Authored By Tr3Dent CEO and Founder Kevin McCaffrey, Advanced360 Solutions Principal Brian Delidow, Advanced360 Solutions CEO and Founder William Carter
With Gartner projecting global businesses to invest a cool $4.5 trillion in IT this year, it’s safe to say that, regardless of industry, no company is immune to the rapid pace of innovation – including organizations specializing in private equity, venture capital and M&A. However, digital strategy is unique for these companies. Why? For these firms to capitalize on investment opportunities, they must assess the digital readiness of their target firms.
As global competition heats up in every industry and deals close more than ever before, M&A, PE and VC executives are placing bets on what they believe to be promising organizations, with investment stacking up to over $1 trillion in private equity, $643 billion in venture capital and $5.9 trillion in M&A in 2021 alone. But how do companies in these industries identify a “promising” investment? In PE, they will often evaluate a company’s market position, competitive advantages, and leadership team. However, all too often, one essential step is underappreciated or completely forgotten during this process – assessing the target company’s digital maturity. Similarly, organizations involved in M&A will jump at the opportunity to create synergies – even if it means merging companies with dramatically different digital cultures. Digital readiness is not always top of mind when making deals, though it should be in this transformational environment. VCs are not immune to this fatal flaw either. Digital maturity assessment should be an ongoing component of their portfolio management strategies, but all too often, it is not.
This article will break down the importance of assessing digital readiness as part of a value creation plan in any deal and what it means to be digitally mature from a people and data capability perspective.
What Digital Transformation Means for Value Creation
Building a comprehensive digital strategy is about changing where and how value is created. Theoretically, value is created via digital transformations by improving connectivity with customers, identifying opportunities for efficiencies (process and cost), creating faster time to market thereby improving the bottom line. Although some of this value can be recognized early in the transformation process, the majority of the value materializes as companies mature digitally. To maximize value creation, investors should consider how far along the target company is in their digital journey when determining the scope of their investment, then identify ways to streamline the transition to digital business models.
Generally speaking, companies still operating under traditional business models have lower market value than those that have adopted digital-first strategies or have developed business ecosystems. Therefore, to elevate them on the digital maturity scale, “digital laggards” require additional investment and support from their acquirer.
Digital maturity does not confirm or deny a company’s potential. Rather, it provides key data points regarding the company’s readiness to participate in a connected digital world. It informs the size of the investment and how that investment should be used. Therefore, just because a business does not sit at the forefront of innovation yet, does not mean it will not have the potential to become a high-performance organization, but it likely means it will need more investment to get there.
Still, it’s crucial to explore digital maturity focusing on value creation. But many organizations do not know where to start. While there is an abundance of conversation surrounding digital transformation, it is mostly focused on the technology, and there is less guidance on how to assess a company’s digital maturity.
Fortunately, businesses can examine several strategic key performance indicators (KPIs) to assess digital maturity. We focus on two vital areas within digital maturity – data capabilities and people.
Evaluating Digital Maturity from a Data Capabilities Perspective
Within data capabilities, there are three layers to take into consideration – foundational, data integration, and data mining which is further split into rule-based and knowledge-based decision making. The deeper companies reach into these data capability layers, the closer they are to create digital value. Foundational data capabilities refer to the backbone of a company’s technology strategy, such as data collection, data integrity and a platform that supports a wide distribution and analytical capacity and reporting that can ultimately lead to creation of value.
In a time when most companies boast “data-driven” strategy, one would think this means most companies are driven by data. Fair assumption – but not exactly. Many businesses collect data, but they do not know how to use it to drive business decisions. So, when assessing foundational data capabilities, it is important to a) consider if the business measures data integrity (measured by %DI – the proportion of each data type held by the organization that is fit “for purpose”); b) has a data platform that can support data analysis, reporting and distribution, and c) leverage the data to improve insights into the business. Without this foundational data layer, companies cannot effectively integrate data into the decision-making processes.
Data integration refers to the degree to which a company has enhanced data access and enabled the cross-pollination of data – a critical component for organizational growth as it defines how various companies must work together. Companies that have successful data integration eradicate data silos. Data is shared, leveraging the foundational platform noted above. Further, more than simply the data being shared, multiple organizations work together on the same data sets to improve company insights and create more value. As groups work together to improve processes through data mining and create more corporate value, they break down traditional silos improving the corporate culture, unlocking additional value – more on this below.
