Value creation and how to achieve it

Value creation is a core principle for any successful business. At a basic level, the concept involves transforming inputs (resources) into outputs (products or services) that deliver more value to stakeholders than their cost. 

A value creation plan almost always includes initiatives to drive greater cash flow and long-term value, but these aren’t the only metrics involved. Customer value is also important, helping businesses gain a competitive advantage with innovative products going above and beyond to foster a greater customer experience. 

With private equity value creation, the onus is on increasing a company’s value for investors. This involves strategic planning to create a high-value organization via growth strategies and streamline internal processes for improving financial sustainability and the overall bottom line.  

More often than not, private equity value creation hinges on short-term decision-making to deliver the most value for investors within a set timeframe. This doesn’t necessarily mean neglecting long-term value or growth. Instead, private equity business leaders develop a value creation plan that optimizes existing operations while also exploring opportunities for new products or strategic acquisitions.  

A key area for delivering enhanced shareholder value is reducing IT spend, especially with organizations leveraging increasingly complex cloud environments. Uncontrolled IT sprawl is a significant barrier to an optimized value chain, encouraging sub-optimal resource allocation that can lead to wasted budget and value capture opportunities. 

Areas where value creation is typically achieved 

Taking a segmented approach to the creation of value while retaining a holistic mindset is crucial. Here are a few common areas for a value creation plan to target.

Business strategy 

Incorporating value creation into wider business strategies is vital. This covers everything from internal resource allocation and computing choices, to marketing campaigns and the products or services themselves.  

Entrepreneurs and startups are particularly able to achieve value creation with innovative business strategies. These companies have the agility to build an internal business strategy from the ground up, while also delivering unique products or services in a B2B and B2C context. Take LinkedIn for example, a company with a successful business strategy to create a first-of-its-kind professional network. 

Supply chain 

Optimizing supply chain is another key area for value creation. This involves streamlining processes, consolidating vendors where appropriate, and efficiently managing inventories — both for virtual resources and physical supplies. 

Not only does this reduce costs, but it also works further along the value chain by reducing delivery times, ensuring high-quality materials, and ultimately enhancing customer satisfaction. In the context of private equity creation, this also leads to higher valuations. 

IT infrastructure 

Small businesses that have scaled too quickly without considering how the increased demand will strain traditional IT infrastructure can see their budgets drain quickly. In these cases, a value creation plan addressing these deficiencies is crucial. 

For example, an organization may decide to invest in moving from on-premise infrastructure to cloud computing, thereby saving costs on hardware maintenance and setting the foundations for a more scalable business strategy going forwards. 

Resource allocation 

Efficient resource allocation creates value by reducing wastage and optimizing the most high-impact initiatives. CFOs must leverage data-driven decision-making to identify areas where resources are wasted, and other areas where an increase in something like bandwidth or personnel (e.g. in a restaurant kitchen) could maximize output and profits. 

Doing so can completely transform a company’s prospects, simultaneously cutting costs while fueling growth through optimized operations. It’s music to the ears for private equity value creation leaders, creating higher company value with a few simple tweaks. 

SaaS ecosystems 

Developing an optimized SaaS ecosystem is another area where value creation can be achieved with significant success. Leveraging a tech stack with streamlined integrations and workflows considerably improves employee output and satisfaction. 

Users often cite the complexities of modern business applications as a prominent stumbling block to productivity. Removing the siloed data and clunky integrations with a streamlined SaaS management strategy drives value creation by enabling organizations to use more innovative work processes and make significant financial gains. The effect on company valuation can also be transformative — the most innovative businesses are often valued the highest.  

Business partnerships 

Strategic business partnerships can enhance private equity value creation, particularly if portfolio companies leverage similarities or collaboration opportunities within their portfolios. For example, two grocery companies within a PE firm’s portfolio could consolidate back-office operations like accounting and HR while also sharing logistics networks. 

In the software world, strategic SaaS procurement operations can deliver closer business partnerships, leading to discounts and greater opportunity for scalability. 

The challenges of value creation in software and IT management 

Value creation within software and IT management has never been more important, especially with the growth in cloud computing and SaaS software. Maximizing value here can be a complex endeavor. 

Some of the main challenges to appreciate include: 

• Business strategy and IT misalignment – Avoiding misalignment between IT investments and wider business strategies is a key value creation challenge. This can easily result in shadow IT, where teams or individuals purchase software to deal with short-term challenges without understanding how it wastes resources and increases SaaS sprawl in the long run. 
• Legacy IT infrastructure – Older organizations can often struggle with outdated software and infrastructure, accumulating a ‘technical debt’ that can reduce efficiency, security, and innovation. A successful value creation plan must look forwards, leveraging modern computing solutions.  
• Obscured visibility – General visibility across an organization's IT infrastructure is crucial, but it can be challenging to achieve, especially with more complex ecosystems like multi or hybrid cloud setups. At Vertice, we provide unified dashboards and real-time reporting to clear the fog and drive higher overall value with increased software visibility.  
• Skills gap and talent shortage – Leveraging open-source technology to build organization-specific applications or workflows can improve private equity value creation, but having the developer talent to do so can be hard to secure. 
• Security threats – Getting hit by a ransomware attack can destroy value creation, both by inhibiting work processes and ruining a company’s reputation — an especially disastrous aspect for private equity value reaction. Achieving watertight cloud security posture across an IT environment is a fundamental but challenging prerogative. 
• Environmental, Social, and Governance (ESG) integration – Integrating ESG principles into software and IT management is increasingly important. Organizations must balance value creation with responsible practices for energy consumption, data privacy, and employee wellbeing across their networks. 
• Compliance – Getting hit by regulatory fines, lawsuits, or operational disruptions due to inferior software compliance is a surefire way to damage value creation. Organizations must keep on top of compliance aspects like data storage and security regulations. 

How Vertice supports value creation 

Value creation in the modern business world often hinges on managing and optimizing software to reduce spend and improve operational efficiency. Vertice’s SaaS Purchasing Platform and Cloud Cost Optimization tool help organizations tackle these challenges head-on. 

Our SaaS Purchasing Platform can drive savings throughout the procurement cycle. We negotiate directly with your chosen vendors using pricing benchmarks derived from what our partners pay for similar services. This gives vital leverage, helping us secure an optimal price. As an example, we helped Lighthouse save $170k on a single SaaS contract.  

After initial purchase, Vertice can also help your organization monitor and optimize SaaS usage through granular insights and unified dashboards while eliminating shadow IT.

Our Cloud Cost Optimization tool drives savings on the cloud infrastructure you use to deploy software. We leverage automation to buy and sell reserved instances depending on usage, also providing in-depth data on resource allocation and intelligent optimization suggestions that can often be made automatically.

This simplifies private equity value creation in particular, taking the burden off CFOs to monitor reporting and analytics across a portfolio. Vertice empowers them with unified dashboards and automated optimization, allowing a greater focus on strategic initiatives and maximized returns. We helped a leading cybersecurity company identify over $1 million in cloud savings — proof of both platforms’ cost-saving potential. 

To date, we’ve got $3.4 billion in managed spend across our customers and can save up to 25% on cloud costs. For more information check out the SaaS Purchasing Platform and Cloud Cost Optimization tool. Get in contact to see how we can help.