The Benchmarking Blind Spot: What PE Firms Don't Know They Don't Know About Portfolio Technology Spend
7/27/20264 min read
Ask an operating partner how a portfolio company's gross margin compares to its sister companies, and they'll have an answer within seconds. Ask the same question about technology spend as a percentage of revenue, or cost per employee, or cloud spend relative to headcount, and the answer is almost always some version of "we'd have to pull that together." Financial metrics get benchmarked constantly. Technology spend almost never does, and that gap is quietly costing funds a clear early-warning signal on which portfolio companies are overspending or under-protected relative to their peers.
Why This Benchmark Doesn't Exist Yet at Most Funds
The absence isn't due to a lack of interest. It's structural. Each portfolio company tracks technology spend in its own chart of accounts, often bundled differently, sometimes split across IT, telecom, software, and security line items with no consistent categorization from one company to the next. A fund with four portfolio companies effectively has four different definitions of what counts as "technology spend," which makes any cross-company comparison an exercise in reconciling incompatible data before any actual analysis can begin.
Industry benchmarks exist for revenue multiples, EBITDA margins, and working capital ratios because those categories are standardized by accounting convention. Technology spend has no equivalent standard, and most funds have never invested the relatively modest effort required to build one internally across their own portfolio, even though that internal benchmark is arguably more useful than an external industry average, since it reflects the fund's own companies under the fund's own ownership model.
What a Portfolio Benchmark Actually Reveals
Once technology spend is normalized across a portfolio into comparable categories, telecom and connectivity cost per employee, cloud spend as a percentage of revenue, security spend relative to data sensitivity and regulatory exposure, patterns emerge that are invisible looking at any single company in isolation. A portfolio company spending noticeably more than its peers on a comparable category isn't necessarily doing anything wrong, but it's a flag worth investigating, whether that's an unrenegotiated legacy contract, an inefficient architecture, or simply a vendor relationship nobody has revisited since the company was acquired.
The reverse signal matters just as much. A portfolio company spending noticeably less than its peers on security, for instance, isn't automatically more efficient, it may be under-protected relative to the risk it's actually carrying, a distinction that a simple benchmark makes visible in a way that no individual company's internal review would ever surface on its own.
Turning This Into a Standing Practice
Building this benchmark once is useful. Maintaining it as a standing quarterly or semi-annual practice, refreshed every time a portfolio company renegotiates a contract, onboards new technology, or shifts its risk profile, turns a one-time snapshot into an ongoing management tool that flags emerging problems before they show up in a financial statement. A portfolio company quietly drifting toward technology cost inefficiency or security under-investment is far easier to correct at the first sign of divergence than after two years of compounding drift.
This also gives operating partners a genuinely useful data point during the diligence process for a new acquisition, comparing a prospective platform or add-on's technology spend against the fund's existing portfolio benchmark before the deal closes, rather than discovering after close that the new company's technology cost structure is meaningfully out of line with everything else the fund owns.
Why This Matters More as Portfolios Grow
A fund with two portfolio companies can informally track differences between them without much structure. A fund with six, eight, or a dozen companies across multiple funds cannot do this informally with any reliability, and the absence of a structured benchmark becomes a genuine blind spot rather than a minor inconvenience. Funds that build this discipline early, while the portfolio is still small enough to establish clean categorization standards, find it far easier to maintain as the portfolio scales than funds that try to retrofit consistent benchmarking onto a decade of inconsistent internal reporting.
Getting Started
The starting point is a standardized technology spend taxonomy, agreed once at the fund level, applied consistently across every portfolio company going forward, and mapped retroactively against at least the last year of spend at each existing company. That single exercise, run once across the portfolio rather than company by company whenever someone happens to ask, is what turns technology spend from an unexamined cost center into a metric the fund actually manages, the same way it already manages every other line on the income statement.
What the First Benchmark Usually Looks Like
The first pass at a portfolio benchmark rarely produces a tidy, uniform picture. It typically surfaces one or two portfolio companies with technology spend meaningfully out of line with the rest, in either direction, along with a handful of categories where every company in the portfolio is quietly overpaying relative to what combined negotiating leverage should be able to achieve. Neither finding is a criticism of any individual company's management team. It's simply the visibility that comes from comparing numbers that were never compared before, and it's consistently the most useful single output of the entire exercise.
Funds that run this benchmark for the first time are often surprised by how much variation exists even among portfolio companies operating in similar industries with similar headcounts, a reminder that technology spend efficiency has very little to do with company size or sector and almost everything to do with how recently, and how rigorously, someone last reviewed the underlying contracts.
A Tool Worth Revisiting Every Quarter
Once built, the benchmark is inexpensive to maintain relative to the value it provides. A quarterly refresh, incorporating any new contracts signed, renewals completed, or technology changes made at each portfolio company, keeps the comparison current and lets operating partners catch drift early rather than rediscovering the same gaps from scratch during the next full portfolio review. This is the kind of tool that compounds in usefulness the longer it's maintained, since each additional quarter of data makes the underlying trends, not just the current snapshot, visible for the first time.
Sigma Technology Consulting, Inc.
25 Years of Experience, Vetting & Procuring Technology Vendors
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