Driving Asset Value Post-Pandemic: A Technology transformation approach
Harvey Nash Private Equity Event Series presents-
Driving Asset Value Post-Pandemic: A Technology transformation approach
Private Equity’s interest in technology businesses and technology enablement in their portfolio is flourishing. This panel looks at the impact of technology transformation from the perspective of both financial sponsors and operational stakeholders to uncover some of the practical challenges and opportunities that it reveals.
Key Take Aways
- Go fast from day one and create a road map that supports the business strategy
- Focus on critical talent technology and I.T leadership – avoid rookie mistakes through lack of experience in these roles
- Ask how technology is going to deliver the investment thesis during diligence – get an intelligent view of what is going on by using practitioners with hands-on experience
- Assure scalability of the tech stack before turning on the M&A tap
- Leverage technology partners with hyper-scaling background to get to ROI quicker
- Be flexible when sourcing talent – augmented teams, outsourcing, up-skilling by injecting the right talent for the stage of business growth
- Ensure technology voice at the board level to provide the right challenge to the executive team and speed up execution of strategy
Most recently Technology Operating Partner at Bain Capital, Peter is a seasoned CTO and CPO with extensive large company and high growth experience. He has particular experience in complex M&A challenges in the technology space.
Currently an investor and operator at Permira, Josephine covers the Technology and Financial services markets with a focus on value creation especially through digital transformation. She has over 10 years of strategic and operational experience in tech-enabled industries.
Stephen advises executives and private equity funds that need to rapidly scale or transform legacy businesses. He holds 20-years of interim management across retail, FS, healthcare, automotive, TMT; for mid-cap incumbents, global brands, and innovators like Google, where he was Head of Digital Transformation for Google in EMEA.
Facilitator: Lisa Weaver-Lambert
Lisa is currently working for Apollo Global Management and on ESG for a Global Mining Company. Previously Digital and Data Director at Montagu Private Equity, ex-Accenture, and brings a strong and diverse line role experience in business-led technology growth across multiple sectors. Lisa also co-hosts the Private Equity Technology Podcast.
As Head of Practice for Private Equity at Harvey Nash, Emma has a wealth of experience recruiting directly into Private Equity and Venture houses, along with consulting and recruiting leadership positions within their portfolio.
Why this topic now?
Lisa spoke into the trend of tech intensity as emerging more prominently over recent years and is coming to fruition. “Investors are seeing the returns they are getting in public markets on technology. Economic conditions have driven more capital into the PE sector, there is intense competition on deal flow since Q3 and 4 last year – so there is a lot more interest in tech specific companies and also businesses that have some sort of enablement with tech, and financial sponsors who what to be apart of this”.
What do we mean by Technology Transformation in Private Equity?
“Simply put it is any change project involving back or front-end technology for our portfolio companies.” stated Josephine, “It is important for PE for two reasons. Firstly, it is a way to increase your multiples – a more digitally scalable business will also be more expensive. Secondly it is a way to enable key value creation through either unlocking more revenue or better margins. Directly or indirectly technology transformation is key for funds of all sizes, but it is easier to achieve in smaller businesses with more agile environments.”
Peter agreed that there was a general appetite to adopt technology to drive business value creation although it can vary across industries. “Broadly speaking, it depends on how much the business is geared into tech anyway.” he stated. “Portfolio companies can broadly be triaged into those that are CIO driven where IT is more supportive, and CTO driven where technology is at the heart of the business. For the latter there is an appetite for transformation, for example in the insurance and banking businesses, where technology is a native element - particularly now we have remote working as a result of the pandemic. There is a need for these companies to embrace tech or face jeopardy to their core business. CIO driven organisations tend to take a more pragmatic and measured approach and perhaps decide to apply band aid rather than change legacy technologies completely.”
How does it compare and contrast with non-PE organisations?
“The situation is largely the same for both,” pointed out Stephen, “There are recurring patterns of problems for both but with changes in context and scale. IT services often hold a lot of technology debt from legacy systems and those systems do need to be fixed in order to support the operational platforms and to be scalable and robust.” He highlighted that a large part of the problem is cultural and constrained by how people are used to working. “The overriding challenge is achieving a mentality for having everything configured across the business for value creation – it is a big mind shift. PE gives business the opportunity to create this shift as long as they understand the urgency for the new owners of the business. This isn’t always the case in private business who may not have the existential need and the same levels of urgency that is in PE.”
All the panellists remarked on how the pandemic had put a huge stress test on infrastructure. Since Q3, Lisa has noticed investors seeing out more proprietary investments due to competition and level of tech sophistication being low, putting extra emphasis on de-risking the technology component of the investments. Internet traffic doubled, trebled, and quadrupled through the use of digital meeting platforms, and remote access to the core systems of the company which weren’t designed to be used that way.
