Table of Contents
- What is a Digital Transformation?
- 4 Main Themes of a DX Strategy
- Planning a Digital Transformation
- Implementing a Digital Transformation
- Balancing Cost, Effort, & ROI
- Impact of a Digital Transformation
- Ongoing Digital Transformation
Introduction to Digital Transformation
Using an effective digital transformation strategy, a private equity (PE) PortCo can differentiate itself to thrive in a landscape where agility, speed, and data-driven decision-making are imperative. By helping their PortCos evolve past legacy systems built on manual functionality, PE firms can increase efficiency and profitability in their acquisitions, helping both organizations successfully navigate the competition.
Achieving digital maturity in PE portfolios increases value and improves performance for long-term growth, but it doesn’t happen without company-wide buy-in, change management, and the right partners.
What is a digital transformation?
Digital transformation (DX) is the adoption of business programs powered by technology with goals such as improved customer experience and increased market responsiveness. Unlike more short-term projects that end once a specific goal is achieved, true digital transformation is ongoing—focused on improving outcomes over time while integrating evolving technology further into the business.
It’s rarely necessary for a business to become fully digital. Instead, implementing a successful and focused digital transformation strategy creates a comprehensive impact across multiple business functions within individual acquisitions while considering cost, effort, and ROI.
The critical role of digital transformation for competitiveness and growth in PE portfolio companies
Due to advancements in technology, regulatory changes, shifts in consumer behavior, and the rise of fintech companies, financial services are among the fastest-evolving markets. To remain competitive, the transformation approach taken by private equity must be applied to internal business processes as well as assessing and developing acquisitions. To achieve company growth and corresponding profitability, PE firms must be careful about the PortCos they select for moving toward digital maturity.
Since it can be costly and time-consuming, the process must be planned for and managed appropriately alongside an expert vendor partner. The right digital transformation partner can help PE firms better position their PortCos to meet customer expectations and build brand loyalty, thereby increasing valuation and profitability.
The 4 main themes of a digital transformation strategy
Depending on the private equity organization’s goals, certain themes will emerge regarding IT digital transformation. Some version of the following will likely apply to each company a PE firm acquires:
1. Adoption and integration of new technologies
DX centers around embracing new and evolving technologies. This may include migrating to a cloud platform, incorporating artificial intelligence (AI) as an internal tool or customer-facing chatbot, updating an e-commerce storefront, creating an employee portal, or capitalizing on automated data analytics. Whatever the specifics, the goal is to improve efficiency, agility, and innovation.
2. Improvement of customer experience
When considering ROI on digital transformation, focusing on enhancing customer experience is an excellent place to start. Digging into user needs and expectations to create a digital personalization strategy guides the selection of digital tools and necessary UX upgrades. As customer experience improves, so do satisfaction and loyalty, culminating in increased business growth.
3. Use of data for decision-making
A huge boon of digital native culture is its inherent ease and comfort in using and relying on data to inform decision-making. By collecting, analyzing, and evaluating data, PE firms and their vendor partners gain insight into customer behavior, market trends, and the efficiency of internal systems.
By leveraging data for informed decision-making, partners, CIOs, and company managers can employ an agile strategy to make better business choices and emerge as forward-thinking industry leaders.
4. Creation of cultural and organizational change
Moving to a digital-first approach typically involves shifts in an organization’s culture and structure. As company leaders work to encourage a mindset of continuous learning and agile transformation, collaborative teams naturally break down departmental silos and increase innovation. Leadership must drive these changes, setting the strategic direction for transformation while providing the encouragement and training necessary for adopting digital maturity.
Regardless of the specific processes included in a PortCo’s digital transformation strategy, the overarching themes are interconnected and should be viewed holistically. Because enterprise agile management requires ongoing flexibility in line with the ever-evolving digital landscape, leaders, team members, and vendor partners must work together to remain adaptable and successful.
Planning a Digital Transformation
Before undertaking any degree of transformation, digital due diligence is necessary to identify potential businesses for acquisition and understand their current level of digital maturity. Within this research phase, assessing the risks and opportunities associated with such acquisitions and setting a corresponding strategic direction is imperative.
Digital tools can streamline this part of the process by automating data collection, analysis, and reporting—accelerating the procedure while increasing the depth and accuracy of assessment.
