During the last decade, the Private Equity industry has had a great run and, as private market capital growth has outpaced public market capitalization, fundraising has hit record highs on a global level. However, this newly-felt success brings along a new set of challenges for the PE industry. With such an enormous amount of funds coming in, company valuations have moved up because Private Equity companies look to invest in well-run, attractive companies. It’s a changing world for PE-backed companies.
To address those challenges, Private Equity firms must acquire stakes at relatively higher valuations, deploy unprecedented amounts of money, and generate profitable exits – all while helping their portfolio organizations navigate through industry makeovers. Let’s take a closer look at how automation and AI increase finance efficiencies in a PE-backed company to achieve cash flow predictability and performance while improving customer relationships and experiences.
The Age of Automation and AI
The financial services industry is going through a period of profound disruption and change. Although PE firms have been experiencing massive success and growth during the last ten years, Artificial Intelligence (AI), automation, and analytics are still underleveraged in the industry. Commonly referred to as the 3As, it is surprising how slow their adoption has been – today, they are mainstream tools that help businesses enhance operational efficiencies, reduce costs, and propel growth.
Technological progress over the last 5 years has provided an impetus for Private Equity firms to consider applying AI, automation, and analytics to their businesses:
- Open-source platforms are reducing the cost of technological experiments and cutting the upfront investment.
- Costs are variable and can be paid on a usage basis (or some other metric)
- Cloud and analytics infrastructures are available on-demand and can be scaled up and down as needed.
- The increasing availability of alternative data adds to the potency of new analytics models.
- Industrialization in data science and other processes has reduced the reliance on the human workforce and significantly cut model-building time.
All of these factors have laid a solid foundation for PE firms to adopt 3A and get a leading position when it comes to portfolio company value creation.
Automation is expected to be crucial in changing the way the financial industry operates, and for it to thrive and compete. According to some estimates, the contribution of AI technology and automation to the financial services companies’ bottom line will top at $140 billion in cost savings and productivity gains by 2025.
Artificial Intelligence and Automation in Business Finance
Artificial Intelligence has found its way in various business tools. Some would say that AI is still in its infancy, but it’s not completely new and can solve various business challenges. AI has the power and capability to:
- Eliminate or reduce errors
- Analyze vast amounts of information
- Power up predictive analytics that can save money for the organization
Artificial Intelligence allows companies to analyze huge volumes of data in a shorter time frame and helps make informed decisions based on the financial data they have. Thanks to the availability of AI-based platforms and FaaS service providers equipped with the technology, it has become available to companies of all sizes (not just large enterprises with big budgets).
Private Equity firms and their portfolio companies are concluding that the potential of Artificial Intelligence in their industry cannot be ignored. Many of them now think creatively and differently about how to leverage the power of AI.
Today, there is no reason for accountants to spend the biggest portion of their time on making sure that the books close. Many of them have actually grown accustomed to it, but there is simply no time to perform certain extensive tasks, such as conducting fluctuation analysis and revamping outdated business processes. Many F&A professionals say that these tasks often remain unfinished at the end of the month. But thanks to automation, many of these tasks can be automated, which leads to saved time, improved accuracy, reduced errors, and less employee stress.
Automation is especially beneficial when it comes to reducing errors. “To err is human,” which means that eliminating human error is impossible. Human errors can be caused by anything from misremembered training, wandering concentration, a slip of the hand, or any other cause. However, using adequate software can help eliminate various manual operations by automating them. Automation has contributed a lot to the F&A industry with:
- Strategic tasks
- Trading bots
- Algorithmic software that can automate various vital processes
- Providing vital advice
- Analyze vast amounts of data
- Reduce the number of incorrect declines
- Enabling finance leaders (CFO), their leadership team, and other staff members to focus on the strategic aspects (and other critical tasks)
- Reduce the number of incorrect declines
- Identifying process improvements
- Detect fraudulent transactions faster than human analysts
- Improve how fast real-time transactions are approved
- And much more
How Can PE-Backed Companies Benefit from AI and Automation?
