Converging technologies and growing interconnectivity present huge opportunities for private equity funds to reap the rewards from digital transformation, either across a suite of portfolio companies or within standalone owned entities.
PE firms often can be driven to embark on Industry 4.0 digitalization by the anticipated benefits that form part of the sell sheets of the implementer and, with deal multiples increasing, the pressure is on for portcos to find additional levers to pull on.
Here are four key considerations for private equity in how to approach Industry 4.0 with the primary objective of realizing value quickly:
- View Industry 4.0 and digitalization as part of your diligence toolkit: Building a value creation plan that is realistic and underwriteable will draw upon a range of identified levers – for example, organizational design or offshoring plans. Adding a digitalization roadmap adds a string to the bow of driving more value quickly. Identifying digital value creation levers at an early stage can also help shape the overall initial investment thesis, and this information can be evaluated against the existing skills within a PE fund or other portcos, which could be applied to fulfil transformation potential. With PE hold times often only stretching for just a few years, short and sharp improvements focused on boosting Industry 4.0 capabilities can demonstrate how in actuality savings can be driven in a much shorter timeframe. In that respect, certain targets may present significant potential for value creation due to their reduced levels of digital maturity at the point of acquisition, providing the opportunity to elevate operations to a level more consistent with even the baselines of Industry 4.0 pioneers, alongside other value creation activities.
- Interrogate the industries around you to inform a digital direction of travel: Just as the world of retail has evolved to respond to customer demand through dynamic, real-time levels of personalization, so too other industries are now looking to develop a similarly enhanced experience. This could be more tailored product and service recommendations, more frequent product launches, or faster, automated ordering processes and delivery timeframes, all of which improve the overall customer journey. Manufacturers need to be mindful of the changing needs of high-demanding customers by building flexible “ecosystems” that leverage digital technologies to build a cohesive network that delivers on these desires. Identifying and improving areas where Industry 4.0 digitalization can improve real-time access to the right information at the right time to drive decision making. The outcomes of this can present tangible business improvement examples that will build confidence in the longer-term transformation strategy.
- Build a blended talent base with appetite for change: Digital transformation will succeed or fail not because of the technology itself, but the human capital surrounding it, driving implementation. Identifying best-in-class talent within organizations and blending it with strategic hires to address the needs of both legacy technology and the technology identified for a future end-state will create the engine room for delivering incremental improvements and subsequent step changes. For example, talent demonstrating strong analytical data management capabilities is a skillset in high demand. Indeed, further acquisitions may secure market-leading expertise that can be applied throughout digital value creation activities in a company portfolio. Culture, too, will play a critical role, and leadership will need to display not only the technical prowess to effectively articulate the Industry 4.0 journey ahead but also the softer people skills that engage, motivate, and catalyze the change. In the post-pandemic war for talent, the reliance on people for game-changing technological transformation has never been greater. Read more about the power of people in Industry 4.0 here.
- Focus Industry 4.0 efforts on driving ROI fast: As mentioned above, starting small and implementing quick wins in Industry 4.0 programs can drive value creation at pace. This is vital today, as the timeframes expected to realize investment benefits continue to tighten and the promises of incredible returns – only after a multi-year transformation program is complete – lose their luster. Investors will be keen to see progress quickly and encourage reinvestment to generate even more value incrementally. Establish a robust set of KPIs that pinpoint manufacturing pain-points and tie investment dollars directly back to subsequent process/product improvements. As with many elements of Industry 4.0 transformation, “slicing the elephant” and breaking down progress into short three- or four-month sprints of incremental change can keep programs tightly controlled and accountable for the effectiveness of tech enhancements. Also develop and maintain an accurate view of the opportunity cost for not embarking on Industry 4.0 change. As the possibilities from ever-improving technology continue to accelerate, the picture in the rear-view mirror will prove another vital set of data points when telling the equity story years later as exit approaches. Having the right focus is critical – embarking on a multi-year transformation journey is not an issue per se, but it should be developed alongside the objective of generating returns within an initial 12-to-18-month timeframe, which will also drive exit run-rate benefits.