This will inevitably unleash a new sense of what is possible. With 5G coming – will companies embrace these new approaches even more? Take advantage and keep the foot on the accelerator? All agreed that some of this momentum is yet to unfold, we are still at the start. Josephine commented “I have seen agility changing even for the slower paced, more traditional companies in our portfolio. We have seen management teams going from taking 6 months to make decisions, that is, idea to business case sign-off, down to a couple of weeks, Hopefully this is a change that is here to stay. Digital has become a key client channel, even for those that were traditionally dealing with their clients face-to-face. We have seen businesses invest in their digital strategy to the extent that technology has suddenly appeared at the top of the boardroom agenda from nowhere. This represents a huge shift in thinking.”
Peter told the panel that he had worked with some businesses that have had to transform their shop floors and change the nature of the interactions between the white- and blue-collar workers. He cited the example of quality checks on the factory floor. “It just stopped.” he stated. “QA teams were not prepared to go into the factory. The companies had to re-invent the processes - move to digital dashboards, digital whiteboards, all ways of doing the same thing and keeping the same quality of results but with fewer feet on the shopfloor. It’s great, because it paves the way to a more nimble world, but it involved engaging tech in a pragmatic way to serve a particular purpose around the covid challenges.”
How do investors identify tech opportunities within targets? And how important is tech diligence now?
The panel concurred that what had traditionally been a tick box in the general IT audit has now shifted in priority. They agreed that tech due-diligence is now an integral part of the due-diligence process overall. Lisa commented “The intense competition for deals in the mid-cap has made the job of assessing and communicating the technology of some of these targets more nuanced due to high valuations yet many of them have massive amounts of technical debt whether that’s unsupported ERP systems, out dated or proprietary technology - yet investors need to have an appetite for that given what is left to invest in”.
“I have noticed big changes in how the businesses within our portfolio have evolved over the last year." stated Josephine. “The ones that did have the right technology in place were able to create a lot of impact and those who didn’t were at greater risk of failing. That doesn’t mean that if you don’t have the right tech in place at the start we are not going to invest, but it does mean that we need to identify that from the beginning and build it into our 100-day plan. We will need to hire the right people to get the correct focus from day one, as opposed to it being an afterthought. We are also changing the type of people that we engage with in PE. We are using more and more digital expertise, for example CIOs within the operating team or as advisors, to enable us to be really credible through the due-diligence process and identify the opportunities for value-creation through technology.”
Peter pointed out that the depth of technology understanding was critical and that entering an acquisition without it could be perilous. “Who wants to get to day 100 and find out that things are hugely different to what you thought? Getting people who have seen these systems, lived this life, gone through failures and successes, helps to get an intelligent view of what is really going on. Once you are on the other side of the acquisition and find out you need to change platform it completely changes your number game, and a great acquisition can turn into a liability. It puts a pressure on the consulting companies that we work with in the PE space. How much hands-on experience can they bring to the table is crucial. CIOs, CTOs, people who have been in the machine room, are invaluable.”
Are you delving deeper into certain technology areas now?
The consensus amongst the panel was that Cloud migration was one example of where extra attention from PE companies is happening. “Consider the company where every single business system is located on servers within their premises.” stated Stephen, “if they get a power outage, they have a major problem. Each of their systems will have its own upgrade path and there are a host of integration issues to be resolved. You might choose to move each one to hosted managed services, platform as a service or go completely bespoke – all options come with their own challenges and these are non-trivial decisions and need to be prioritised.
"This is just for back-office technologies, and this is before you get to the technology driven, product led good stuff!” Peter pointed out that even if you solve all the tech problems, you might still encounter a huge business challenge in terms of customers not wanting to migrate or wanting to migrate at different times. “Unless you have thought about all of this then you are not set to take full advantage but simply creating more mess and complexity. Cloud migration may start with rewiring servers and proxies but ultimately it can completely change how you sell the systems to the customer and convince them to embrace them. Unless they can see real advantages then why should they move when from their perspective it looks the same?”
It was also pointed out that the matrix of digital competencies changes significantly when migrating to the cloud. It has different sets of tools, different ways of working and there can be massive upskilling required which has to run in parallel with these decisions.
How are the tech giants directly supporting PE firms if at all?
In Josephine’s experience all the large software companies are developing a team, or channel to tailor their solutions to private equity’s particular needs. “Even the smallest companies within a portfolio can take advantage of the full-scale opportunities available for other companies within the same portfolio. This is interesting because it allows them exposure to many companies through a single channel. The push to value creation may be greater within PE than in a non-PE company. We get to offer new portfolio companies something that they wouldn’t be able to access if they weren’t part of the premier account family.” Lisa commented “There seems to be a broadening of perspective on how large tech partners such as Microsoft, GPC, AWS, SAP among others, can benefit the portfolio firms.”