Align the direction and goals of the transformation
The first step in planning a digital transformation for a portfolio company is to set a course based on clearly defined objectives. Identify the desired outcomes for the business, including goals like improved efficiency, a better customer experience, or increased innovation.
PortCo leadership can then create a team of collaborative stakeholders representative of the company. This ensures a better understanding of all perspectives, potential roadblocks, and resources needed.
Work with your vendor partner to establish metrics for measuring the progress and success of defined outcomes by creating KPIs (key performance indicators) and OKRs (objectives and key results) related to cost savings, increased revenue, improved customer experience, and enhanced efficiency. The specific metrics chosen will differ based on the business’s strengths, weaknesses, and goals, as uncovered during due diligence and goal setting.
Planning technology changes
To plan the individual changes necessary for achieving the long-term goals of DX, PE firms must understand the current technological landscape and infrastructure of potential acquisitions. This is much easier and more comprehensive with help from a digital transformation vendor.
Once this has been evaluated and understood, leadership, stakeholders, and vendor partners can sequence the implementation of technological changes by developing a technology roadmap. Decide which initiatives to prioritize based on desired outcomes while also seeking to avoid creating technical debt by selecting optimal solutions rather than merely the cheapest or quickest option.
The initiatives chosen may include emerging technologies or those that improve scalability. Work with your vendor partner to ensure integration with the business’s existing systems. Remember to develop a data strategy that determines how the KPIs and OKRs chosen during the goal alignment phase will be collected, stored, processed, and evaluated.
Vetting vendors & partners for various aspects of the transformation
The comprehensive and technical support necessary for DX in a PE PortCo typically requires vendor support. Choosing appropriate partners requires due diligence and planning centered around defined needs and desired outcomes. Stakeholders can identify the requirements these partners must meet using the transformation goals and technology roadmap. Consider building success metrics into vendor contracts so both parties understand what constitutes success as well as detailing the steps to be taken should success not be achieved. PortCo leadership can use this data to assess vendor performance and keep everyone on track.
Implementing a Digital Transformation
As with the other phases of digital transformation, the implementation phase requires a strategic approach. Most PE firms can use the following processes to successfully implement DX in their acquisitions.
Change management in digital transformation
Creating a change management plan is an effective way to ensure companies have the proper team to realize a successful digitalization plan. Leadership must be ready to champion the change and communicate its importance to the business. They must involve stakeholders as change agents to further engagement and enable concerns and roadblocks to surface earlier in the process.
Employing a cloud platform for communication and data centralization is key to enhancing connectivity and access to data. This is especially relevant as studies like Accenture’s 2022 Future of Work study show that 68 percent of high-growth companies have enabled a work-anywhere model, up from 63 percent the year before.
Consider also that training and communication styles differ between individuals. Use multiple channels to keep team members informed and involved. By prioritizing effective communication, stakeholders can identify areas needing additional training and skill development.
Balancing cost, effort, and ROI in digital transformations
Digital transformation is a layered process requiring continuous communication and ongoing adaptation. Businesses must be selective when choosing where to begin their overall transformation process. The best approach is to select projects that balance cost, effort, and return on investment (ROI). A vendor specializing in digital transformation can be quite helpful here.
Consider conducting a cost-benefit analysis outlining the financial implications of various options for digital transformation. Remember to include both direct and indirect spend as well as quantify the expected benefits of transforming.
Next, prioritize those initiatives based on their ability to impact the overall objectives and their likely ROI. To build company-wide support and create momentum, start the DX process with projects that deliver relatively quick wins and show value.
Continue to roll out additional initiatives in phases. Break the big-picture strategy into stages so stakeholders have time to learn and adjust. Using incremental implementation also encourages agile transformation that adapts to unanticipated events. It allows teams to identify potential risks related to the new technology, organizational issues, or external factors and to use this new information to develop necessary mitigation strategies.
Establish and use metrics to measure changes as they occur. By providing teams with accessible data, leadership can create a culture that is comfortable with and eager for continuous improvement. By employing digital tools offering advanced analytics, scenario modeling, or predictive analysis, PE firms can more successfully assess and mitigate risks to create more sustainable and resilient portfolios.
