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Private equity firms are in a unique position to successfully unlock the value creation potential of digital transformation – and should be looking to independent consultants to boost and accelerate returns.
Digital transformation is one of these ambiguous concepts that seem to mean different things to different people. To some, it’s all about digitalisation and analytics. For others, it’s a matter of workflows and efficiency, or perhaps limited to just technology adoption and innovation. Still, everybody tends to agree that:
- it’s potentially a company’s most powerful value creation lever;
- it’s a challenging undertaking and the return on investment is often elusive; and
- ignoring it could leave you with an obsolete proposition and business model.
All of those statements are true. Today, almost any value creation initiative will require a successful digital transformation effort, from operational excellence and workflow optimization, to customer experience and product innovation. And any change programme is hard, so most transformations will either fall short or outright fail.
But private equity firms are uniquely well positioned to make them succeed. Not only are they resourceful and run by smart people. The factors favouring private equity as digital transformation agents are structural:
Private equity time horizon
A major digital transformation can easily take several years to fully implement, and it may take even longer for benefits to fully materialize. This matches up well with the typical investment horizon of 3-6 years for a private equity. In contrast, a public company must deal with shareholders and deliver quarterly results.
Agility and room for manoeuvre
The nature of private equity deals typically gives them full control of a portfolio asset via majority ownership or super-voting rights. That set-up permits strategic decisions and major projects to be green-lit without the need to placate management or other shareholders. This level of decision-making agility and room for manoeuvre isn’t found elsewhere.
If you really want to get buy-in to goals and strategy and activate behavioural change, then you’ll need alignment of incentives throughout the entire organization. Unlike other forms of ownership, private equity is a position to single-handedly shake up organisation, processes and priorities, and align management and financial incentives to achieve the kind of company-wide commitment necessary.
Digital transformation should hopefully deliver operational efficiencies, incremental revenues opportunities and growth in EBITDA and cash flow. However, the pay-off for private equity doesn’t stop there. Having digitalised operations and with greater availability, transparency and granularity of data, digital transformation also helps expand both the exit valuation multiple and the realm of options for exit.
Areas warranting special attention for private equity
Being well-positioned, of course, isn’t sufficient. To succeed, a digital transformation needs to be well planned, designed and defined, and be properly resourced and managed.
Four areas in particular warrant special attention for a successful digital transformation in a portfolio company:
Digital due diligence
Some commercial due diligences will include a digital due diligence component, but it’s often left out or too narrow in focus. E.g., it may look only at digital marketing efficiency, e-commerce operations or the high-level threat of technology disruption. As a minimum, it should provide a comprehensive overview of the availability and quality of customer, operational and business data; the actual and potential levels of digitalisation and automation of key business processes; and the systems in use and integration challenges.
Digital transformations can easily lock up all of a company’s digital resources and competencies – and often last several years. It’s thus imperative that strategies and roadmaps focus not just on the vision and end deliverables, but also on incremental improvements, low-hanging opportunities and work-around solutions and fixes in the transition period. For example, one client company had a three-year cloud data lake project to enable fancy AI and big data analytics in the end. However, with no additional bandwidth, during those three years they had to decline any task or request not already in scope, no matter how solid the business case.
Managing specialist skills
A lot of people with highly specialised skills, from data engineers and data scientists to machine learning and digital security experts, will be needed. They are short in supply, high in demand and pose a real risk for holding up any digital transformation. It’s important to identify, plan and strategize for this potential scarcity upfront, by acquiring and onboarding talent, training and up-skilling current resources. Equally important is to explore work-arounds, either through creative planning or alternative solution designs, architectures and technologies.
General acceleration and private equity interim management
After margin improvement and multiple expansion, “time to exit” may be private equity’s biggest value creation lever and probably the easiest to influence. E.g., finding and recruiting permanent talent takes time, be it a Head of Transformation, a PMO or a customer journey designer. Using interim and external resources, that time could be used to catalyse and accelerate efforts. Any incremental cost will be dwarfed by the value uplift from bringing forward improvements in, for example, sales, onboarding and retention performance, by, say, 6, 12, or 18 months.
Use independent consultants to unlock and accelerate private equity value creation
Some private equity firms have in-house teams, dedicated to operational value creation teams and digital transformation, as part of their toolkit. Some of their portfolio companies will also have internal talent pools suitable for the task. Even then, the hire and use of external consultants will usually be both necessary and desirable.
There will be a question of whether to use independents v. a traditional consulting house. In some cases, a blue chip consultancy may be better suited, e.g., when a rubber-stamped bluebook report is required. On other occasions, it will be optimal for the two services to complement each other. Generally, however, when it comes to accelerating and optimizing a digital transformation, independent consultants may offer greater advantages.
Digital transformation projects are different from most traditional consulting projects.
The aim is usually capability development, to be hired in or built internally. The role of an external consultant is therefore as a placeholder, to build momentum and get the process off to a head-start until a permanent hire can be found and onboarded, then possibly to move on and fill another role in the transformation. With little predictability and constantly shifting priorities, it calls for the kind of flexibility that is hard to formalize in a standard LOP but an independent consultant can offer.
The most effective profiles will have enough experience and a toolbox that’s sufficiently big to straddle both strategy discussions with the leadership team and providing hands-on operational support across functional silos as needed. Most senior professionals at McKinsey, BCG, et al, would certainly do a great job. However, unlike independent contractors, you hire teams and not individuals and individual experiences at consulting houses.
The flexible, yet long term commitment required for most digital transformation projects are inherently incompatible with the career development needs of the traditional consulting houses. The more senior project managers might be productive from day one but need to prioritize client development. The more junior consultants need to roll off to new client challenges every three to six months, just as they’re becoming productive. There is no such conflict with independents.
For some, this might be the main advantage of using independent consultants and it’s probably the most tangible. The best independents may not seem cheap when compared to a permanent hire but you’re getting the talent and experience that you need, on-call and with the flexibility required. And without paying for a full team and the overheads of a traditional consultancy.
Hybrid models make it easy to use private equity independent consultants
For firms that have never worked with independent consultants, it may seem daunting. The market is fragmented, and the entire process – from finding and selecting the right candidate, to scoping and managing project – might seem more cumbersome and complex than simply calling an established consulting house for a proposal. It doesn’t have to be.
Intermediaries, such as Outvise, have large high quality talent pools and can handle the peskier parts, like selecting and contracting candidates. If needed, many, like Outvise’s Private Equity team, can even take on project scoping, day-to-day management and overall project leadership. These kind of hybrid models offer private equity the flexibility, experience and other advantages of using independent consultants, without any of the drawbacks.
Private equity firms are uniquely favoured to steward digital transformations in their portfolio companies to success. Independent consultants may be their most advantageous partners and intermediaries can make it easy to work with them.
Michael is an expert in digital transformation, commercial excellence and go-to-market optimization. A bridge-builder between boardrooms and operations, and between digital, tech and business issues, he works independently for a global client base that includes portfolio companies of Hellman & Friedman, Bain Capital, and BC Partners.
Michael previously worked with McKinsey & Co, Oliver Wyman and various early stage start-ups. He is Danish and based in Barcelona.