Every business by now is familiar with the term “digital transformation,” and for good reason. When done right, digital transformation has the potential to revolutionize the customer experience; drive data-based insights; encourage collaboration across departments; increase agility and innovation; update skillsets and knowledge; consolidate processes and operations; and create incredible returns on investment.
So why aren’t more people concerned about it?
CapGemini found that only a quarter of executives rated digital transformation as a matter of survival, and a Forrester survey of 1,600 North American and European enterprises revealed that a quarter of companies are still investigating digital transformation – or not transforming at all.
This lack of urgency will be an issue for any enterprise, but there are four ways private equity firms in particular will suffer if they fail to digitize their portfolio companies.
The private equity firm won’t be able to properly execute an M&A thesis or realize gains at the end.
A firm may have a rock-solid thesis, but it cannot assume it’s starting from a good place when it comes to technology – and technology impacts the entire value chain.
Two-thirds of M&A deals have technology issues that prevent a firm from meeting its original goals, because they create problems with operations and/or operability. Simply assuming the company’s technology is “good enough” when inking a deal sets the firm up for failure.
Lack of transformation will influence EBITDA. Any private equity firm trying to maximize the valuation of a company so it can spin it for multiples of what it paid needs to keep a careful eye on EBITDA, and digital debt – or roadblocks created by technological bottlenecks – has a massive impact on EBITDA.
Of course, EBITDA is also affected by outside forces like competitive pressure and consumer preferences, but a company’s ability to respond to those is directly tied to technological capabilities, and any kind of technical or digital debt slows response time and puts the private equity firm behind its goals.
Lack of real-time data affects decision making. Another factor that will impact EBITDA is the ability to make smart decisions. An organization that can collect and analyze real-time data at all stages in the process, and use it to make decisions about operations and customers, will be infinitely more successful than those making decisions based on gut instinct or legacy data.
The investment’s redundancies and operational inefficiencies will linger. Companies often have processes and structures in place that appear to be a competitive advantage, but in fact have outlived their usefulness.
An example of this might be a captive offshore, such as a dev shop. It may have been started for the right reasons, but as time passed, it’s outlived its usefulness. Perhaps it proved to be unable to scale effectively, hire the right knowledge base or maintain quality standards, and now it is impacting the investment’s ability to go to market or compete. This is not always entirely obvious without the 360-degree view that real-time data collection and analytics enables.
Remember: Digital transformation is actually a separate initiative that must be owned, managed and funded – not something that just happens along the way – and the capabilities necessary to create business agility and a mature digital organization typically require multiple change agents. A firm must ensure a managed company’s various departments are aligned on the individual processes and goals that will create the company’s overall evolution – and look to third-party experts to guide technical due diligence and the roadmap to digital transformation.