Private Equity: DRIVING VALUE WITH DIGITAL · 2018-04-17 · AGGREGATORS TO SUCCESS. ... growth:...

Private Equity: DRIVING VALUE WITH DIGITALWhite Paper

2018www.lafosse.com

22018www.lafosse.com

1. EXECUTIVE SUMMARY

2. PRIVATE EQUITY’S PERCEPTION: INDUSTRY IMBALANCEIn which sectors is technology and digitally-minded leadership perceived to be more of a preoccupation?

3. DIGITAL BEYOND THE CONSUMER PART 1: B2BHow can digitisation tactics be implemented in the broader market, beyond B2C industries?

4. DIGITAL BEYOND THE CONSUMER PART 2: BEYOND FRONT-FACINGHow can digital be utilised for wider application than user experience?

5. DIGITAL HIRING: THE TRENDS WE’RE SEEINGHas there been a shift of talent from technology native businesses into those which are non-

technology native?

6. BARRIERS TO HIRING DIGITAL EXECUTIVESWhat are the primary obstacles encountered when hiring digital skillsets?

7. WHERE SHOULD DIGITAL SIT WITHIN AN ORGANISATION?Who in a business should own digital?

8. AGGREGATORS TO SUCCESSWhat are the key drivers of success when building and executing a successful digital strategy?

9. A DIGITAL FUTUREWhat expectations do key industry executives have about the future of digital as a valuecreation strategy?

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LA FOSSE ASSOCIATESPRIVATE EQUITY: DRIVING VALUE WITH DIGITAL - WHITE PAPER 2018

CONTENTS

La Fosse would like to thank all those who participated in the study. Special thanks goes to our interviewees:

Charlie CannellDigital Director

Simon CottleManaging Director

Ric Francis Operations Advisor

Stefano SantarelliSenior Principal in the EMEA Portfolio Team

Jan SchusterDirector

Nick HolderPrincipal

EXECUTIVE SUMMARY


DIGITAL TRANSFORMATION AS A TRENDDigital transformation is undoubtedly a key value-add for Private Equity. A European survey by PwC among 100 mid-to large-cap Private Equity houses in 2016 named digitisation as the most important mega trend influencing new investments of PE houses.1

This trend has held strong. In a 2018 La Fosse Associates Survey sent out to Private Equity professionals, 93% of respondents agreed or strongly agreed with the statement “I have seen a shift towards utilising technology and digital as a value-creation tool for portfolio companies in recent years” (Figure 1, 7% were undecided.)

BEHIND THE CURVE?However, 54% of respondents at least partly agreed with the statement “Private Equity is still behind the curve when it comes to prioritising technology and digital” (Figure 2: 18% were undecided, whilst 27% disagreed.) This suggests that there are some digital value creation strategies which Private Equity has yet to fully explore.

WHERE TRANSFORMATION IS PERCEIVED TO BE MOVING MORE SLOWLY

B2B BUSINESSESThe digital transformation narrative has tended to put more focus on specific sectors, and specific strategies.

B2C businesses are perceived to have pulled ahead of B2B businesses. A 2016 study by McKinsey of approximately 200 B2C and B2B companies evaluated 18 management practices related to digital strategy, capabilities, culture, and organization that correlate most strongly with growth and profitability over a period of 3 years. The study shows that B2B companies trail consumer companies in terms of their overall digital maturity: the average Digital Assessment score for the B2B companies in the study was 28, compared with 35 for consumer-focused companies.2

However, digital transformation in B2B businesses clearly represents a key opportunity for profit and growth: the same study showed that B2B digital leaders drive five times more revenue growth than their non digitally mature B2B peers.

DIGITAL BEYOND THE CONSUMERFurthermore, in both B2C and B2B businesses, investment in digital often only focuses on improving front-end technologies. In doing so, it misses the wider uses of technology to streamline, upskill, integrate – and ultimately add value beyond front-facing consumer experience.

However, this perception is certainly changing – a 2017 survey of 2000 UK businesses by The Daisy Group found that over half (56%) believed the digital transformation of back-office operations is now as important as customer-facing functions.3 Meanwhile, digital is being applied creatively to products and services across nearly every industry to create new products and service-lines which challenge the status-quo. For Private Equity houses who feel they have already carried out the first phase of digital transformation, such opportunities for value-add could be crucial factors in driving up EBITDA. The next wave of value creation may well involve looking at how digital can dissect every business vertical, beyond the consumer experience.


EXECUTIVE SUMMARYIn July 2017, La Fosse Associates held an event on “digitising the portfolio,” discussing the most effective strategies when pursuing a digital transformation.