As a company matures its data approach, cross-pollination extends beyond the corporation. Just as various departments within a company work together, companies must work within their business ecosystems to identify new growth opportunities in an ever-connected world. The more thoroughly a company defines its business ecosystem, the closer it is to a growth explosion. One metric for data integration is %DDI, data democratization index, which measures the proportion of data stakeholders are immediately able to access in a usable format.
Data mining is another imperative facet of digital maturity from a data capabilities perspective. There are two levels of process improvements within this facet: rule-based and knowledge-based. Rule-based capabilities replace mundane repeatable tasks (historically performed by staff) with bots and code that make straightforward decisions using simple “rules.” Implementing code and bots streamline these processes and improve consistency and efficiency, resulting in improved value.
Knowledge-based capabilities are also an essential dimension in digital maturity. Unlike rules-based capabilities, knowledge-based capabilities are intended to replace more sophisticated tasks. These capabilities call for AI- and ML-powered tools that interpret information, support decision making and continue to evolve as more data becomes available. These capabilities continuously identify new ways to improve process efficiency as an ever-changing business facet. Widespread implementation of data mining strategies is an indication of data capabilities maturity.
Assessing Digital Maturity from a People Perspective
Digital transformation and changing business models are about more than technology and building cloud-based platforms. Taking advantage of the technology to create corporate value takes more than talented engineers. To fully understand challenges that may arise when investing in or acquiring a new company, it’s crucial to understand digital readiness from a technical perspective and a people perspective.
Therefore, it’s vital to know the traits that indicate a digitally mature corporate culture. So, what are these traits? The presence of an innovative staff that is customer-centric and agile and an executive team that trusts, communicates well, is collaborative, encourages innovation, agility and openness, and has a tolerance for (some) failure. These are the values and characteristics that support digitally advanced environments and lead to value creation. The more these are inherent to the business culture – the more likely a company can continue evolving in an ever-changing environment driven by external forces such as technology. These are characteristics PE firms and VCs should be looking for in management and in staff in general. Further, these firms must assess the management’s overall ability to provide the necessary vision and leadership required to power digital initiatives. This includes clearly communicating to employees how daily operations will be impacted and establishing plans to upskill staff accordingly. In addition to these traits, other key dimensions that fall within the people journey include digital fluency and digital culture.
In this case, we are not equating digital fluency to digital literacy. We use digital fluency here to refer to the ability to leverage technology to communicate effectively and easily on multiple channels with your customers, gather market intelligence, create new knowledge, respond to the marketplace and develop new value for the company. A company’s digital fluency must evolve with its customer’s digital fluency. If you lag, your ability to connect with them will decline, and they will move to a competitor that can keep up.
Last but certainly not least is a digital culture. An organization with a solid digital culture will take an integrated approach to technology and business – rather than establishing them as siloed strategies. Perhaps most importantly, when pursuing digital transformation, digital culture also denotes an organization’s ability to develop, offer and support digital services. Assessing a company’s workforce for digital skills can also determine the strength of a digital culture. A few key metrics can track digital culture from a people perspective – like %DSN, which measures digital skills needed (the availability of staff with skills needed to deliver digital initiatives). Similarly, %WDI (percent of the workforce involved in digital initiatives) is an important metric to keep in mind. This metric considers the percent of total work time spent developing, delivering and supporting digital initiatives.
Conclusion
Before even considering acquiring an organization, merging with a competitor or investing in another portfolio company, companies must determine where an organization is in its digital transformation. Is it just starting its journey? Has it already transitioned to a digital-first business model? For VCs, PEs and acquiring firms alike, the answer to these questions will a) help them size their investments relative to digital maturity, and b) inform them how they can help the company bring digital initiatives to scale and harness its true potential.
Authors’ Note: All digital maturity KPIs mentioned in the article (DI%, %WDI, %DSN %DDI) are defined in TM Forum’s 30 Strategic KPIs for Digital Transformation
This article was originally published on Tr3Dent CEO and founder Kevin McCaffrey’s LinkedIn. Please find the article here:
