Private Equity & Venture Capital Insights: 8 Business Drivers for Digital Transformation in Struggling Companies

The hardest part is over. You’ve helped a struggling company get back on its feet, and now you’re thinking about how to transform the company to yield revenue growth.

Does this necessarily mean you need to pursue digital transformation? It depends. In this post, we’ve outlined the key business drivers for digital transformation in struggling companies (in any company, in fact, but struggling companies especially), so you can determine if these drivers are relevant to your portfolio company.

8 Business Drivers for Digital Transformation in Struggling Companies

1. The Importance of Customer Acquisition and Retention

Even if a struggling company has recently been turned around, it’s still walking on veritable thin ice. Now more than ever, it’s critical to consider customer expectations.

Research shows that 63% of customers will abandon a brand altogether after one bad experience. In the e-commerce realm, image speaks even louder than words – a staggering 90% of online shoppers won’t buy from a company that has a bad reputation.

Investing in new technologies and a new digital business model can help a brand assure its client base that it’s paying attention to their needs.

2. The Need for Cost Control

Traditionally, the term “cost control” or “cost management” refers to ways to slash company expenses. Yet, in the post-digital era, it also means investing in tools and resources that can generate future savings and drive continued growth.

Following a business turnaround, investing in modern technologies, such as artificial intelligence (AI), can help a company avoid the same inefficiencies it fell into before the turnaround. Often, this means saving money on time-consuming manual efforts that drained resources without generating equivalent revenue. 

3. The Importance of Data Insights for Decision Making

Companies need data insights to make business decisions about their supply chain, their customer service, etc. The right business decisions can lead them further away from their tumultuous past.

The data insight capabilities of today’s technology are continually expanding. The Internet of Things (IoT), for example, provides actionable insights that companies could never obtain in the past.

By investing in modern technology, such as ERP systems with AI and IoT capabilities, companies can use real-time data to make accurate predictions, while relying on AI to automate the appropriate next steps.

Developing a digital transformation strategy not only helps companies identify the best technology for their organization, but it helps them build organizational capabilities that enable them to take advantage of these new digital tools.

If you decide to guide a portfolio company in digital transformation, we recommend focusing on human capital management and organizational change management to ensure the organization’s capabilities and culture aligns with its new digital strategy. It’s also important to gain insight into the current organizational structure and culture so you can educate the leadership team on how to best communicate the changes associated with transformation.

4. The Struggle of Keeping up with the Competition

Across most industries, slow adapters tend to lose pace to competitors who are fast to adopt new technology. Increasingly, both B2C and B2B customers are looking to do business with brands that prioritize advancement and innovation.

Falling behind could mean experiencing business distress once again. According to one survey, 85% of decision-makers believe they have around two years to make inroads into digital transformation or risk falling behind their competitors and suffering financially.

This business driver may be more relevant to some industries than others, but even if a portfolio company is an industry with less pressure to innovate, that industry will inevitably feel the pressure in the near future, so it’s a good idea to get ahead of that trend.

5. The Importance of Talent Acquisition

Right after a turnaround, one of the most important investments a company can make is in its workforce. With the right talent, the momentum that the company has gained can continue.

Yet, a company that doesn’t embrace digital transformation might find that it’s more difficult to find and retain industry-leading professionals. For example, Millennials don’t want to work for a company that still uses green screen technology. Instead, Millennials are prioritizing employers that know when and how to let go of legacy systems and respond to the digital disruption in their industry. 

6. The Challenges Wrought by Organizational Silos

One reason many companies struggle in the first place is because of organizational silos. When different departments aren’t sharing data and communicating, it’s nearly impossible to obtain reliable data and provide a seamless customer experience. 

However, digital tools, like ERP software, can ensure data reliability and process efficiency. The key is including business process reengineering in your digital transformation plan, so employees know how to input data, leverage data insights and interact with upstream and downstream processes.

7. The Pandemic-related Need to Enable Virtual Work

Since the onset of the COVID-19 pandemic, companies around the world have been forced to shift to virtual work. In fact, 77% of HR executives expect the work-from-home trend to continue well into the future, even a year after the pandemic significantly subsides.

A once-struggling company that holds tight to tradition and eschews innovation may be resistant to this type of modern, mobile workplace. However, they must learn to adapt.

Companies in almost every industry must digitize processes that were not digitized in the past, and this requires both modern technology and organizational alignment. You will also need to focus on reskilling employees throughout the digital transformation process.

8. The Need to Attract a Buyer

Once you have turned around an organization, you should begin to position it for growth. One way to accomplish this is to look for an acquirer or a company with which the organization can merge.

However, the company may not currently be in a position to attract a buyer. It may need to increase its competitive advantage or develop strategies to increase cash flows. More often than not, this requires digital transformation.

Investors and buyers look for:

• Businesses that create value with consistency from period to period
• A high probability of future cash flows along with a history of performance and improvement, or the promise of cash
• A market-oriented management team with a focus on producing revenue
• Businesses with the ability to sell and compete, as well as develop, produce and distribute products (i.e., a track record or demonstrated changes in the right direction)
• A continuous improvement culture
• Fair entry valuation and a realistic return potential
• Exit options and the likelihood of realizing a high ROI at the time of resale

Embracing Digital Business Transformation

While your portfolio company may be happy to have survived a major operational setback via financial and operational restructuring, it’s also important to wipe the company’s slate clean and help it move boldly into the future.

Digital technology is at the heart of that movement, and each company has its own reasons for embracing it. These business drivers for digital transformation are only a few of the reasons why a company might decide to make a transformative shift.

Are you wondering if a particular portfolio company has good reasons to pursue digital transformation? Request a free consultation below to speak with our business turnaround consultants.