Following on from the insights gained in 2017, in this white paper and subsequent event, La Fosse aims to facilitate and inform an open discussion about where digital can add the most value. This will focus on 1. Discussing digitisation in non “digitally-ready” sectors, including B2B businesses and heavy industry. 2. How digital can impact end to end processes and product, beyond customer engagement. 3. How senior leadership hiring trends into portfolio companies are evolving within a technology / digital context.

La Fosse utilised a three-stage research strategy involving data collation and analysis, a survey and in-depth interviews with Private Equity professionals. For full details of our research methods, click here.

EXECUTIVE SUMMARY



LA FOSSE SURVEY:I have seen a shift towards utilising technology and digital as a value-creation tool for portfolio companies in recent years.

LA FOSSE SURVEY: Private Equity is still behind the curve when it comes to prioritising technology and digital.

FIGURE 1:

FIGURE 2:

36%

54%

57%

18%

7%

27%

NEITHER AGREE NOR DISAGREE AGREE STRONGLY AGREE

DISAGREE NEITHER AGREE NOR DISAGREE AGREE

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

BusinessandSupportServices

ConstructionandInfrastructure

Consumer

Industrials

FinTech

GamingandEntertainment

Health,EducationandPublicServices

Insurance

LifeSciencesandPharmaceuticals

Logistics

Manufacturing(Traditional)

Manufacturing(High-techandElectronics)

Media&Publishing

Oil,gas,energyandutilities

Pure-playE-commerce

RetailandFMGC

Renewable Energy

Telecommunications

ProfessionalServices

Technology

Travel



Ric Francis, Operations Advisor at Advent, identified ‘Industrials’ as furthest behind, but added that this had the potential to stimulate digital discussion in different areas.

“Industrial sectors are clearly the furthest behind because they are way more physical and asset driven, but what it means is facing digital in slightly different areas of the business – such as product – which relies on thinking creatively.”

He added that this bore an interesting comparison to Financial Services, a sector which has seen much more obvious disruption in

some areas, but had yet to see the improvements to internal systems which digital has the potential to drive.

“FS is ahead when it comes to Payments, but is still way behind when it comes to internal banking solutions and systems. If you look at the top five banks – their internal systems are as old as the internal systems they have 30 years ago, which is why challenger banks are able to come up and provide different solutions.”

DIGITAL HIRINGIn our survey, we asked Private

Equity professionals “In which sectors is having a technology / digitally-minded leadership team more of a preoccupation?” (Figure 3.)

The results generally reflected a suggestion that B2C industries were far further ahead; for example, 55% of respondents perceived technology and digitally-minded leadership to be a preoccupation in ‘Gaming and Entertainment’, whilst only 9% saw progression in the ‘Oil, Gas, Energy and Utilities’. ‘Renewable Energies’ were perceived as making no advancement.

PRIVATE EQUITY’S PERCEPTION: INDUSTRY IMBALANCE

LA FOSSE SURVEY: In which sector is having a technology / digitally-minded leadership team more a preoccupation?

FIGURE 3:

45%

64%

27%

36%

36%

0%

64%

9%

0%

9%

18%

9%

18%

9%

55%

64%

0%

55%

9%

45%

18%

PRIVATE EQUITY’S PERCEPTION: INDUSTRY IMBALANCEDuring the course of our interviews, we asked Private Equity professionals which sectors they perceived as being noticeably behind the digital curve.

DIGITAL BEYOND THE CONSUMER PART 1: B2B


Stefano Santarelli, Senior Principal in the EMEA Portfolio Operations Team at Ontario Teachers Pension Plan, suggests that the digitisation of B2B industries is an untapped opportunity:

“From a pure value creation perspective, the digitisation of consumer industries is easier to grasp through the lens of consumer engagement.

The more industrial business services are still thought of as more traditional businesses, and there is therefore a gap in terms of how people think about really transforming the supply chain or the manufacturing plant. However, the way we look at digital really affects everything. Though infrastructure and heavy assets businesses will be less intuitively exposed to it, there is a lot to do in terms of digitising their core that I

think people should look more and more into.”

He goes on to suggest that the proper application of digital in B2B industries has the potential to raise a Portfolio above its competitors:

“For the B2C, digital strategy is becoming the bread and butter. In some ways I would give more attention to the ones who are less intuitive as that is where you can create a real competitive advantage.” Stefano Santarelli, Ontario Teachers’

Ric Francis, Operations Advisor at Advent International, highlighted that digital strategy holds tremendous opportunity in B2B businesses, such as manufacturing, but that such a strategy necessitates different ways of thinking about driving value with digital:

“Digital strategy needs to be approached differently in a physical product manufacturer. Ultimately the digital contender is less likely to win over, when compared to a retail brand for example - digital printing is good but it’s never going to print a Mars Bar.

