Private equity firms routinely interact with their portfolio companies' chief executive, chief financial and chief operating officers, but many don't spend as much time - or any time - with the chief information officer (CIO).
Here are five questions that will shed light on the health and direction of a company's information technology organization.
1. Is your IT organization doing things right or doing the right things?
Let's face it. IT teams often complain that they are understaffed and overworked - that they do not have enough resources to meet business demand or keep the lights on. This may be the result of poor project and portfolio management (PPM) processes.
PPM is a prioritization method used to analyze, prioritize, select and manage an organization's projects. The goal is to determine optimal project prioritization to achieve overarching business goals. There is a big difference between doing things right and doing the right things. PPM ensures that you are doing the right things by having a defined process for ensuring that IT is working on the most important initiatives. A poor PPM process indicates that the IT organization is immature and the cusomter is unsatisfied.
Implementing effective PPM processes does not need to be complicated or expensive. Ask your CIO about the portfolio company's PPM and how he or she knows that the IT function is working on the most critical business projects. If the process is informal, improving PPM could make a difference.
2. When it comes to cybersecurity, is the portfolio company good, bad or ugly?
Technical security breaches are a scary and serious topic, but they are no longer limited to governments and Fortune 500 companies. This is one topic that should be on the boardroom agenda at each quarterly meeting for companies of any size.
Security attacks are becoming more sophisticated and imperceptible. In the past 12 months, many attacks have been carried out in the random access memory (RAM) of computers, so traditional defensive software, such as an anti-virus program, has limited ability to detect them.
The comprehensiveness of a company's security measures will vary based on its size, industry and business's type. Industries such as banking and retail require considerable technologies and processes, while others may require less. Even for a less technical business, it is important to protect the business' intellectual property.
Essentially, there are three types of companies: those that have not been attacked (the good); those that have been attacked (the bad); and those that have been attacked but have not realized it yet (the ugly). When visiting a portfolio company, ask the CIO about the measures in place to prevent security attacks. Aside from investing in the right technology and processes, such as backing up critical files off site, does the company have defined disaster recovery and business continuity plans?
3. How are you using mobility to advance your company's business strategy and customer experience?
Stock valuation analysts argue that most of Facebook's valuation is contingent upon the success of its mobile advertising. Your portfolio company may not be the size of Facebook or in the business of social media, but that does not mean it should be without a mobile strategy.
Last month, I received a text message from my dentist reminding me of my upcoming appointment. It prompted me to reply "YES" or "NO" to indicate whether I would still be able to make my appointment. The mobile environment is here, and it is changing the face of every business, from global corporations to local service providers, such as small dentists.
A sound mobile strategy begins by acknowledging the business strategy and describing how mobile advancement enables it. It should articulate how mobility impacts a business' stakeholders - from the internal sales team to customers. Finally, it should include a documented plan for capitalizing on this evolving medium, highlighting customer expectations and competitive capabilities.
Be sure to ask the CIO about the company's mobile strategy, its key initiatives and how it supports the business strategy.
4. Which IT services are becoming commoditized, and what have you done as a result?
The concepts of outsourcing, managed services, and software as a service (SaaS) may be confusing to the private equity owner, but they cannot be confusing to the CIO.
Outsourcing and cloud-based services are becoming more prevalent as functionality increases, costs flatten and data security concerns are alleviated. The number of software companies that offer only SaaS-based services proves where the market is headed. Whether it is used for data backup, payroll or application hosting, outsourcing - in some form - has a role in every organization.
As technologies advance, more IT services are becoming commodities. These solutions can reduce capital expenditures and ease the effort required to run the company's IT infrastructure.
However, these solutions can increase operational expenditures (due to the large decrease in capital expenditures). Many CIOs, however, negotiate favorable payment terms with outsourcing providers, which helps manage cash flow. Finally, SaaS-based solutions can limit customizations, which could potentially impact your business processes.
To better understand your CIO's strategy for leveraging these solutions, start by asking the CIO about the IT services they believe are commodities and whether outsourcing makes sense.
5. What percentage of your IT budget supports transformation or innovation?
It is not the IT function's job to formulate business strategy, but IT should generate innovative ideas that support the strategy - for example, through streamlining business processes or improving customer stickiness.
Carefully assess the CIO's understanding of the company's business strategy and investment thesis. Without this knowledge, the IT function will struggle to add business value through innovation.
Executives will hear that limited IT dollars exist for innovation. In a typical year, most IT organizations spend about 85 percent of their budget on activities that run and grow the business, while about 15 percent of their budget is allocated to transformation. A prerequisite to delivering IT innovation is making sure the activities necessary to run the business are mature and efficient. Without this maturity, the IT organization will always be reactive and will never have the time or budget necessary to be an innovative partner to the business.
Ask the CIO: What percentage of your IT budget supports business transformation or innovation? Knowing this, you'll have one key data point regarding the maturity of the IT organization. The more mature the IT organization, the more budget available for innovation.
Matt Sondag is the leader of the private equity practice of business consulting firm West Monroe Partners.