Insights from the Operating Partners (Virtual) Forum – October 2020

On Wednesday, October 28th, Accordion invited a (virtual) panel of Operating Partners to discuss digital transformation: what it means, its relation to value creation, its talent variables, its timeline, and its acceleration during the COVID economy.

What we learned is this: Digital transformation is critical, yet ill-defined. Its success lies in finding the right talent, but just who that talent is—and where that talent sits—remains quite unclear.

Here are a few of the headline learnings and lessons:

On digital transformation as a value creation lever versus a value creation enabler:

Digital transformation is a big, (too) broad, buzzword. In most cases, say our operating partners, it’s really just a combination of initiatives that enable value creation, but are not part of the VCP explicitly:

“I’m loathe to consider digital transformation as part of the value creation plan. I like to view it as a ‘how.’ It’s the how behind the existing VCP, the how behind growing the company, acquiring new markets, building new products, and getting the right margin structure.”

“We’re not going to underwrite to digital transformation, but we look at it as part of value creation planning. And where we see the most value from it is not necessarily in upgrading systems, but getting the processes around those systems working together – like the handoff between marketing and sales.”

“It is not the VCP, but we link it to our VCPs in terms of driving to a certain outcome, whether it’s margin expansion, efficiency, driving the top line, new customers, grabbing share wallet, etc.”

On COVID accelerating the pace of digital transformation:

COVID has served as a necessary forcing function for accelerating digital transformation.

“Has COVID accelerated the pace of digitization? In a word: Yes.”

“We’ve certainly seen an acceleration and it’s pretty much across the board. And that digital transformation comes in a massive variety of flavors: We’ve had consumer product companies that have had massive shifts to ecommerce. We’ve had businesses that were in B2B services that have shifted from in-person events to completely digital events. We’ve had to cue up virtual selling for big ticket items on the B2B side. We’ve had businesses that have large in-person sales teams where they’ve completely switched to a new remote model.”

“We have this one company in our portfolio that’s a massive, rapidly growing business that sells different varieties of a singular specialty item. When we bought it, we knew we were going to have to upgrade IT because it had a relatively antiquated and homegrown platform. So it was already part of the plan – we had hired a head of IT and head of digital marketplace. But COVID accelerated the pace. We put in place processes that streamlined operations and a dashboard to see in real-time how specific products were performing across multiple platforms. They were all useful upgrades in any scenario, but because we were working remotely due to COVID, and we were not able to pop into offices to ask, ‘Hey how is this product performing’ and because we were selling online more, the new digital tools proved to be really transformative.”

But, the COVID economy has also served as an opportunity to accelerate digitization without its traditional business disruption.

“One thing we suggested with our portfolio companies with respect to COVID was to use the “car is in the shop” perspective. Every company has a wish list of digital projects they want to get to at some point on the horizon. We said, as everybody’s business was getting hammered, think of it as time the car is in the shop – the time when you have the bandwidth to fast track some of those digital wish list initiatives that would have been disruptive to undertake during the normal course of business.”

On building or buying for digitization:

When it comes to the infrastructure that enables digitization, some OPs are of the build – but only if it’s transformational – mindset.

“We have a lot of old school service-driven companies; field forces that are going out, rolling trucks, rolling parts, using their own playbooks. If we have decided that it makes sense to digitize some of that work – to enable those field forces with data – the question then becomes how do we get that technology? Do we build in-house? Do we go with off-the-shelf tools? Do we align with a third party that customizes something for us? What we have said is if it’s something that will be a differentiating core competency within the industry, we may want to look into building. On the other hand, if it’s a consumer and retail environment, where a lot of other companies are doing this, then let’s go outside and get something off-the-shelf.”

“If the digitization is going to be a key point of differentiation versus just table stakes, I think that is what would influence your decision as to whether to build or buy.”

Others are of the buy mindset that, when technology is not otherwise native to the business, you buy.

“If you’re not in the technology business, you shouldn’t be in the technology business. So lean on third parties and folks who know how to do it. I’ve seen too many companies invest in these things as science projects and then their private equity investors hammer them on why the ROI is not there right away.”

On the importance of talent to digital transformation:

Operating Partners across the board agreed on the criticality of talent to the success of any digital initiative:

“When you’re investing for transformation, it’s a little bit more of a binary outcome. If we are able to do it and drive the outcomes that we want within the hold period, that’s going to be a great ROI. Or we’re going to put some dollars against it, and we’re not going to be able to prove it out during the holding period. But the question really becomes: do I want to put a pot of money behind this? And what we often base our decision on when answering that question is: Do I have the talent?”

“In regard to transformation, especially in the time of COVID, we’ve seen our spend profile change dramatically. It’s not necessarily investing as heavily in needs or tech platform decisions. Instead it’s investing in getting the right people in place.”

On the need for dedicated digital talent:

What OPs had less consensus on was what that talent looks like and where, between the sponsor and the portfolio company, that talent resides:

There’s the tech operating partner camp:

“A number of us internally have been pushing to have a technology-focused operating partner resource at some level to be leveraged across our 13 portfolio businesses.”

There’s the company functional expert camp:

“Because digital transformation comes in a massive variety of flavors there’s a talent challenge: how do you get an operating partner in to help, because there are so many specific disciplines we’re dealing with? We have been struggling with this and have come to the realization that it’s really not one technologist in the firm. There are so many specific disciplines, there isn’t a one-size-fits-all solution.”

“We’ve had more success finding the kind of the core mid-level expert in the area of expertise that we need, rather than starting with a chief technology individual. More often than not, we’re not going after two or three different technology agenda items simultaneously. We need the person who is the expert on the one agenda item we are pursuing.”

There’s the ‘we don’t know’ camp:

“I have not been able get consensus from my operating partner group on whether we need a digital person in our group. We’ve asked: Do we want to hire an analytics person into our group? And then the question became: well who would that counterpart be at the portfolio companies? We seem to do better when we have explicit counterparts at the portfolio company that they can work with.”

And then there’s the ‘let’s look at this another way’ camp:

“We departed from the tech operating partner search. What we have done instead, quite pragmatically, is that we think topics like advanced data analytics and machine learning, bring up incredibly valuable use cases across all of our portfolio companies. And so we are building a team within our firm around those areas to drive value creation.”

On digital timelines and hold periods:

Of course, with any major investment, there’s always the ROI question. Does this allocation of money make sense against our timeline and hold period? Will we see returns?

The answer seems to be: First, understand that digital transformation is not a short-term initiative.

“When you try to do something truly transformative, it takes a long time. And so if anybody comes to me with a digital transformation model that shows some kind of return within the first 18 months, I say forget about it and come back with a model that shows a more gradual graph.”

And because of that longer timeline, sponsors must think beyond the traditional hold period paradigm.

“I like to force myself to think in terms of two hold periods. The first is our hold period, but the second is the sponsor or strategic or public market hold period after we sell. What we are really doing is building something that the next buyer is going to be pretty excited will, therefore, increase our exit price.”