“Whilst you may not digitise your product per se, you can strategise around providing solutions to your customers using other assets - for example, if you are a light fitting manufacturer, you can leverage your industry knowledge so you are the go-to place for light-fitting solutions as well as products. If you start to build your customer relationships in a different way then you can secure your place in that vertical supply-chain, whereas if you are the light-fitting provider, this could potentially be outsourced to China.” Ric Francis, Advent

DIGITAL BEYOND THE CONSUMER PART 1: B2BWith discussions of digital often predominantly focusing on its application in B2C industries, a significant question raised during La Fosse’s ‘Digitising the Portfolio’ event was how digitisation tactics could be implemented across the broader market. B2B sectors, such as heavy industry, have seen less noticeable utilisation, and digital strategy therefore may have the potential to be even more impactful.

General Electric4 is one of the most high-profile B2B digital transformations of our time. The company’s journey illustrates the transformational impact which data and analytics can have when applied to product offering and customer relationship in a B2B corporate.

SECTOR: Industrial GoodsINDUSTRY: Diversified Machinery HQ: Boston

THE STORY IN BRIEF:GE generated revenue through the sale of industrial equipment and maintenance servicesIt faced increasing competition from companies who provided services, informed by data and analytics, to optimise machine efficiency and reduce downtimeGE committed to transform itself from an organization predominantly involved in selling hardware or industrial equipment to one selling data-based services. It started building software around its products, enabling its consumers to create new revenue streams and become more efficient.

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CASE STUDIES



THE STRATEGY:In 2012, GE set aside up to $1.5 billion for small take-overs to boost its presence in analytics. By 2013, the company was able to introduce a wide range of big data products, including predictive software products, a Hadoop-based big data software for ingesting and managing industrial data, and a relationship with Amazon Web Services to share industrial data in public cloud.GE attached sensors to its machines that enable it to capture performance data. The company monitors and analyses 50 million data elements from 10 million sensors on $1 trillion of managed assets daily.Developed and introduced nearly 40 software products under its “Predictivity” brand designed to optimise efficiency across industry.

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The success of Aspen Pumps5 is demonstrative of the high gains which digitalisation has the potential to unlock for SMEs in the Private Equity sphere. We interviewed Inflexion’s Digital Director, Charlie Cannell, who led the digital branch of the Aspen Pump’s strategy.

THE COMPANY:Established in 1992, Aspen Pumps designs, assembles and distributes specialised mini pumps which remove condensate water from air conditioning systems. Aspen Pumps was bought by Inflexion in 2007.

LOCATION: East Sussex, UK and worldwide distribution network.DATE OF ENTRY: 2007 DATE OF EXIT: 2015RETURN: 14.0x: secondary buyout

THE STRATEGY:Alongside a ‘progressive internationalisation strategy and a compelling acquisition plan’, Inflexion launched an innovative digital approach to new product development.

“Our digital strategy for Aspen Pumps started with the central question – how do we drive loyalty from our customer? As this was a B2B play, an advertising campaign based around the proposition that the pumps made the air cleaner would have been pointless – we had to make the product seem more attractive to the businesses who install the pumps.

The same dynamics are not available in every market, so you have to work out what the path into transformation will be in order to embark upon it. Website-based digital transformation is brilliant but it is not going to be the way in which you use digital in a pump business. Instead, we decided to use digital technology to improve the product itself.

Aspen were already market-leading in the two established planes of design for their kind of product – size and noise. We decided to explore a new digitally-led product pipeline: information. We established that if a pump could sense when it was going to break and could transmit this information directly to a mobile phone, it would enable the pump installation team to develop a new tech-enabled service line for their customer. The IoT team had never taken their skillset into water pumps in the aircon industry, because no-one had ever done this before. This is the very definition of entrepreneurial - taking a technology-centred proposition and putting it into another kind of business, then working this into a new service proposition.

This meant that the businesses installing the pumps were able to offer a connected product, continuity of service and assurance guarantee on top of an installation opportunity. This enhanced the likelihood of repeat-custom and allowing them to charge their customers more - we tested the product in the market and could prove that customers were willing to pay 4x the price of the original unit.

