Epicor: Time is of the essence with enterprise resource planning

Time to value is the key determinant when choosing an ERP system for private equity-backed businesses with a defined hold period, says Epicor chief executive Steve Murphy.

This article is sponsored by Epicor

What changes have you seen in terms of private equity’s willingness to embrace tech solutions within their portfolio companies over the last five years?

Steve Murphy

Private equity is now investing heavily in tech solutions, as a necessity, because there has been a tech refresh happening to modernise many old-line industries in the face of a rapidly changing workforce and the need for a much more adaptable supply chain. At Epicor, we focus on the make, move and sell sectors – so the manufacturing plants, distribution facilities and stores. Those industries have had to adapt their supply chains in response to the demands of covid.

Yes, everyone has been working remotely, but they still needed to eat and still expected products to be shipped to their houses. That has meant factories, distribution facilities and logistics operations have had to be incredibly productive. As a result, the willingness of the private equity firms behind these companies to invest in enterprise resource planning systems has increased dramatically.

I would add that many investment cases are predicated on growth, and there are only so many levers that a private equity firm can pull to unleash that growth. If you are buying a business with a view to only taking out cost, you might not be all that motivated to invest in technology. However, you absolutely need tech to drive growth. Capital may be a commodity, but a private equity firm can differentiate itself by really understanding tech.

How can technology be employed to achieve some of those objectives?

The private equity-backed businesses we work with were often multi-generation family-held businesses in their previous life. In many cases, the machinery and warehouses have been well-maintained over the years, but the software may lag behind what is currently considered best-in-class. A modern ERP system can dramatically increase capacity. For example, when you implement a system for preventative maintenance, a plant that used to run for 16 hours a day becomes more reliable and can run three shifts instead of two.

Let me provide another example. We worked with a private equity-backed distributor of building materials that owned six distribution centres with significant inventory investments and a fleet of trucks. The biggest issue this business faced was that it was competing against the big-box stores such as Home Depot. Those large warehouse stores carried all the same items and sometimes at a lower price. By implementing an ERP system that could forecast demand by ZIP code, however, that company was able to have a better selection available for same-day delivery. That has resulted in significant growth and the business has taken share from the big-box stores.

“If the system itself is smart enough, it can make someone look like an engineer when they are not”

Ultimately, technology enables businesses to process change and, in some cases, change or evolve their business models. For example, it may enable them to go directly to the consumer, which can have a dramatic impact on the economics of a PE investment.

We worked with a car parts company that initially sold exclusively to automotive manufacturers, but the implementation of the right technology meant that company could go directly to consumers. It involved enabling an online store where individuals could easily verify whether a part was right for their vehicle. It meant the business had the ability to ship the parts with the appropriate paperwork while also enabling a reverse logistics chain where consumers could return parts as required. Going directly to the consumer drives improved margins – it is retail, not wholesale, thus the company can charge more.

Why is time to value such an important concept when it comes to employing these tech solutions?

Private equity has a defined holding period for its assets. Private equity firms are going to look to sell a company at some point around the four- or five-year mark. That means these are not science projects where lots of money is going to get spent with no need for a return. You need to know how quickly the ERP system is going to be up and running and delivering value in the form of business efficiencies. Indeed, if you expect to sell the company in three years, you need to have the system working within two, so that by the time that third year comes around, you have had a full quarter with financials to demonstrate the results.

It’s pointless to say the system is working if you cannot prove it. Without that proof, you will not be able to recoup your investment when it is time to sell. Furthermore, a private equity sale occurs at a single point in time. It is not like the public markets, where a company can sell a 3 percent stake here, and a 5 percent stake there. There is a complete transfer of ownership, so you must be able to point to that data. If you are not quick enough, you may do tremendous work without getting credit for it, so time to value is a very big deal.

What should private equity firms be looking for in a technology partner?

Domain expertise is very important. At Epicor, we have deep expertise within the industries that we sell into – manufacturing, distribution and retail. Once a firm establishes they’re speaking to a vendor with the relevant expertise, they should start by asking how long it will be before the system is up and running.

Next, I would test that the product is cloud native – that the software was written from scratch to run in the different clouds. Finally, it can be powerful to ask the vendor what it can offer that no-one else can. You may get blank looks in return if that vendor does not truly have anything unique for that industry use case. However, if we were in a sales cycle and we did not have anything that stood out to the client, I would never expect to win that work.

What are some of the challenges that private equity firms face when it comes to achieving ROI on tech spend and how can those be overcome?

The biggest challenge, from my perspective, is making sure you get what you are paying for. Does the system solve the specific business problem in the way that you intended? That means spending a lot of time and money on diligence. You need to have someone in the private equity firm that is tech-minded enough to evaluate the software – the code – and understand its functionality.

Sometimes, someone may decide that what is on offer gets close to the mark, but in software, 99 percent is not close enough. It must do precisely what you expect it to. Where we see private equity firms do well is when they employ a team including a tech specialist who understands software, a businessperson and often a finance specialist. That group will kick the tyres and ensure the necessary due diligence takes place.

What are some of the newer tech evolutions that are going to be most impactful that private equity should be aware of for the future?

I am seeing strong AI use cases and connections in software between natural language processing and the ability to translate verbal requests into a series of actions or processes that deliver real value. For example, you could have someone working in a hybrid taxi factory, who is not an advanced user, engineer or technologist, ask the system what the production quota will be for the month and whether the factory is behind schedule. They would speak to the ERP system, just as you would ask a question of Amazon’s Alexa, for example. That individual would then receive a report with production details.

“Capital may be a commodity, but a private equity firm can differentiate itself by really understanding tech”

That is exciting because, at a minimum, it upskills the staff, empowering people with less analytical skill and expertise to become more productive and to better interpret data and understand the business processes. If the system itself is smart enough, it can make someone look like an engineer when they are not, and that’s valuable to the business.

You are a private equity-backed business yourself. How are you putting some of what you have talked about into practice?

We continue to invest heavily in technology where it makes sense. Most recently, we acquired Grow, a no-code, full-stack business intelligence platform that empowers all users, of whatever skill level, to make data-driven decisions using dashboards and interactive visualisations. Last year we acquired KBMax, a specialist in the Configure Price Quote market, and CBC Computer Systems and its Decor Fusion point-of-sale software, which can help retailers transform their business.

We will continue to use our scale and know-how to buy businesses that we think customers are going to love. We compete with the likes of SAP, Microsoft and Oracle, so while we are big, we are up against some of the biggest companies in the world. Anything that means we can be better, smarter or quicker within the fields of manufacturing, distribution and retail, is a big bonus.

I would add that being a private equity-backed company ourselves helps us work with other private equity-backed businesses. When you are in the middle of it, you can really understand the private equity mindset, and I say that as someone who has previously worked at public companies. It is a very different experience.