is used to model LBO deals, compile comparables, reconcile financials, and more. Unsurprisingly, private equity Associates bring their passion for Excel to their new private equity employers, to deploy the software to portfolio companies-.

The issue is that Excel is a terrible tool for KPI dashboarding. For one thing, KPIs are based on large data sets that drastically exceed Excel’s capabilities (> 1 million rows). Moreover, often reports must be pulled from several systems through a highly manual process, leading to hours of unnecessary work and significant divergences between the source system and the Excel report. Finally, having more than one person using an Excel file at a time is difficult. 

With KPI reporting tools, programmers distinguish between a front-end” and a back-end” in the KPI-centered discipline of business intelligence” (BI). The front-end” is what the typical user sees and works with, it’s a dashboard of graphs and charts that can do everything that Excel can in displaying, slicing, and dicing data, and more. The most common front — end analytics tool on the market are Power BI and Tableau. The back-end” is more like the large table” spreadsheet tabs that only stores (but doesn’t display) transaction lists e.g., systems like MySQL & SQL. 

Using a proper BI system instead of a dashboard spreadsheet has many advantages:

  • Data is available in (close to) real-time and is automatically updated
  • There is a single source of truth”
  • Different dashboards can easily be created, and automatically maintained, for different users (e.g., one for CFO, one for COO, one for each Regional VP, etc.)
  • Entire data sets can be analyzed at a time, instead of, e.g., just the previous month’s data
  • Executives can interrogate the data themselves with drill through” capability, rather than asking a portco Analyst and waiting weeks for a response

So, if BI systems are so vastly superior to Excel, why aren’t they used more? According to Rob Hong, CEO of Sapling Financial Consultants- a Toronto-based consulting firm, there are several reasons. One is simple lack of awareness, despite some improvements, typical business training is falling behind the leading edge of technology. Many of the decision-makers at private equity firms are also far removed from Excel and data analytics, therefore most IT vendors that could help don’t speak the same language”. Cost – or at least an outdated impression of cost – can also turn people away. Finally, private equity firms like to control data flow; Associates understand Excel and can control it, but without training, will struggle to supervise portco BI projects.

The solution to execute this effectively is twofold: first, private equity firms need to level up their staff through the plethora of cheap and high-quality training. Second, find trusted vendors who can help navigate both the private equity firm and their portcos, through digitalizing their dashboarding. Private equity is an industry that is premised on bringing best practices to companies that can benefit from stronger management. Consequently, it’s critical that private equity firms become fluent users of the BI new tools that are increasingly becoming the norm or risk falling behind.