29. September 2020

20% more value through Digitization and Agilization

SMP Private Equity Study

Digital transformation and agility have both become common practice in today’s businesses, right? Wrong! Even though both topics have been on top management agendas for many years, most companies have not met the expectations yet.

True is: Digital and Agile are inseparable and can be understood as two sides of the same coin.

While our understanding of digital business models covers all aspects of the value chain, under agile working methods we summarize all cultural, organizational and process changes that form the basis for a new way of working.

A digitally and agilely transformed company excels in 4 dimensions:

  • A clear transformation strategy,
  • outstanding customer experiences,
  • efficient and highly automated internal operations and
  • an appreciative corporate culture.

Companies combining these elements usually perform significantly better than others in key metrics such as sales, earnings and multiples.

Impact of digital business models

Illustration 1: (Illustrative) impact of digital business models and agile ways of working on company valuation

To deepen this hypothesis from SMP project work, we asked numerous decision-makers in the private equity industry about their impressions of the relevance and maturity of digital business models and agile working methods both within the private equity fund itself and in the respective portfolio companies.

Key findings

The relevance of digitization is confirmed by the participants with a clear focus on the exit phase. Besides additional sales and entry to new market segments, the digital transformation of portfolio companies is particularly used to optimize equity stories.

Overall, about two thirds of the PE funds attribute good progress to their companies, while one third are still working on the first initiatives. Accordingly, the funds consider the digital support of their portfolio companies highly relevant, 84% of the funds provide extensive support for their companies. On the other hand, over 40% of the funds say that they themselves have little or no digital expertise, a clear field of action to further improve exit multiples.

Level of expertise and support

Illustration 2: Digital level of expertise and support

A different picture emerges regarding agilization, which is assessed overall as having little to moderate relevance within the investment cycle. Accordingly, the study participants consider the acquisition of new talent to be the most important goal of agile transformation, which is still perceived predominantly as an IT issue. SMP experience however shows that modern organizations include agile ways of working also in non-IT functions.

Not surprisingly, agile expertise is hardly found at the level of PE funds, which in turn provide only limited support for their portfolio companies. The limited resources are considered a central obstacle to a further agilization of companies. The agile maturity of the portfolio companies is therefore easy to understand; only one in five portfolio companies has good agile progress, while for all other companies the issue is still in its infancy.

Agile Level of expertise and support

Illustration 3: Agile level of expertise and support

If this assessment is broken down further to the four core elements of digital and agile company, it becomes clear that PE funds see a need for action in almost all dimensions at their portfolio companies.

While companies are attested a good understanding of digital customer needs and advanced automation of internal processes, performance is critically assessed in many important dimensions such as a clear digital vision and strategy, digital products and services or decentralized decision-making:

Comparison of relevance and actual performance

Illustration 4: Comparison of relevance and actual performance in key digital and agile dimensions

Having worked with multiple private equity firms, we also aimed to access the expected impact on multiples. The results were tremendous: For a fictive company A that has a fully digitized business model, PE funds are willing to pay a premium of +24%, compared to a financially identical, non-digitized company B. The agile upside is also positive but less strong (+5%):

Multiple premium of companies

Illustration 5: Multiple premium of companies with a digital business model and companies with agile operations

The participating PE funds confirmed our hypothesis that companies with digital business model and agile ways of working usually perform significantly better in key metrics such as sales, earnings and multiples.

Therefore, driving digital elements of the business model is key for PE funds. On the other hand, a lack of agile working methods often causes companies to fail in digitizing their business models. Consequently, agilization should also be an imperative for growth and value enhancement from a PE perspective.

SMP Strategy Consulting has been advising clients on digital and agile transformation programs. We are looking forward to apply this knowledge for your digital and agile value creation plan – both at portfolio and fund level.

Please get in touch for the full study report.

Marcel Vandieken

Dominique Tichelbäcker
Senior Manager