From an initial focus on the product, we moved into thinking about how digital could transform the work-force, work-flow, design output and manufacturing plant of the business.” Charlie Cannell, Digital Director, Inflexion

DIGITAL BEYOND THE CONSUMER PART 1: B2BLA FOSSE ASSOCIATESPRIVATE EQUITY: DRIVING VALUE WITH DIGITAL - WHITE PAPER 2018



We spoke to Simon Cottle, Managing Director at Ardian Capital, who highlighted that there will always be an opportunity to digitise business process, whether as part of a wider transformational strategy or as an incremental goal of improvement:

“There’s always a piece of digitisation on most companies – most companies have an invoicingprocess which could be digitised,for example. Certain companies thedigitisation of their entire businessmodel would have an enormousand profound effect, whereas thereare some where it will be part ofa general goal of improvement.”Simon Cottle, Ardian

Inflexion’s Charlie Cannell identified the transformational potential of digital beyond the front-facing improvements in Private Equity’s mid-market:

“In my experience of the UK mid-market, digital is a completely untapped opportunity. In the eyes of many UK entrepreneurs, digital just means website. They don’t see digital technology as a transformation greater than the industrial revolution – businesses need to ask not justhow to put it through their marketingchannel also through their productand pricing.”

Ric Francis, examining the question from a Large-Cap perspective as an Operations Advisor for Advent,

described the potential of digital to intersect all operations.

‘When driving a digital strategy, you have to affect one of the levers that the business would recognise as being valuable. This involves looking at digital in three areas, and customer experience and insights, including data and channel engagement, is only the first part of this. The other two parts are operational, which includes cost reduction and productivity improvement, and arguably the most exciting – product. This involves using digital to engage in a different way and take the product into new services and technology-enabled platforms.” Ric Francis, Advent

Charlie’s explanation concurred with Ric’s assessment, as he went on to describe the way in which operational improvements are crucial to any digitisation piece.

“You have to examine the different layers of digital. The top surface is what we traditionally talk about when we speak about digital: the touch-point with the user, be that a business-user or a consumer, often focused around website or mobile technology.

Below this, you have to have all the other components of the tech-stack needed to make an organisation succeed – this starts with computers which allow your team to work, enterprise-wide

wifi, CRM package and finance processes. In a manufacturing and design scenario it goes down to an enterprise system (ERP) which allows you to understand the workflow of product through the factory floor through to shipping. This is core to the digitisation thesis: everything between the user experience to the computers on your desk has to be completely digitally proficient to allow for the best workflow and the MI to be provided which helps you in your business to deliver the best customer experience. The most brilliant digital marketing strategy in a business ever may be hamstrung if you don’t do anything about the finance package and the CRM system. You are not looking to optimise within an inch of a company’s life – just to free up time for employees which could be spent elsewhere. Even if you only get 5 minutes back a week, you can multiply it by the number of people then multiply it by the profit you command – at this point you’re able to stick a shareholder value against it.” Charlie Cannell, Inflexion

Ric highlighted the importance of using digital strategy to enact improvements from an operational perspective, and the ways in which digital can be used creatively to formulate new product and service offerings.

“Looking operationally at cost reduction and productivity means applying technology more creatively,

BEYOND THE DIGITAL CONSUMER PART 2: BEYOND FRONT-FACING

There is increasing emphasis on modes of value creation in both B2C and B2B businesses which go beyond improvements to user-experience. The potential for digital to streamline, upskill, integrate, and ultimately add value beyond consumer-facing experience was a key theme which was raised repeatedly throughout our research.

DIGITAL BEYOND THE CONSUMER PART 2: BEYOND FRONT-FACING



The digitisation of integral systems in the Logistics industries has turned the sector upside-down, and this is a theme which was raised repeatedly in our interviews. Sainsbury’s6 is a B2C retailer, which in addition to adopting customer-facing digitisation strategies has also committed to impactful digitisation of its supply chain using data and analytics software.

THE STORY IN BRIEF:Sainsbury’s aimed to make their lorries more logistically efficient, cut costs and improve precision. They implemented an Integrated Transport Management System from Paragon Routing across 16 of their depots This integrates planning optimisation with telematics to dramatically enhance the accuracy and execution of each day’s complex transport plans.This includes

“Resourced managed software” which plans routes against the individual driver shifts and available vehicle resourcesRoute Execution monitors the execution of the delivery scheduleIsotrak’s Active Transport Management System to capture real-time data such as vehicle location and driver tachograph outputs

THE GAINS:142,245 gallons fuel savings across four sites15% reduction in store turnaround times overall3.1 million lb CO2 emissions reductionDriver productivity increased by 8%Improved empty running by 12%On-time delivery levels increased by 17%3.8% overall travel distance reductionAutomatically re-spin schedules to avoid potential time window breaches due to late runningOther retailers including the Cooperative and Asda are now similarly employing Paragon’s software for route optimisation

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CASE STUDY

DIGITAL BEYOND THE CONSUMER PART 2: BEYOND FRONT-FACING

and asking how to bring more knowledge, understanding and data to influence those conversations. Pick an area of business – such as supply- chain. As a manufacturer, I have to establish how to optimise the efficiency of my planning – from my production planning to supply chain planning, my routing planning, automation within warehousing. When I’m referring to digital in this context, I really mean the conjunction of tech and data. All of this has to be data-driven: using technology to automate, understand and reduce operational costs.

