A common mantra in the business world is “Every company is a technology company now.” We hear it repeated ceaselessly by a host of industry pundits, tech reporters and consultants. That’s not only because it’s catchy – it’s also a valid point. The line between “regular company” and “technology company” has been blurring for decades, and for private equity firms, that means every company in which they invest is a technology company. Or, at least, they should be. In actuality, many brands are falling short of the digital transformation everyone is striving for these days – the promise of using technologies and digital strategies to transform the entire value chain, from visual identity to user experience and customer engagement to time to market and more, to streamline a business, create new efficiencies and boost profits. The reason for this shortfall is that many companies carry digital and technical debt, which not only hinders their digital transformation, but also diminishes their brand value – thus impacting a private equity firm’s return on investment. Why digital and technical debt matters Although the terms are often used interchangeably, digital and technical debt are two separate entities that might be best understood by using a casual dining restaurant chain as an example. Unlike financial debt, digital “debt” refers to a deficit in technological capabilities and assets. In this case, it might comprise lack of website personalization; low social media presence across sites like Instagram, Facebook, Foursquare, etc.; an unresponsive mobile site; or lack of engaging brand content (especially user-generated content) on a website – basically, the brand’s digital experience does not mirror its positive, comprehensive in-restaurant experience. Technical debt for the chain might include issues like online ordering systems that go down a lot; online pricing or menus that don’t match the in-store restaurant prices/menus; or loyalty programs with inaccurate customer data – technological malfunctions that lower brand perception, no matter how good the in-restaurant experience is. An experience must be seamless and balanced from end to end – from digital to in-person, across all technology aspects of a company. If it’s not, it impacts revenue and the lifetime value of the brand, which means the PE firm won’t get the most out of its investment. That means it’s critical to examine every single aspect of the managed company’s business, delving deep into the complete value chain early in the acquisition – or even before it – to understand keys areas of technological impact and deficit. Getting out of debt To determine the quality and quantity of an investment’s digital and technical debt, a private equity firm must consider eight main factors and evaluate how well (or not so well) the brand is doing with each one: · Customer engagement · Execution and delivery · Technology and platform · Data management · Culture · Digital operations · Capacity and capability · Content Every brand is at a different stage of the life cycle for each of these, but looking at all of them together measures the status of a brand’s current digital transformation – and it’s critical for a PE firm to know where they stand. Delineating where digital and technical debt reside within a company and what areas need to improve will help a private equity firm define its approach to technology in its target company. Once you understand the context of any shortcomings, you can make better decisions on where to focus your investment, bringing your portfolio brands up to speed and reaping the most value out of your acquisitions. For example, you may be buying a brand that has low customer engagement, but accurate master data on their customers and plenty of solid content they just aren’t marketing appropriately. You likely don’t need to add any more content or clean the data, but instead should invest funds in strategies that improve the customer experience and access to that content. The earlier, the better Additionally, technical and digital debt can actually affect the terms of the deal. A private equity firm may allot a certain dollar amount for investment to generate the desired results – but that might not be enough. Finding issues prior to closing means you can alter projections and renegotiate the price, depending on the risks it reveals; after the deal is locked in, your freedom to change any part of it is limited. Reducing digital and technical debt is important even at the end of the investment cycle, because the next buyer may balk at any lingering technology problems, and back out of the deal. Deloitte found that technology acquisition is the new No. 1 driver of M&A pursuits, ahead of expanding customer bases in existing markets, or adding to products or services. Formerly, private equity firms were left to evaluate their investments on their own, but a shift in perspective is driving more firms to partner intimately with both target companies and third-party advisers early on to perform a technology audit and help guide the digital transformation journey. Getting it right Private equity firms may think they are not in the technology business, but they are – because every company is a technology company these days, and to maximize the business case for investing in a particular brand, getting the tech right is critical. Digital debt leads to loss of brand value and can increase costs and reduce profitability – all of which thus affects the PE firm. A company might have the best product in the world, but if it’s missing the technological capabilities that allow that product to reach and resonate with the customer and maximize market opportunities, that great product isn’t worth much at all.