Owners and operators of digital infrastructure face a number of headwinds: Rising inflation, skyrocketing energy costs, a potential looming recession, and labor shortages are creating something of a perfect storm in the industry. Meanwhile, owners in some regions face additional challenges, such as unfavorable foreign exchange rates, geopolitical strife, and tightening credit markets.

These headwinds have been blowing for 12 months or more, which makes it imperative that digital infrastructure owners and operators develop a solid strategy to thrive in this uncertain climate. Mature operators risk a 3% to 5% erosion in their EBITDA, as well as a drop of 30% or more in their operating free cash flow. Meanwhile, younger operators face additional challenges as they attempt to build out new infrastructure amid rising construction costs and uncertain demand forecasts while also reassessing a reasonable rate of return.

We guide digital infrastructure owners and operators through four critical imperatives to prioritize assets, develop asset-specific optimization plans, empower operators with the right tools and capabilities, and optimize the fund’s operating model—all of which will enable them to create a comprehensive playbook that maximizes ROI.

Figure 1

Four key imperatives for digital infrastructure owners

Fund owners must evaluate their assets in two ways. First, they should evolve their analytical models to incorporate a more dynamic outlook of the macro environment, with a more holistic view of modeled risks (including inflation, supply chain constraints, energy landscape, etc.) and prioritize their assets according to risk. Second, owners need to evaluate the capacity and capability of each asset’s management team to navigate these scenarios and take appropriate actions to maximize yield.

Many fund owners currently operate with static models, and they don’t rapidly refresh these models to simulate scenarios that challenge their initial assumptions about macroeconomic conditions. They also typically do not have robust systems in place for evaluating management teams’ abilities to respond to a changing environment.

This is the most complex part of navigating the current environment. A comprehensive yield optimization plan should address the following factors.

Top-line growth: Infrastructure asset operators typically don’t professionalize the go-to-market levers of their assets and thus operate well below full potential. This is a material missed opportunity. A comprehensive yield optimization plan should include the full suite of top-line levers to preserve and enhance value during a downturn. Most operators, especially those serving B2B customers, can benefit from taking a granular view of the opportunity represented by their customers and prospects. Once they do, orchestrating specific “plays” that bring together sales, marketing, and product teams drives focus on the greatest value and unlocks material productivity gains.

For instance, a closer look at pricing practices often reveals that operators are exercising poor rebate discipline, failing to enforce contractually scheduled price increases, or applying blanket measures during periods of uncertainty. Segmenting the customer base and taking intentional pricing actions—such as moving a customer from a lower-margin product to a better offering with higher margins—typically unlocks revenue retention or growth of between 5% and 10%, while providing the customer with more value.

Operating costs: Digital infrastructure companies should not let high inflation become an excuse for failing to properly manage expenses. Third-party expenses present opportunities for immediate cost optimization, with minimal execution risks. For instance, owners may pool the purchasing power of their various assets to negotiate better deals on services such as electricity or software. In our experience, third-party expenses can be optimized by 8% to 12%, with infrastructure companies often seeing the largest impact from costs such as rental fees, maintenance and repair, hardware, IT services, and site services such as cleaning and security.

There may also be an opportunity to lower internal labor expenses through nearshore and offshore hiring. These models not only provide access to world-class talent at a lower cost, but they also “variabilize” costs by better aligning staffing levels with demand. Finally, operators must seek out the automation opportunities that exist within general and administrative activities as well as within network operations.

Capital expenditure optimization: Capital plans typically take months to prepare, in part because so many different variables factor into what sort of returns owners can expect to see in today’s macro environment. Owners simply cannot afford to depend on capital plans that were drafted using outdated assumptions, but not many owners have access to the tools needed to re-create the business cases for all planned capital investments (while simultaneously optimizing their scheduling to minimize wasted time onsite and between jobs). As we explain below, sophisticated tools, including Lumi, can help owners to make data-driven decisions on new investments and maximize the return on invested capital for existing deployments.

Working capital management: It’s critical to note that, even if you get the three elements described above right, you may still be off on your cash cycle. When operators have unfavorable payment terms—for instance, paying their suppliers within 30 days but allowing their customers 90 days to pay—they must either slow their capital investments or increase their borrowing to keep pace. We help operators conduct “cash hunts,” using industry benchmarks to evaluate existing cash management processes and seek out opportunities to improve through contract adjustments, without creating a significant risk of lost business, of course. Operators who get ahead of their working capital management processes can expect to see a significant improvement in their net working capital.

Once you have the right levers prioritized, the focus shifts to execution. At the operator level, it can be challenging to run a robust yield program on top of existing management programs. This requires a change management platform that tracks companies’ activities against created value, ensuring that initiatives stay on track and actually deliver the intended business outcomes. Such a platform creates a single source of truth around these initiatives, consolidating teams around common value metrics, status updates, and roadblocks.

Additionally, operators require an integrated, dynamic decision-making capability that integrates customer, competitive, network, and operational data and insights to engage the value creation levers above.

As they focus on assets, build out optimization plans, and track progress, owners have an opportunity to revisit the operating models of their funds in the context of the current macroeconomic environment. We find that it’s helpful to think of fund operating models as existing on a spectrum, according to two variables—namely, the level of resourcing provided by fund owners to individual assets; and how prescriptive fund owners are in their involvement.

Fund owners should also consider the extent to which their fund models utilize cross-portfolio leverage across their assets. This can include sharing of best practices, prenegotiated vendor lists, consortium buying, and even shared services. Key opportunities include labor arbitrage, leveraging scale with third-party contractors, standardizing and centralizing back-office processes, and deploying various forms of automation. The impact of these tweaks to the fund model will vary. Funds may be able to reduce operating expenses by 1% to 2% across their portfolios, with some categories of shared services seeing cost reductions of up to 20% to 40%.

How we can help

As the world’s leading consulting firm for the private equity industry, we have an unrivaled track record in providing essential guidance on strategy, sourcing, due diligence, value creation, and more. We have also developed a deep portfolio of cutting-edge tools, diagnostics, and benchmarks that help our clients optimize business performance across their portfolios.

We’ve already mentioned Lumi, our breakthrough AI-powered platform that gives digital infrastructure decision makers incredibly detailed customer, competitive, and network data and insights that lead to more accurate decisions and superior ROI.

Another important Bain tool for infrastructure funds seeking to maximize yields is ARC, a robust change management platform that tracks activities against created value, ensuring that initiatives stay on track and actually deliver their intended business outcomes. ARC creates a single source of truth, allowing managers to create initiatives, move them through stage gates, and facilitate project governance and approvals. It also natively supports the tracking of your decarbonization goals and associated value created through such efforts. Finally, the tool empowers operators to create reports and share insights through embedded reporting or custom business intelligence platform integration.

We have also developed a powerful way for companies to strengthen the connection between go-to-market strategy and frontline execution. Sales Play System aligns product, sales, and marketing teams into a cohesive, data-driven system that consistently and compellingly brings the core value proposition to life for customers.

The challenges facing digital infrastructure owners and operators are considerable but not insurmountable. With the right tools and expertise, owners and operators can find new opportunities to reduce costs and increase revenue, adopt superior modeling capabilities, price effectively, and ultimately generate superior asset yields.