The product side involves a lot of creativity - continually challenging the products and services you’ve got to produce new ones, or the same ones through new platforms.

Companies need to become their own challengers in order to secure their space, because digitisation means that challengers are coming from areas which they never could have anticipated. Uber isn’t a taxi logistics business, it’s a tech platform which sees their current drivers as interims – and ultimately it’s the most significant

challenger to every taxi logistics business in the country. Mastercard would never have dreamed five years ago that they would be competing with Apple.

What I try to encourage portfolio companies to do is to design your competitor without any assets, to establish where digitisation could potentially win out in every area. If you stick your head in the sand and think “we’ve been doing this for 100 years we know what we’re up to” then there’s a real obstacle.’”Ric Francis, Advent



The results suggest that there is an increasing emphasis towards hiring individuals from tech and digital companies into non-digitally native portfolio companies. In the past five years, this has risen from 14% to 34%. This could suggest an increasing preoccupation with hiring individuals with digital experience.

The results of our subsequent survey suggest that this preference of experience is not limited to technical positions explicitly: 81% of respondents agreed or strongly agreed with the statement: “Technology and digital capabilities are a key consideration even when recruiting senior leadership roles which are not explicitly focused on these areas (figure 6).

However, Simon Cottle of Ardian suggested that, whilst functional experience was preferential when hiring, there were sometimes difficulties cross-pollenating digital skillsets across, industry, particularly when looking at industries which were at too early a stage of the digital revolution for candidates to have many years of experience in this area.

“It’s a plus if people come from a background as a chief exec where they have demonstrable digital leadership. However, a lot of people with digital backgrounds have come from very specific sectors, such as retail. The issue is that most sectors are not like retail and have a far more complex implementation around using digital as part of their business model.

It would be nice if everyone had digital experience, but in most of the sectors we look at, there won’t be that much experience anyway. It’s a preference but I don’t think it can be a pre-requisite.

Of course, if individuals come with a very clear idea of how digitisation can enhance their business model that will always be valued – I’d say that there is more of a preference towards individuals with a digital vision rather than a digital background.” Simon Cottle, Ardian

Jan Schuster, Director at Lion Capital, who has extensive experience of digital transformation in the retail sphere, concurred with this assessment, suggesting that business acumen would always be prioritised over functional digital experience in Portfolio hires.

“It’s difficult to generalise, but for senior business executives, business acumen always trumps functional expertise. This is also the case when it comes to digital transformation – you need to know a little bit but it’s more about properly understanding and internalising the commercial opportunity behind all of the technology. This is much more important than a deep granular understanding of what’s going on in the technology.” Jan Schuster, Lion Capital

In some ways these comments are corroborated by our own research, which highlighted that it is still rare for people with functional digital experience to be hired into a non-tech role at a non-tech company

(e.g. an ex-CIO being made into a NED or CEO.) Only 5% of the placements surveyed over the 5 years reflected this kind of career trajectory.

Ric Francis of Advent highlighted the difficulty of marrying business acumen and technology expertise when recruiting leaders of digital transformation.

“The people with the tech background can’t quite articulate what it’s going to mean and how they’re going to respond to the challenge – they might be able to talk the technology and point at some things, but don’t have the ability to bring that conversation to life in a way that the business can truly act upon it and see business value and returns

“Forgetting the word digital now and just thinking about technology – the best CIOs are the oneswho are able to go into a roomand almost never use the word‘technology.’ They can just talkabout business, with the knowledgeof how to influence it in terms ofwhat technology may / may not beable to do. It’s a challenge whenyou’re pulling people directly outof tech companies, as they won’tnecessarily be able to play into thatinternal business conversation.” RicFrancis, Advent

DIGITAL HIRING: THE TRENDS WE’RE SEEING

DIGITAL HIRING: THE TRENDS WE’RE SEEINGLa Fosse’s research team profiled the hires made into the senior leadership teams of non-digitally focused portfolio companies over a 5 year period. (figure 4.)



