Today, AI seems to be everywhere. Every ERP vendor is building AI into their platform. Our search results are improved by Generative AI (GenAI), and with tools like Chat GPT, Grok, and Gemini, we can create and edit images and even videos based on simple text descriptions. Gartner, in its 2024 Hype Cycle for Artificial Intelligence1, states that GenAI gets all the buzz, but doesn’t always deliver business value. At PIP, we have seen that as well while working in middle-market Private-Equity-owned businesses. However, we have found there is business value to be generated using AI, it just requires a bigger vision.
The Bigger Vision is a Business Vision
At one of our larger PE clients, an IT Operating Partner has been asking their more-than-one-hundred portfolio companies about the value realized from AI investments. That Operating Partner told us that only about 10% of all the AI projects had a measurable benefit. In the lower middle-market, portfolio companies can’t afford to miss 90% of the time, even if the investment is relatively small. That’s why we believe that AI can’t be treated like another “IT” project. For AI to deliver transformational results, it needs to change the way the business markets, sells, operates, or makes decisions. And to get this type of impact, a business must look at AI and ask: How can we transform our growth or profitability through dramatic change powered by AI? This must be a business discussion informed by technology, rather than being technology led. Your IT leadership should have a seat at the table, but the rest of the business is critical to developing the vision, empowering change and realizing the return. Also, while it may be tempting to take on many opportunities at once, AI investments should be relatively narrow and the benefits to the business should be directly measurable.
How to Make an AI-Empowered Business Change That Produces New Value
We explore this question with PE clients, and the formula for assessing the value of any AI investment should be driven by ROI and potential risk. We start with a simple workshop to identify the industry and business imperatives that could be addressed by custom AI solutions. One of our recent experiences included providing sales and customer service representatives with dynamic recommendations based on client phone conversations, dramatically increasing upsell rates. Another involved developing an AI recommendation engine on the factory floor to avoid wastage during production runs, increasing profitability. At the end of the workshop, you should have a good idea where there may be opportunities for business improvement through AI, and a high-level business case for change. The second step is a detailed planning process to validate assumptions and increase confidence in what would change and the cost to achieve it. The final step is building proof of concepts (as desired) to ensure the larger development and change investments can be executed with speed and confidence to capture the desired business results. We recommend approaching each of these phases as a separate engagement, limiting over-spend, providing clear stage-gates along the way, and giving management teams and the PE firm clear information to aid in deciding whether they are ready to move forward.
In Summary: Tailored AI Solutions Deliver Exceptional Value
Tailoring AI solutions to your business is the surest way to create exceptional value through AI. Explore all the ways your business can be optimized with an experienced value-creation partner and set a vision for how AI could deliver exceptional business results and, ultimately, increase enterprise valuations. These benefits could include:
- Increased market share
- Increased win rates
- Improved cross-sell and upsell rates
- Reduced costs through automation
- Improved efficiency and profitability
- Improved decision-making across the business
By targeting tailored and well-defined use cases, lower-middle-market companies can invest and reap AI rewards to ultimately increase EBITDA and valuations for PE investors.
