Leading private equity portfolio companies are pushing hard on digital transformation to unlock value, increase profits and speed up exit time. But many others are muddling along in digital adolescence, wary of the costs and potential disruptions of moving to full tech maturity. These portcos now face the choice of either growing their digital presence or risking falling further behind competitors.
We recommend thinking about digital maturity as an evolution of how your business runs. To make intelligent moves, figure out what you have that’s good and build on it. Imagine an industrial manufacturing company is looking to go digital, but doesn’t have the resources to fix everything all at once. It already has one system (e.g., sales) that is on a cloud platform. The next step is to think through other departments and processes that aren’t digital (inventory, for one) and figure out how to modernize them to also run on cloud. And move from system to system in that fashion until they get to a place where tech capabilities match their business goals.
Focus on the areas of the business that can add value immediately. Transformation doesn’t have to be a giant rip-and-replace transformation that takes years and disrupts lines of business. Building out the appropriate skills and technologies over time can make it easier. And those that take the leap to develop advanced cloud-based digital capabilities are likely to perform better no matter how economic conditions fluctuate.
We think about this change as moving into digital maturity. A company’s digital maturity can be measured by examining its prowess in using digital tools to enhance its market efforts. That may mean a better product or service, an enhanced customer experience or a better platform that allows management to detect changes and shift strategy as markets move. Companies with robust capabilities can remain nimble to navigate shifting digital markets more easily. They don’t believe in “set it and forget it.” They don’t settle for languishing either, or trying to achieve a specific target state that may be out of date by the time the company gets there.
The level of digital transformation necessary can vary by company or even by industry. But there are common themes. We’ve seen companies succeed by creating a digital transformation plan and using that plan to guide a transformation as it goes through the rest of the process. Make your business priorities the focus of your transformation efforts.
Leaders in this space can start this transformation the same way they would start any transformation — perform a digital due diligence on your portco.
For example, picture a private equity firm building a platform of family doctor’s offices. Some individual offices may be more sophisticated than others. Some may be doing their operations manually on paper, but have great sales and presence in their local market. It may be a matter of targeting a more digitally progressive office to bring in the platform. Spread that office’s systems, technology and practices to other offices to digitally advance the platform to attain a more effective result.
That’s just one example. There are many ways to create a digital-native culture that makes sense in your industry.
Finally, prioritize the highest value areas that would most directly benefit from a digital transformation. For some companies, that’s a long list.
It can be difficult to visualize what these projects could be and what return on these projects could look like, so we’ve included two examples below. This is by no means how every project progresses. There is no one-size-fits-all solution, but these types of projects can give you an idea of how leading companies are creating value through digital transformation.
Across a variety of industries, many portcos resist making the changes and investments needed for a move to cloud. We’ve seen companies burdened with tech debt, fueling doubts of seeing value from change. Many are comfortable with the old if-it-ain’t-broke-don’t-fix-it mindset, so transformation is rarely a priority, leaving the company vulnerable when market conditions shift.
But it has never been easier or cheaper to move to cloud. A conversion from legacy hardware to cloud that would take years not that long ago can now happen in a fraction of that time. In some businesses, key functions can be up and running in a matter of weeks. The key is to create a dual track. Take a snapshot of the IT current state and run those processes virtually on cloud while simultaneously working on a traditional cloud migration.
The ROI is immediate — there’s no more maintenance or server space cost and a reduced need for day-to-day IT support. Further, removing the complexity of old infrastructure and techniques can lead to benefits throughout your company. You can be more agile to adopt new strategies if you’re not bound by a legacy ERP and infrastructure. You can also make the kind of upgrades that generate topline impact, including improved sales platforms and more sophisticated inventory management. All of these are cost effective add-ons that can become much simpler once those operations are on cloud.
Let’s say a manufacturer of consumer products has a snag causing delays in shipping and there’s missing product at sales sites. Because the company’s systems are siloed on different legacy systems, sales reps don’t know about conditions at the plant fast enough to adjust their sales strategy or reach out to clients. But, by migrating all departments to a single data lake on cloud, you can cut the lag time for vital information to spread across the supply chain. If there’s trouble in production, for instance, a predictive analytic can issue an automatic alert to those who need to know. That kind of data flow not only allows almost everyone in any department to contribute to improving strategy, it can also save on maintenance of disparate systems. Managers can pivot more quickly and change tactics. Making this switch gives a company the opportunity to build a “supply chain control tower,” a single reporting point that can provide a near real-time view of manufacturing output and sales activity. From there, management can make agile strategy decisions in a way that would have taken months to make. Or leaders in different departments can come together using a single source of shared data to brainstorm product tweaks, increasing profit.
We hear it all the time. Why did we do so well this last quarter? Or why did we fall short?
The answers might be buried in spreadsheets and clunky outmoded data systems that don’t communicate with each other. Cloud can change that. Instead of poring over months-old spreadsheet data to discover insights, cloud offers faster, better answers via things as simple as a refreshable dashboard. Many companies already have access to the kind of internal data that can build out real-time, predictive analytics to fuel decisions far in advance. Advanced data analysis can help a company from operations to exit.
Cloud can make progress on company goals seamless — and easier. After you’re fully in cloud, the smart move is to push beyond simple dashboards to advanced predictive modeling. This can create a whole new way of operating that most traditional portcos thought was far beyond their reach. A shift in strategy that produces the kind of analysis it would take financial planning and analysis (FP&A) teams weeks to complete, can now be calculated in the background and instantly pushed to decision-makers.
Imagine a hospitality business with far-flung properties, all operating on their own separate systems. Leaders have no visibility into the entire system, can’t compare one property with another on any key metrics. Systems don’t communicate, and when data finally does emerge, it’s already outdated. It’s impossible to do something as simple as moving staff from one facility to another to help support crunch times. Within months, however, a digital makeover can offer actionable insights into labor, financials, operations and performance. That data helps executives quickly adjust workforce levels, keep ahead of supply snarls, and anticipate future customer demand at their properties. This creates a new agile opportunity for a legacy people business.
Done right, a digital makeover gathers momentum on its own. Quick wins demonstrate how a transformation enhances value. Leaders can then move to a more holistic, deeply embedded transformation strategy using capabilities and culture built on earlier projects. And that digital maturity can deliver the profitability management expects. None of it happens overnight, but the work needed to get initial results is substantially cheaper and simpler than it used to be. The only thing holding your portco back is making the choice to get started.