DIGITAL HIRING: THE TRENDS WE’RE SEEING

LA FOSSE DATA: In an analysis of senior leadership hires made into non-tech native portfolio companies, how many individuals had previously worked at a ‘Tech-Centric Business’?*

We define “Tech-Centric Business” as• A company whose primary product is tech or digital goods or consulting services OR• A company which is primarily or significantly online e.g. ecommerce OR• A company where tech or digital is otherwise central to their product offering

FIGURE 4:

14%

2013 2014 2015 2016 2017

21%

23%

32%

34%

Had the individual hired previously worked at a ‘Tech-Centric Business’?Yes No

2013 86% 14%2014 79% 21%2015 77% 23%2016 68% 32%2017 66% 34%



The biggest barriers identified were lack of talent and cost. Crucially, no respondents believed that such individuals were not necessary for value creation.

Jan Schuster of Lion Capital’s primary experience is in the consumer and retail bracket, an area which has seen the greatest disruption and arguably therefore has the greatest volume of talent. His statement concurs with Ric Francis’s earlier point, citing the difficulties of hiring senior executives with both the technical expertise and the business acumen to successfully lead a digital strategy:

“The challenge in many cases is that in order to have the technology edge it still implies that people need to be relatively young, and therefore

on the business-side relatively inexperienced. For a role like a Chief Customer Officer, it’s quite difficult to find a senior executive with the gravitas that is required for such a role on the one hand, and on the other hand fully au fait with the tech. The conclusion is often that the role has to be split with a tech executive hired on the one hand and a marketing guy on the other hand and make them work together rather than find someone who combines the two attributes, as they are indeed quite hard to find.” Jan Schuster, Lion Capital

However, Stefano Santarelli of OTTP suggested that the primary difficulties lay in getting buy-in from the business, rather than identifying the right talent:“I don’t agree with the results of the

survey, as talent is more and more accessible, whilst cost should not be an issue – these individuals are not as expensive as other leaders you want to hire.

“The main challenge is getting the board and the rest of the executive team aligned on how digital is critical to drive value for the business. Often it is not seen that way and is pushed to the bottom of a business’s priorities. The main challenge is getting alignment on what digital can drive by understanding that it is there to create value and embedding it in the culture – as soon as you get this alignment, the barriers are very limited.” Stefano Santarelli, Ontario Teachers’

BARRIERS TO HIRING DIGITAL EXECUTIVES

BARRIERS TO HIRING DIGITAL EXECUTIVESAs part of our survey, we asked Private Equity executives what the biggest barriers were to hiring technology and digital people into the senior leadership teams of portfolio companies figure 5.)

LA FOSSE SURVEY: What are the biggest barriers to hiring technology and digital people into the senior leadership teams of portfolio companies?

FIGURE 5:

No-one internally driving the initiativeBuy-in from the board

They’re not necessary for value creation

Lack of Talent

Technology Executive’s inexperience in PE-backed companies

Other

Cost

54%

46%

23%

15%

0%

23%

23%



Stefano Santarelli of Ontario Teachers’ suggests that such a move is imperative:

“From a Non-Executive Director perspective, every board should have this expertise around the table –they can bring some fresh air and really push the agenda. Then at company level it really depends – it can be a CPO, Digital Director– according to the agenda whichyou want to drive on the digital side.Ideally they are directly reporting toCEO.” Stefano Santarelli, OntarioTeachers’

However, across the Private Equity sphere, there isn’t an established viewpoint on where digital best sits within an organisation, whether with a Chief Digital Officer or as an additional function of the CTO.

The lifespan of the Chief Digital

Officer role was a key conversation topic in La Fosse’s ‘Digitising the Portfolio’ event in June 2017, where it was suggested that such an appointment can be indicative of a ‘cry of frustration’ on the part of the Private Equity houses.

Ardian’s Simon Cottle suggests that the Chief Digital Officer may have a shelf-life, as digital skillsets grow to become more commonplace.

“At various points, various functional heads have been brought to more prominence – HR in the 90s, IT director / CDO in this decade (2010-2020). Technology as a much broader topic will dominate boardrooms for years and years to come – but the huge digital transformation going on right now as people learn how to alter their business model to incorporate digital will have an

end-point as skillsets become more commonplace.

“The question mark will be whether there is room for a separate role – it may be subsumed as partof what a qualified CTO willhave to do. This is especiallydue to the fact that the CTO is afar more reduced role than it usedto be. When you used to haveto run enterprise software withinan organisation you had to knowand manage quite a lot – people,software, infrastructure – but nowmost of the computing power hasbeen moved out of the companyand put into a server farm. CTOsmay manage a digital transformationbut not an IT team of 50-100people, because once you’vemade the transition to a plant-basedsystem you don’t need that kind ofteam.” Simon Cottle, Ardian

WHERE SHOULD DIGITAL SIT WITHIN AN ORGANISATION?