The use cases for automation and AI solutions across processes are diverse and numerous, but they can roughly be categorized into three domains: operational efficiency gains, cost, and loss reduction, and revenue generation.
Automation and AI algorithms are often the biggest levers when it comes to cost reduction, particularly in activities that are process-intensive. Robotic process automation (RPA) and intelligent process automation (IPA) have recently gained widespread adoption. Companies are reporting that they’ve reaped benefits by automating the process of invoicing – handling and processing invoices, marking them for payments, etc. And thanks to RPA, companies can slash handling time and reduce errors in manual processing. There are all types of AI and automation initiatives that a PE firm should bring to its portfolio firms.
Real-time targeted marketing has been made possible thanks to digital transformation and the continuing shift to digital. Automation and AI interventions are useful across the entire customer lifecycle and sales journey by helping enrich customer data, improving campaign effectiveness, and linking taxation data with customer demographics. The industry believes that increased focus on digital technologies (including the shift to automated processes and cloud) is most likely to be one of the ultimate game changes for the Private Equity industry. It’s simple – companies that take a data-driven approach will be set to outperform their competitors, while those that don’t take that approach will be left behind.
Before the robotic process automation, many transactional process tasks meant days of data entry and manual reporting. The accounting staff was faced with repetitive, tedious work prone to duplication of work and error. Thanks to RPA, the staff has more time and energy to focus on strategic roles and activities because it can significantly cut down the energy and time it takes to perform accounting tasks.
Improving your financial analytics capabilities is a foundation for financial forecasting, planning, and recognizing opportunities. Business and data analytics are valuable because they provide detailed insight that defines your growth strategies. Access to historical financial data and the ability to measure and analyze it (financial analytics) helps you identify your company’s strengths and weaknesses, recognize where funds are wasted, and understand its financial health and overall performance status. Financial analytics allows PE-backed companies to plan and manage existing investments much better. When facing increasing competition and regulatory challenges, data and analytics are the secret weapons that guides better investment decisions.
Outsource Your F&A Function to Get Access to the Latest Technology
Data-driven decision making based on timely and accurate financial information is the pillar of continuous growth and satisfied clients. By outsourcing your finance and accounting function, operating partners will have what it takes to make the best decisions based on the financial position of their portfolio companies. The advantages that Finance as a Services brings include:
- A streamlined and automated process of accounting
- Constant and timely updates on regulatory requirements
- Access to advanced software and digital technology
- Fast and accurate financial reports
With access to the crucial financial information that gives a clear overview of the portfolio company’s expenses and capital, operating partners can focus on strategic planning, scaling, and decision-making. PE-backed finance teams can be distracted with daily finance & accounting tasks while reporting becomes more demanding and structures are more complex. Upon investment or acquisition has been made, PE firms need to review their portfolio’s oversized back-office teams, examine the efficiency and cost of the in-house F&A department, and determine how to reorganize it. Minimal expenditures and maximum efficiency of the finance function brings a maximized ROI.
The Future of F&A with AI and Automation
The future of finance and accounting doesn’t include eliminating the need for the human workforce and replacing each function with extreme automation technology and AI tools. The role of the finance professional will change and demand new learning and competency requirements. HR and senior executives need to lead the change and encourage their staff to develop the mindset and competencies that will prepare them for the digital work and finance transformation. By leveraging machine learning, AI technology, Big Data, analytics, robotic process automation, and other emerging technologies, organizations can scale faster and make better decisions.
We also have to mention that there’s great potential for international cooperation (and rivalry) in AI expertise and research, as well as in AI applications to capital markets, M&A, and investment.
Many organizations out there believe that adopting these advanced technologies comes at a high cost, but it doesn’t have to be like that. Outsourcing to a FaaS provider is an excellent solution to gain the experience and skills of a professional accounting team without having to spend large sums of money on hiring in-house finance staff and expensive software maintenance.