Early Warning Systems — Role of Data Strategy & BI
A key issue I’ve faced in my PE career is firms not reporting issues in time. Either they themselves couldn’t anticipate this or they chose not to highlight the fact to us. There are several instances where firms got into trouble and by the time we got involved as shareholders, it was too late to course correct.
In such situations, better management information tools would have improved SME performance. Not just for the PE or other shareholders but for senior management themselves.
Sadly, SME management informations remains mired in siloed buckets and often relies on manual integration using Excel or such tools.
Traditional Excel/ Offline Based Workflows
That Microsoft Office has played a stellar role in the data revolution cannot be overstated. It’s been a long time favourite of managers and has come to define “Business Intelligence” in many firms — especially SME.
Image credit: History of Excel
Excel in particular is as popular as it is because it’s a versatile tool for limited data sets — it is not however, particularly well suited to Business Intelligence applications. BI built on an excel framework ends up being clunky and inelegant and doesn’t really help in information discovery from raw data.
Excel also doesn’t come with a built in data storage and retrieval mechanism which means data and analysis ends up sitting in disaggregated buckets. Ever heard someone say we can’t produce that analysis today as it’s sitting in someone’s laptop who’s on sick leave?
All of these limitations are particularly troubling now when we have an explosion of data — Excel is ineffective and hampers effective decision making.
I can think of a couple of examples from my own life when not having a Business Intelligence solution prevented us from identifying issues or effectively solving them. Here are a few examples I dealt with.
Case 1: Stock Reporting
I was responsible for tracking sales of a particular stock. Each day I’d get Excel files from the sales desk and would add that to my master xls and using the most convoluted DSUM functions I’d send out tables of data: sales to date in quarter, realisation to date in quarter, residual shareholding etc.
What I also needed to track were certain sales thresholds which triggered compulsory filings to the regulators (every 2% as I recollect).
Since this was my sheet, every time I went on vacation or was sick, it would cause mass panic!
This is what it looked like:
I wasn’t particularly proud of this sheet and would struggle to explain it to new audience (say whenever a new BU head took over at the investors or a new compliance or dealing room person got involved in the deal) but was the best I could do in Excel. I’m sure more elegant sheets can be created but the core issue of Excel’s limitations remain.
However, with not much effort (and I might add no significant cost!) I put together an automated workflow in PowerBI which would auto update the summary each day and send out alerts whenever key triggers were reached.
This solution solved the immediate issue of alerting the compliance team when we were in danger of reaching our regulatory threshold and didn’t depend on my being around to ensure this.
The interface also allows for easy click through filtered reports by entity, date range etc. — meaning analysis by unit heads didn’t need to depend on my being around.
I’ve covered the implementation of this in more detail in my article here.
Case 2: Firm Running into Liquidity Issues
I’ve unfortunately seen a few situations where some of our portfolio companies ran into liquidity issues. The last couple of decades have been quite volatile with 9/11, Lehman, COVID, etc.
Particularly in the mid market space, firms don’t have the best ability to weather such storms. Even worse, leave alone shareholders, sometimes management themselves cant see the approaching storms. Reliance on static reports is a key issue.
A company we were managing ran into trouble on forex contracts which ballooned out of control and caused severe cash flow crunches. The firm barely escaped NPA status.
Why didn’t we hear of this? Because our extensive (and I repeat extensive) monthly reports didn’t have a detailed section on forex. Even the CEO didn’t get these reports. Better BI would have helped give early warnings — for instance by allowing us to drill down into other costs and show trendlines of which costs were rising rapidly and by allowing us to play with forex scenarios.
What all of this amounts to is that running offline, old world reporting systems based on MS Office serves poorly in an era of volumes of data. These systems neither provide adequate insights nor do they equip managers and other stakeholders with adequate warning to manage upcoming crises.
Effective management is based on smooth flows of information and BI systems are critical to achieve this.
To me, it’s rather surprising that stakeholders such as PE and VC are content to still run their businesses on excel. Some moves are being in the right direction and I’m sure we’ll see more.
What firms need to do is implement low cost, non disruptive BI architecture that integrates existing systems – ERP, CRM, MS Office files etc. Next the human side of BI must be addressed with personnel trained to use these systems in daily workflows.
For shareholders, a smaller dataset should be output to their own shareholder level BI systems. This will alleviate the need to rely on push-pull data requests.
BI is such a simple and quick to implement solution to such issues and I believe will become ubiquitous in the years to come.
This is a personal passion of mine and I am always eager to see how I can help companies get started with BI.