The following is a guest post from Connor Augustyn, director of operations excellence/finance transformation at West Monroe. Opinions are the author’s own.
Private equity-backed CFOs operate under unique pressures to drive rapid growth and operational efficiency, often while navigating a highly complex financial environment. Unlike their counterparts in non-PE-backed organizations, these CFOs are tasked with managing stricter covenant compliance, maintaining tighter cash flow visibility, and responding to a higher level of reporting demands.
These pressures are compounded by the often short-term growth objectives of private equity sponsors, which can introduce additional complexity when initiating a finance transformation roadmap. Bottom line: life can be tough as a PE-backed CFO.
Key challenges and solutions for PE-backed CFOs
The primary challenge PE-backed CFOs face is managing focus and alignment amidst numerous, often competing, priorities. With demands coming from both day-to-day operations and the private equity sponsor’s growth objectives, CFOs can quickly feel overwhelmed by the number of “fires” that need to be put out. Without a clear strategy for prioritization, these challenges can escalate and consume valuable time and resources.
To address this, CFOS must take a step back before reacting to every new challenge.
Here are four critical steps to successfully navigate the complexities of finance transformation in a PE-backed environment.
1. Understand the investment thesis. CFOs must first understand the sponsor’s vision for the company. For instance, if the goal is market expansion through acquisition, CFOs need to ensure their Enterprise Resourcing Planning (ERP) systems and financial consolidation capabilities can handle the increased scale and volume.
2. Evaluate current operations. Next, CFOs should critically assess their business’s current state, focusing on accounting operations, finance operations, technology and data and people. Rather than simply rating performance, CFOs should consider how each domain could pose risks to achieving the investment thesis. For example, in accounting operations, CFOs should focus on areas like business processes, financial close, working capital management, and internal controls. Assigning a risk score for each area with respect to how it may impact the investment thesis can help prioritize the necessary actions.
3. Define remediation initiatives. Based on this evaluation, CFOs should outline high-level initiatives to mitigate risks. The goal here is not to develop detailed project plans for every issue but rather to identify the key actions required to address the most significant risks.
4. Create a roadmap. CFOs should work with their PE sponsor to prioritize initiatives based on impact and urgency. A framework such as “impact vs. urgency” can help determine which initiatives are must-dos, quick wins, growth bets or de-prioritized actions.
By focusing on these steps, CFOs can ensure they are aligned with their sponsors, de-risk the transformation, and prioritize the right initiatives to drive success.
Aligning finance transformation with strategic goals
Aligning the finance transformation vision with the private equity firm’s strategic goals is another critical challenge for CFOs. Private equity sponsors typically operate on a shorter timeline, often with a four- to five-year hold period, while CFOs may be focused on longer-term objectives. This misalignment can create tension, particularly when it comes to major financial decisions such as replacing ERP systems or delaying large-scale transformations.
To bridge this gap, CFOs should revisit the investment thesis to understand the sponsor’s priorities and use the “impact vs. urgency” framework to determine which initiatives can be delayed and which need immediate attention. CFOs must also communicate the risks associated with delaying certain actions and provide solutions that balance short-term results with long-term stability.
For instance, much like a doctor choosing between a knee brace or full knee replacement based on urgency, CFOs need to determine whether temporary solutions can extend the useful life of systems or if a more comprehensive overhaul is necessary. This ensures that both CFOs and sponsors are on the same page regarding priorities.
Securing stakeholder buy-in
Transforming finance functions requires buy-in from both private equity leadership and internal teams. One of the most effective strategies for securing internal buy-in is involving key business stakeholders early in the process. CFOs should engage business and operations teams in evaluation exercises, such as deep dives into order-to-cash, procure-to-pay and FP&A processes.
By facilitating candid discussions about where finance functions are falling short, CFOs can build trust with internal stakeholders and foster a sense of collaboration. This also sets clear expectations for the changes that will be required from different teams. For example, in a SaaS business, improvements to contract management for ASC 606 compliance may require additional input and adjustments from the sales team.
By positioning finance as a strategic partner to the business, rather than simply a reporting function, CFOs can ensure internal teams are fully engaged in the transformation journey.
Evaluating and selecting technology solutions
Technology plays a central role in finance transformation, and choosing the right solutions is critical to success. However, it’s not a magic bullet. CFOs must avoid the common pitfall of rushing to select a vendor before fully understanding the role technology will play in the transformation. Instead, they should follow a structured process that includes:
- Identifying the need
- Designing the future state and gathering requirements
- Evaluating alternatives
- Short-listing vendors
- Running a structured selection process
By taking this approach, CFOs ensure that technology acts as an enabler of transformation, rather than a quick fix for broken processes. This holistic view of technology helps prevent situations where a tool is implemented without addressing underlying issues, resulting in limited or no impact on operational efficiency.
Change management must be a priority
Managing change within finance teams, particularly in a PE-backed environment where speed and efficiency are paramount, requires a thoughtful approach. Key best practices include:
- Driving change champions. Selecting influential team members who can advocate for transformation and garner peer support. These champions should be empowered to lead initiatives and actively participate in decision-making processes.
- Celebrating quick wins. Identifying and achieving early successes builds momentum and maintains morale throughout the transformation journey. Celebrating these milestones helps sustain motivation across the team.
- Regular feedback mechanisms. Implementing mechanisms for ongoing feedback to understand and address concerns promptly. This helps prevent the silent build-up of resistance or doubt that can derail transformation efforts.
By following these best practices, CFOs can foster a culture of continuous improvement and drive successful change within their finance teams.
Measuring success with KPIs
To gauge the effectiveness of finance transformation efforts, CFOs should establish clear key performance indicators (KPIs) aligned with both the investment thesis and broader business objectives. Common KPIs include:
- Financial accuracy and timeliness. Such as days to close and forecast accuracy.
- Operational efficiency. Including cost of finance as a percentage of revenue and process automation rate.
- Compliance and risk management. Measured by audit adjustments and compliance reporting timeliness.
- Stakeholder satisfaction: Evaluated through internal customer satisfaction surveys and employee engagement metrics.
- Strategic insight and value creation. Assessed through ROI of finance projects and value-added analysis.
By regularly reviewing these KPIs and ensuring they drive meaningful improvements, CFOs can ensure their transformation efforts are delivering tangible value to the organization.
Being a CFO in a private equity-backed company is incredibly challenging — so much so that roughly 75% of CFOs fail to meet expectations or fully understand their role in driving value creation within their first year.
Private equity-backed CFOs face unique challenges in driving finance transformation, from aligning with short-term sponsor goals to managing stakeholder buy-in and selecting the right technology solutions. By focusing on alignment, prioritization, stakeholder engagement, and effective change management, CFOs can navigate these complexities and build a future-ready finance function that delivers value both in the near term and for the long haul
