Private equity firms no longer have the option of skipping an assessment of a portfolio company’s digital capabilities. But how do you conduct one that’s objective and relevant to your target? We spoke with Scott Koerner of Chief Outsiders about how GPs can make sure every company in the portfolio isn’t left playing analog in a digital world.
The days of ignoring the digital revolution are over, regardless of the size of the business. GPs need to properly assess the digital situation of their entire portfolio to understand every company’s complete competitive situation, in order to best gauge the eventual return on the investment.
Recently, we spoke to Scott Koerner of Chief Outsiders, who has served as the CEO of a pure-play e-commerce business, held numerous senior executive roles in digital commerce and online marketing, including at businesses owned by private equity firms. And now he’s a fractional CMO at Chief Outsiders, helping to upgrade marketing strategies and creating digital transformation at both public and privately held companies.
“Every private equity firm is looking to maximize value in the near term, and they can’t do that without addressing the level of digital sophistication of the Company,” says Koerner. He recalled working at a billion-dollar company that owned its category, but still took orders by phone, email and fax.
“That might have been sufficient a few years ago, but not any longer. If a Company isn’t moving to digitize its operations, its competition will. That means the Company will lose customers, generate lower revenue and profits, and eventually, provide an underwhelming exit to their PE owners.”
Koerner’s experience has been that companies that lag behind in terms of their digital capabilities are slower to report to their PE owners as well. “I’ve worked with companies that have been late reporting performance data and that’s made it even harder for private equity owners to manage the investment.” Upgrading the portfolio company’s digital framework improves data and analytics, enabling quick access to performance metrics, allowing for more rapid decision making.
In most cases, every business is already in some stage of a digital transformation, where they’re translating business activities from an analog to a digital solution. “Within a private equity portfolio, digital capabilities can vary wildly,” says Koerner. “So they have to be reviewed on a case-by-case basis, with the goal of creating enough digital parity among the companies’ D&A competency, that they can create a single dashboard representing all portfolio companies. This allows for quick assessments of performance across the portfolio.”
Given his marketing background, Koerner’s advice for GPs assessing digital situations is informed with an eye on the market. “GPs may conduct diligence into a Company’s information technology, but ignore the digital elements of a marketing effort.” The best way to avoid that blind spot is to a conduct the assessment with four key questions in mind.
An enterprise with proper digital capabilities has the power to be exactly where the customer is. Customers don’t leaf through a phone book anymore; they go online to begin their hunt, searching for vendors and reviews. Customers want to transact online, since that’s what they’re used to doing, and mobile is quickly becoming the transaction device of choice. The company’s digital tools need to work to provide a frictionless process for the customer to reach the Company, get all the information on the Company’s products and/or services, and create transactions easily, regardless of the device the customer uses.
Digital marketing can ensure that every marketing dollar is well-spent with a maximum ROI. But that requires using data to assess any effort. “Analog marketing is hard to attribute to a given transaction, but with robust data analytics, every digital marketing dollar gets tracked,” says Koerner. Additionally, this data can help the Company understand the customer, segment customers by value to the business, identify how and where to reach the most valuable segments, and even determine how to maximize customer retention.
For smaller businesses that haven’t had to upgrade from their analog beginnings, it can be easy for the marketing, sales and service functions to all operate in silos, unaware of what each is doing. “But if all these divisions operate within a single digital platform, they can share the same information and build off their collective intelligence,” says Koerner.
“From a service perspective, the ability for the customer to self-serve is one of the best ways for companies to create value, because it reduces the need for customer service agents to interact with clients. They can take care of issues on their own.”
Koerner cites the use of AI as a way to help customers get the support they need, rather than relying on customer reps answering phones.
The more time sales executives spend with the Company’s customers offering support, new solutions, new products and services, the more sales will be generated. If, on the other hand, sales executives are spending more time taking and handholding orders to make sure they get fulfilled properly, sales will suffer, customers will be lost, and sales executives will be frustrated. Creating a robust digital framework will maximize the selling effort and reduce customer attrition.
But Koerner is quick to point out that a proper digital assessment needs to be a 360 degree look at the Company’s operations, beyond the marketing function. One of the best ways for private equity firms to conduct them is to tap a Chief Digital Officer (CDO) for the effort, preferably one with experience at a Fortune 500 Company to ensure they can manage the complexity of a private equity portfolio.
“This role really serves two responsibilities,” says Koerner. The first responsibility is to assess the current roster of portfolio companies and suggest what needs to be undertaken at each business, so that every Company is using the most advanced digital tools for their industry. “A capable CDO will prioritize upgrades so the GP is only paying for the most vital improvements, rather than undertaking a full digital transformation all at once,” says Koerner.
The second responsibility for a CDO is to review potential investments, and make a set of recommendations, so the GP knows what will be required to bring that Company up to speed. “This way, they can bake that digital investment into the price they pay for the asset,” says Koerner.
And for GPs still hesitating on making digital diligence a priority, Koerner warns they will be sacrificing competitiveness and exit value. The return on the investment is tangible and the work needed to accomplish the right outcome is simpler than one might expect.
“The digital revolution isn’t slowing down, and in the years to come, companies that lag their peers will pay a huge price. And with many GPs still reluctant to take the digital plunge, those that do will benefit that much more. Stay ahead of the pack, transform your portfolio with a solid digital framework. Your investors will thank you for it.”