DO YOUR PORTFOLIO COMPANIES HAVE DIGITAL DNA?

Digital transformation for private equity 

ON Partnership with Partner, Todd Wyles and Guest Author, Raghav Mathur, Senior Digital Executive

PE-Digital-DNA

What is digital transformation?

The buzz around “digital” seems to have picked up in private equity circles. Based on conversations with private equity investors and their management teams, one fact has become apparent: most teams are not sure what digital transformation is, how to define it, or if they should be focused on digital as a legitimate lever for value creation.

In the past, “digital” was viewed as an expense line item that referred to tools and technologies that historically were the sole domain of the IT department.  More recently, there has been a shift to organizing the business to respond more quickly to windows of opportunities, disruptive and competitive forces, and unforeseen impacts from technological breakthroughs. 

The “transformation” or “acceleration” is essentially the act of reprogramming the DNA of an organization making it more nimble and responsive.  A digital mindset, coupled with technologies and tools, will enable PE firms to use traditional value-creation levers with much greater force and velocity. The impact is felt in all aspects of the business:

  • Top-line growth and sales efficiency – Revenue & EBITDA – e.g. hire, onboard, activate and reduce ramp time for sales.
  • Operational & Customer Service excellence and differentiators – Service Costs and Retention – e.g. identify and address “at-risk” customers early, create loyalty, etc.
  • Personalization & Customer Analytics – Cost of sales, – e.g. reduce burden on sales, effective demand generation and digital sales channels
  • Order to cash management – e.g. Labor/FTE, shared services and supply chain costs, operational efficiency
  • Speed to market, productivity – e.g. “agile-type” capabilities within product, sales and operations

What is the best approach?

There are several ways for PE firms to approach digital—some leading to short-term ROI, through cost savings or revenue driving initiatives, and others leading to longer-term, more consistent value capture through a DNA shift. 

Tangible ROI projects tend to convince less committed leaders that “digital” represents a seismic shift and not just the cost of doing business.  However, for those PE investors and portfolio company management teams seeking a deeper, more lasting impact on business performance, the effort starts much earlier by establishing “Core” vs. “Portfolio company-specific” digital capabilities:

  • Core – Digital capabilities or digital enablement functions that cross all portfolio companies and funds – talent, processes, support, systems and tools
  • Portfolio-specific – Digital capabilities which are must-haves for each portfolio company to command premium multiples by owning “rising star/challenger” spot in the industry.

Conducting a portfolio-wide assessment enables the PE firm to make a rapid, first pass / top-down assessment of the current digital capabilities of all portfolio companies. The benefits of this assessment include:

  • Perspective on capabilities / weaknesses relative to competitors. e, benchmarking digital DNA across the portfolio
  • Exposure to current / emerging digital trends and disruptive potential to that industry, adjusted for the investment horizon
  • Assessment of individual portfolio companies for the presence of key digital value enablers – e.g. Revenue Drivers: Sales & Marketing (integration of functions, commonality of tech stack, percentage of sales from digital vs. traditional channels, etc.),
  • Analytics and data to drive real-time churn/loss intelligence, information and quality of data flow from pre- to post-sales operations and customer support – CX specific

A measured approach to execute against the findings of the portfolio assessment is via a low investment, proof of concept or “Alpha” (i.e. Light-weight test):

  • Find the low-hanging fruit. Pick a portfolio company for a test and design a quick set of objectives to test and measure value creation and ROI (ideally < 3-5 months)
  • Identify success/failure points of test, design full digital transformation plan within that portfolio company

Simultaneously with the light-weight test, begin developing the overall Digital Transformation architecture at the fund level:

  • Digital capability, team and organization architecture
  • Discuss tradeoffs between value, cost and flexibility of architecture
  • Build transformation plan and execute

Who leads a digital transformation?

Actually, all senior leaders must be prepared to support the digital transformation process.  In every case, it is critical to ensure that the right technical and strategic talent exists at the PE Sponsor and/or the portfolio companies to propel successful digital transformation (see sidebar: Questions Private Equity firms should be asking themselves).  Leaders across any private equity-backed business also must collaborate to ready the culture for change.  When a CEO not only endorses but also has the vision to champion digital transformation, there is a much greater opportunity for true value creation. Other functional leaders often play crucial roles as well.  But since the culture of a business needs to embrace the change, it is truly a company-wide endeavor and requires the right digital DNA.

 

Questions Private Equity firms should be asking themselves


  1. Do you have a digital evaluation / scoring mechanism or tool to assess your portfolio companies’ digital capabilities?

  2. How do you and your portfolio companies compare to peers in your industry in this area?

  3. Have core digital capabilities been built and enabled at the fund and portfolio company level?

  4. Do you have a clear vision and specific objectives for your initiatives?

  5. Are you aligned, supportive and champions of change? Do you have the know-how to lead the change process?

  6. Is the necessary talent present to deliver the change? Critical roles include CEO, CMO, CTO, CIO, CDO People/change management leaders, who need to be both receptive and champions.

  7. Have clear success metrics been defined? Key performance indicators tied to objectives, bench-marked to best of breed?

 

About the author:

Raghav Mathur has lived and breathed digital transformations for almost 20 years. His experiences with organizations looking to transform themselves – radically or incrementally, span strategy through to execution. He has successfully led transformations within Fortune 500 companies, PE-backed organizations, start-ups, and Small/Medium Enterprises. When he is not advising or leading companies, he can be found with his family, immersed in nature, hiking or skiing in the mountains around Denver. 

 

How can we help?

Todd Wyles is a Partner with ON Partners. Backed by over two decades of experience in human capital advisory, management consulting, financial services and related professional services, Todd’s practice focuses on working with private equity firms and their portfolio companies.

 

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