WHERE SHOULD DIGITAL SIT WITHIN AN ORGANISATION?

La Fosse is seeing an increasing trend towards hiring an individual straight into the boardroom to push the digital agenda, with numerous recent mandates for Non-Executive Directors and Chairmen with a technology focus to be placed into ‘traditional’ businesses.

LA FOSSE SURVEY: Technology and digital capabilities are a key consideration even when recruiting senior leadership roles which are not explicitly focused on these areas.

FIGURE 6:

69%15%

8%8% DISAGREE NEITHER AGREE NOR DISAGREE AGREE STRONGLY AGREE



BE OPEN TO NEW IDEAS, AND ALLOW EMPLOYEES ROOM TO EXPLORE

“The biggest barriers to a successful tech strategy in a B2B business are the arrogance of your own business, and inherent investment in your legacy world which probably still hasn’t paid back. Many businesses believe that they know how things should be done because they’ve done this for the last 50 years, and therefore has blinkers on with regards to what the challenges in the marketplace are.

“Leadership want to be enlightened by people within its business and outside - the challenge is therefore you need people to stick their head up against their organisational culture in order to challenge it from the inside.

“This means creating a cultural environment which allows that challenge to take place, as people won’t have the capability to do it alongside their day-job. An individual needs the time and the ability to find the small start-up that could become the competitor and buy it. I don’t think businesses afford their people the time and the freedom to go and do those things enough.” Ric Francis, Advent

PLAN FOR THE SKILLS SHORTAGE WITH STRATEGIC PARTNERS

“Businesses need to plan not just for the regional imbalance in digital skills, but also the systematic shortage of specific skillsets – the digitisation of business and skills imbalance which exists in the mid-market is so systematic, endemic and impactful that relocating the business from Peterborough to London is a start but will not be a future-proof solution ten-to- fifteen years from now.

“You need to think carefully about your business model. Businesses have always have had a customer value proposition – now is the time to focus on your employee value proposition. Business models need to adapt in order to ensure people with the scarce but important skills can be attracted and retained. The necessity to embrace remote working is a basic but common example.

“Businesses should partner with investors who have travelled this road before, but also work with specialist recruitment consultancies with deep understanding of the digital ecosystem – and importantly an appreciation of the skillsets being sought.” Nick Holder, Director, Livingbridge

DIGITAL DUE DILIGENCE

“What we’re doing as a fund is now carrying out a multi-faceted approach to digital due diligence before going into any situation, involving analysis of all the functions of a business and all of the ways it could digitise. We see it as crucial for the success of the company: they have to be digitally ready or the gap between them and their nearest competitor within digital has got to be small enough to be bridged.” Simon Cottle, Ardian

AGGREGATORS TO SUCCESS

AGGREGATORS TO SUCCESS: BUILDING AND EXECUTING A SUCCESSFUL DIGITAL STRATEGY

As our interviewees spanned several roles, sectors and size of fund, we asked them to give a broad perspective of significant aggregators to success in their given industry when launching a digital strategy.



“It’s easy to fall into the trap of thinking - we’ve done a couple of things, and therefore we’re becoming more digital. However, digital presents new challenges: you may have done a couple of things six months ago, but now you have to tear that investment up and do it again a completely different way because, that’s how the worlds working. Your CFO may be saying - ‘we’ve had no ROI on this –where is your business case?’But this isn’t a business-caseworld all the time – you have to trythings.” Ric Francis, Advent

OUR VISIBLE SHIFTS

Over the past five years, we have seen significant changes to the way in which Private Equity creates value through digital strategy, including the entrance of in-house digital operating partners onto the scene, the addition of technical due diligence specialists in the pre-deal stage and of tech specialists onto the board to add tech and digital capability.

WHAT WILL THE LANDSCAPE LOOK LIKE IN 2023?

Lion Capital’s Jan Schuster gave his perspective on what industries further behind on their journey can learn from the digital transformation of consumer industries:

“If there’s anything that other industries can learn from the complete market-shift we have seen in retail, it’s that people both over-estimate and under-estimate the pace of change. Despite what certain publications say, nothing changes overnight, and this is not what has happened in retail – Amazon has been around for 25 years. People had a long time to adapt.

“Nonetheless, people underestimated the rate of change because they embarked on that journey way too late. You have to move big wheels in order to change your organisation to make it suitable in today’s environment but if you can, don’t put yourself in a position where you have to rush it. Digital requires a culture change and, in many cases, significant people

changes, all of which are better done with time as your friend rather than your foe.” Jan Schuster, Lion Capital

The landscape of many industries has already been rendered virtually unrecognizable with the effects of digitisation, and undoubtedly digital will begin to impact all sectors in the next five years. Thinking about how to drive digital beyond the consumer, and beyond the transformation now, could be one way to get ahead of the next wave of value creation for when the next investment cycle comes around.

