5 Takeaways from the ACG Technology & Business Services Conference -
Digital Drives Value

In September, we attended ACG New York’s Technology and Business Services Conference. If you weren’t able to attend – or even if you didn’t take great notes -- here are five top takeaways from the event’s second panel, which focused on “Digital Drives Value—Where and How to Add Digital to Your Private Equity Playbook.”

Competitive Tool or Foundational Platform

Even before a portfolio company ventures into digitalization, the first move should be to understand the desired outcomes; e.g., some companies might see a source of revenue growth, while others might target improved employee engagement. Understanding these opportunities and their varying business requirements is crucial because digitalization is not a one-size-fits-all process. Many current companies focus on providing a service rather than discrete products—such as turbine manufacturers giving away turbines and charging for the electricity generated from them. To make this model work, it is essential to figure out how technology can help the business grow. Private equity owners must also assess management’s attitude toward change, as resistance from management can tip an already challenging digitalization project from success to failure.

Prioritizing Technology for Value Creation

In today’s world, companies often rush to adopt technology before understanding its significance or forming a strategy for implementation. Before taking action, companies need to make sure they understand the “why” behind going digital, which means gaining a deep understanding of the technology involved. Certain companies that operate in niche segments have integrated technology into their business models, taking businesses to a next level that otherwise would have been hard to reach. That being said, mid-sized companies are often faced with tough choices in implementing technology and software tools, in that they may have the revenue needed to acquire the technology, but not enough to pay a technology specialist who can help drive change and successful implementation. A failed integration can often be more costly than not doing anything in the first place.

Investment Focus with Changing Digitalization

A digitalization strategy almost requires PE investors to shed investment rationales that traditionally have been focused on either growth opportunities or a value play. Investing in companies that are already technologically savvy demands such high multiples that it essentially invalidates any value play in the current environment, according to the panelists. By contrast, the search for digitalization-driven growth opportunities can have a needle-in-the-haystack quality, trying to hunt down businesses that have innovated in a very narrow niche but are capable of scaling that innovation with the proper support and resources. Panelists also noted that digitalization is part of a larger, tech-driven generation gap that is present in many companies and that can challenge private equity investors to balance technology pushes and integration alongside broader issues of workplace culture and mindset. The bottom line: there is almost no potential investment in which digitalization should not be considered as a factor.

Reasons for Technological Successes/Failures

Despite the existence of many technologies, getting a platform to work to achieve the value that investors are looking to obtain from these technologies is crucial. One of the reasons why companies succeed with digitalization is by figuring out unique ways to use technology—matching the technological capabilities of the company to the unique experiences of its customers and making customer experience more effective by tailoring technology accordingly. Companies that build huge data analytics platforms and generate huge amounts of data with no idea how to analyze it are guilty of failed implementations. Chasing digitalization as a ‘magic bullet’ can also lead to fundamental disconnections around a business’ true value drivers.

Private Equity Investors Recognizing Technology

The low volume of technology adoption within private equity-owned businesses is evidence that private equity investors are at the beginning of the curve in terms of recognizing/adopting technology. Investors should open up to unfamiliar concepts, accept challenges, and embrace the need for cognitive diversity. One way of doing so is to ask every portfolio company how it is using analytics to manage its customers, suppliers, and costs more effectively, given the fact that analytics is the core of everything today. An example: What is the business or industry rate of ‘decision errors?’ (The insurance industry is known to have an error rate of 40-50% among underwriters, while radiologists have an error rate of 20%.) How can technology be used to reduce errors and maximize returns for investors?