In April, a group of 3i executives returned from a trip to Silicon Valley. The group, made up of individuals with experience in digitisation drawn from the firm's sector teams, met with senior executives from digital game changers such as Google and LinkedIn down to innovative start-ups.
At a meeting in London that followed, 3i drew from the same network of digital leaders to speak at a gathering of 11 companies in its consumer portfolio. The companies, which include UK retailers Hobbs and Agent Provocateur, heard from the likes of Facebook and Instagram about best practice engagement with those platforms, in this case to boost their customer acquisition processes.
Of 3i's response to digitisation, partner Tom Salmon, who heads up its UK consumer division, says: “We've been quite big picture, thinking about trends and themes and macro drivers, and then quite granular in terms of thinking about individual impacts on sectors in which we invest and what does 'good' look like within those sectors.”
Technological innovation, internet connectivity, increasing processing power, big data, the internet of things, social media, mobile platforms and advanced analytics are among the digital forces reshaping the business landscape. Retail, telecommunications and financial services sectors have already been transformed, with digitisation now revamping more traditional industries, like construction and heavy industry.
Some GPs have responded more nimbly than others. “For some funds, this is something they have been thinking about anyway,” says Aaron Cheris, Bain & Company head of Americas retail business based in San Francisco. “It's an evolution they are paying attention to. For a lot of people, though, it's going to be a revolution. We have gotten more calls than usual from funds saying come talk to us about digital, in a very broad, unstructured way. They know they have a problem but they don't know what to do about it.”
The cost of not addressing digital change is high. “If you look five to 10 years ahead, you're going to be completely out of the market,” says Salmon. “As an investor you have to be alive to these trends and recognise that more traditional business models that were good investments five or 10 years ago don't really exist.”
The impact of digitisation is vast, transforming a portfolio company's business model, its products and services, its research and innovation capabilities, purchasing and production capacity, supply chain dynamics, marketing, sales and customer interaction, as well as back office functions.
One clear benefit of devising a response to digital disruption is the reduced risk of obsolescence. Digitisation can also lower operating expenses, increase output and efficiencies, improve flexibility in production and delivery, boost market responsiveness through predictive analytics, improve customer interaction, and accelerate information sharing across the value chain. It also has implications for reporting and meeting compliance standards.
According to a PwC survey, industrial companies that have implemented a comprehensive digitisation strategy expect to increase revenues by an average of 2.9 percent over the next five years and reduce costs by an average of 3.6 percent a year, with a significant minority projecting total revenue growth of more than 50 percent over five years.
Devising a digital strategy goes much further than embarking on e-commerce. “That isn't a digital strategy to me,” says Salmon. “A strategy is, here is a set of levers that are relevant to businesses in the new digital world and here is a business that can really take advantage of them. It's easy to say that 'we have a digital strategy as we have a great transactional website', but it's so much more than that, for example, a coherent omni-channel strategy, innovation acceleration, and digitisation of workflows, to name a few.”
How a company gets started depends on the urgency and the business segment affected, says Cheris. “Is this industry instability, competitive position or is this a gradual move? What is most affected? Is it operations, the underlying offering, the customer pathway, whether it's to or within the business that is changing?”
Prioritising a portfolio company's digital direction differs from drawing up a typical value creation plan, says San Francisco-based Elizabeth Spaulding, who is global head of Bain & Company's digital practice.
“A lot of private equity has been about continuous improvement and taking a dollar of equity and getting it to three by improving various parts of the business,” Spaulding says. “That is all still true, but there is an elevated pace of change and innovation that is new and different and creates more disruption for private equity than others.”
As digitisation proliferates, GPs can be sure of one thing: in five years time, value creation is likely to look very different. Those already thinking about digitisation will be better equipped to exploit the change.
THE DIGITAL CHALLENGE
EQT Partners' head of marketing technology Sven Törnkvist talks digitisation
How significant is introducing digital change to creating value?
Digital influences everything. Every value creation strategy can benefit and become a stronger play by using what the digital era makes possible. So while we don't find it meaningful to differentiate “digital” as a separate thing, we recognise the value of being digitally mature on an overall level.
A typical example could be when a company asks for help on their digital marketing strategy. There is no separate strategy for digital marketing – we should talk about the marketing strategy as a whole in the digital age.
Looking at how much better companies with a high digital quotient (across all functions) are performing financially, the long-term value is massive.
What are the biggest challenges of introdu-cing digital transformation?
We have tremendous respect for the EQT portfolio companies' management teams and do not aim to lecture them about their respective markets or disruption in their industries. Having said that, we can almost always identify gaps between the portfolio companies and best-in-class performance when it comes to, for example, utilisation of installed technology, approaches to innovation, testing-and-learning, leveraging data assets, marketing, cross-functional collaboration and personal productivity.
Let's take, for example, the value of having a modern, in-sourced analytics function. The value that such real-time customer insights can bring to any company's R&D, marketing and sales is enormous. Given the overall maturity in the competitive landscape, excelling in this area typically yields significant advantages.
How difficult is it to recruit digital professionals and build a team?
It is very difficult. While there is an abundance of people, consultants and agencies that label themselves “digital”, few actually have the goods. There's a very real shortage of competence in the talent market, but EQT can offer support in hiring and developing digital expertise.
We also think it's important to create teams of adequate size that can have real impact. Often, companies hire individuals or, as we like to call them, “digital alibis”.
Very few individuals, even on the executive level, can single-handedly change the modus operandi of an existing business if said business is not in a crisis mode. We therefore advocate that companies plan for cultivating digital talent internally, as single external hires typically won't suffice.