A DIGITAL FUTURE

A DIGITAL FUTURE Digital value creation methods are already a regular feature in the strategy deck of many Private Equity houses. How do we expect these trends to evolve over the next five years, and what advice can Private Equity professionals give to those about to embark on this journey?

La Fosse looks forward to hosting a follow-up event to this white-paper to explore the issues discussed in more depth.



STAGE 1Our research team collated information on 315 senior leadership hires made into 67 European portfolio companies of 25 Private Equity Houses over the period 2013-2017, using information from our own database and that in the public domain, such as press releases and case studies. We analysed the backgrounds of those hired to establish whether there was positive a trend towards hiring more executives from tech and digital backgrounds.

STAGE 2Our initial research was qualified with an anonymous survey of 15 key contacts in the Private Equity space to establish prevailing perceptions about digitisation, senior leadership hiring trends and the biggest drivers, and barriers, to success.

STAGE 3We subsequently carried out 6 in-depth phone interviews with Private Equity senior executives in prime position to comment on the issues discussed.

BARRIERS TO HIRING DIGITAL EXECUTIVES

RESEARCH METHODSAs a starting point for discussion, La Fosse Associates utilised a multi-tiered research strategy.

REFERENCES

1 PwC (2016). Private Equity and Digitisation. [online] Available at: https://www.pwc.nl/nl/assets/documents/pwc-private-equity-and-digitisation.pdf2 McKinsey (2016). How b2b digital leaders drive five times more revenue growth than their peers. [online] Available at: https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/how-b2b-digital-leaders-drive-five-times-more-revenue-growth-than-their-peers3 Daisy Group (2017). UK business woken digital transformation according to Daisy Group. [online] Available at: https://daisygroup.com/2017/11/uk-business-woken-digital-transformation-according-daisy-group/4 Capgemini Consulting (2015). Going Digital: General Electric and its Digital Transformation. [online] Available at: https://www.capgemini.com/consulting/wp-content/uploads/sites/30/2017/07/ge_case_study_28_5_2015_v4_1.pdf 55 Inflexion. (2016). Aspen Pumps | Inflexion Private Equity. [online] Available at: http://www.inflexion.com/portfolio/aspen-pumps/6 Paragonrouting.com. Sainsbury’s cuts transport costs with integrated Paragon system. [online] Available at: https://www.paragonrouting.com/case-studies/sainsburys-cuts-transport-costs-integrated-paragon-system

EMMA RODERICKHEAD OF PRIVATE EQUITY EMEA

Emma partners with Private Equity-backed businesses to place Board, executive or C-level individuals, in order to drive and transform the business in line with strategicagenda, strengthen internal capability and create value.

0207 932 2066 | [email protected]

JOHNNIE GREENWOODEVP, HEAD OF NEW YORK AND INTERIM

Johnnie established the Interim Management practice at La Fosse Associates four years ago and is now responsible for building out the New York office as a cornerstone of growth in our US offering. He will be partnering with clients to place board and advisory positions across Private Equity and corporates.

07880 387 780 | [email protected]

https://www.pwc.nl/nl/assets/documents/pwc-private-equity-and-digitisation.pdf.

https://www.pwc.nl/nl/assets/documents/pwc-private-equity-and-digitisation.pdf.

https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/how-b2b-digital-leaders-drive-five-times-more-revenue-growth-than-their-peers



https://daisygroup.com/2017/11/uk-business-woken-digital-transformation-according-daisy-group/

https://daisygroup.com/2017/11/uk-business-woken-digital-transformation-according-daisy-group/

https://www.capgemini.com/consulting/wp-content/uploads/sites/30/2017/07/ge_case_study_28_5_2015_v4_1.pdf 5

https://www.capgemini.com/consulting/wp-content/uploads/sites/30/2017/07/ge_case_study_28_5_2015_v4_1.pdf 5

http://www.inflexion.com/portfolio/aspen-pumps/

https://www.paragonrouting.com/case-studies/sainsburys-cuts-transport-costs-integrated-paragon-system

https://www.paragonrouting.com/case-studies/sainsburys-cuts-transport-costs-integrated-paragon-system

Private Equity: DRIVING VALUE WITH DIGITAL · 2018-04-17 · AGGREGATORS TO SUCCESS. ... growth:...

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Transcript of Private Equity: DRIVING VALUE WITH DIGITAL · 2018-04-17 · AGGREGATORS TO SUCCESS. ... growth:...