Peter pointed out that there are wide variations in the quality of what these companies are doing to support PE. “Everyone is talking about it and they all have someone you can talk to - but in my experience, the hyper-scalers are much more aware of PE needs in terms of data analytics, fast ROI on cloud deployment and the like. More traditional vendors want to be seen to be supportive but are not really bringing specific offerings tailored to PE needs. Take ERP consolidation – not many are doing a real dedicated PE focused offering to helping drive value creation. What we really need is transparency and insight.” “Consider Google,” Stephen stated. “It is just not set up to customise anything. It is attracted to companies that have scale and are attuned to scale and therefore, its services to PE are fairly light touch.”
What are the key challenges around technology talent, and how should PE firms be thinking about solutions?
“Accessing high calibre technology talent demands creativity and flexibility.” stated Emma. I have seen a notable shift over the last couple of years towards using interim executives to initially drive transformational projects.
This may be to do the heavy lifting at the onset of projects or to manage things until a permanent person with the right profile can be found. There is a recognition that the CTO you need for a transformational piece may not necessarily be the person that you need in the longer term, or indeed to take the project to conclusion. In addition, the last year has seen businesses using us to undertake more executive and leadership audits. These can be invaluable because individuals in role at the moment may not need to be changed – there may be more creative ways to get the skills their businesses need. Maybe bringing in someone to work with them in an advisory capacity for a day or two a week? This allows that person to upskill into the role without the potential expense of a change of talent that isn’t strictly necessary.”
Josephine agreed and pointed out that PE was increasing getting involved in identifying the capability gap in technology. “We are trying to help companies go from being CIO to CTO led which is a difficult move because it’s a bit of a chicken and egg scenario especially if you haven’t got the right digital expertise to lead the search to build a team. We always need to look at the CTO role carefully from day one of the investment process. It is essential to assess the tech talent and if you don’t have it then bring it along, because they are key enablers for value creation.”
“With private equity clients I’m there as a practitioner from day 1 post transaction.” stated Stephen. “I oversee the delivery of the growth plan given its capability gaps, level of maturity and other considerations. My involvement with the technology team is about de-risking the delivery of the growth plan. IT is usually the biggest cost-centre, has the greatest level of complexity, and high headcount. I am most definitely growth business led but technology is the enabler to that growth.”
What are the recruitment options for smaller development teams?
“Remote working has negated one of the biggest barriers to hiring tech talent.” pointed out Emma, “There has always been a talent exodus into the city for the bright young things in technology – but now they can live amongst the hustle and bustle but work elsewhere. This is definitely a benefit for businesses based in less attractive or remote locations.” Using a blended approach delivers the most potential for strategically delivering the best team possible. “By all means have key permanent individuals to drive strategy. They will be most invested in the long-term success of the business.” stated Emma, “but augment with experienced contractors and interims to deliver set pieces and combine this with outsourcing for things which don’t need to be based internally. Team composition will always change and shift according to what your strategy is.”
What advice can the panel give around the composition of the Board to reflect the value creation agenda?
Josephine stated that historically her boards would briefly discuss technology before moving onto more ‘pressing’ topics but Covid has raised the importance of technology in business strategy, and it is now often number one on the board’s agenda. With organisations’ increasing reliance on technology as both an enabler to new ways of working, and driving transformation, it is inevitable that having technical literacy will be a key asset in non-executive directors and board composition in general. “It doesn’t necessarily have to be the Chair who can talk tech and digital,” stated Josephine, “but at least a couple of peoplein the room have to have a level of understanding in order to effectively understand andchallenge the executive team.” It would be great to get more CTO presence in the board room agreed the panel, but there is still some way to go.
Emma confirmed that she has seen a dramatic shift in demand over the last couple of years for functional expertise within the non-exec. “The pull for that tends to come from specific transformation agendas in the due-diligence phase flagging up a requirement for increased levels of mentorship and leadership around technology.” stated Emma, “It’s about reflecting the changes that the business is going through in the individuals that are ultimately responsible for overseeing that change.” The panel agreed that they have witnessed more speed and success in transformation where it is driven from the top as well as the executive team.
“Imagine the business five years into the future,” urged Peter, “and hire the best possible people to get you there. Go fast, go deep, and create a plan from day 1. Digital leadership is critical – top-notch people with the resilience, urgency, speed, and communication skills necessary to deliver growth. Whether interim or permanent they should have the maturity and experience to hit the ground running and not make rookie mistakes at the business’ expense.”
Please contact Emma Roderick for more information about Harvey Nash Private Equity Practice -