Most private equity investors say digital is high on their agenda, but few investors or advisors have a formal methodology and expertise to assess digital in commercial due diligence (DD).
Digital has now been firmly established as part of a commercial DD toolkit and can either complement or replace commercial DD. Unlike traditional due diligence, we look at digital market dynamics and the digital capabilities or plans of a business. This is important not only for businesses that need a strong digital showing for online lead generation, sales and customer experience but also to manage product, HR and operations with the help of technology.
The Palladium digital diagnostic is focused on identifying opportunities where the business can prosper in the future and thus preventing it from falling behind disruptive, digitally savvy competitors. The business is analysed in the context of the market and the competition, to provide a benchmark for the investor.
Although each company has a unique set of circumstances and we tailor our approach to the specific requirements; Digital Due Diligence methodology includes assessing or benchmarking the following areas:
Proposition and Business Model
Analysing digital trends in the market: We complement traditional market research and sizing with very specific digital data that can reveal the nuanced (growth) trends in different segments. For example, conventional market research showed the size of the logistics market growing 18% YoY, but our digital footprint methodology that uses weighted purchasing intent was able to discover the growth rate of the refrigerated logistics segment that the business operates in. The confidence levels of large data sets are high and are therefore reliable to make business decisions on.
Identifying technology threats and opportunities: In the age of quickly advancing technological developments, we help you understand the innovations that could disrupt your business model or create new opportunities in the near future. For example, blockchain technology can pose a disintermediation risk for businesses that have a middleman (payments, agencies, insurance) or improve efficiencies in supply chains/transaction networks that are prone to incorrect data due to falsification or human error (supply chain of valuables, insurance, healthcare). We make sure to highlight any trends/technologies that could disrupt the business model or industry.
Go To Market
Customer experience: What is the customer experience like across different digital channels, platforms and devices? Are these touch-points truly integrated and effective, giving customers the experience they demand?
Palladium transformed the manual supply chain of our pharmaceutical client as part of a customer experience engagement. As a result, the business unit tripled in one year, reduced the time it takes to produce an order by 5X and fully eradicated the errors in treatment, therefore, enabling a better customer experience.
Online reputation & visibility: We use digital benchmarking tools to assess the business’ online reputation, and how influential is it compared to the competition. We also look at how its digital brand identity is managed and how effective it is.
Demand generation: How well does the company generate, track and measure customer demand? How much of its growth is driven by digital? What are the digital tools used to manage and monitor it?
Operations
Operational excellence
- Data: Our experience has shown that businesses struggle to make use of the unprecedented amounts of data that they already have. Palladium's due diligence will look at how data-driven the business is in its decision making and whether they use data management platforms to collect and share insights across the business.
Palladium delivered a proof of concept model for a debt recovery client that identified 20% efficiency gains in its operations through predictive analytics resulting in improved collection rates.
- Tools and technologies: How ready is the business to capitalise on digital technologies? To what extent has it digitalised core functions in its business, such as its product and service innovation, operations? Do the e-commerce inventory systems link to other customer channels and align with brick and mortar store?
- Processes: How are digital processes developed, reported and implemented?
Digital and Innovation enablers
- Team and Leadership: Does the business have a digital strategy shared across the business? Is that aligned with operational initiatives? Is there a dedicated digital owner represented in the senior management team? Does the digital team have defined roles, responsibilities and reporting lines; how scalable it is and how do they work with other teams?
- Ways of working: Does the company have a culture of experimentation, iteration and collaboration? What is the approval and management process of digital/innovation initiatives?
A company that implements agile principles in product and marketing but whose teams need to go through lengthy approval process will be unable to capitalise on the innovative experiments emerging from these teams. As Clayton M. Christensen writes in his Innovator's Solution book, ideas often lose their disruptive growth potential in the shaping process that they go through in order to get funded. To avoid these common pitfalls, Palladium was brought in following an acquisition to set up the in-house innovation capabilities, structure the teams, governance and train them on new agile ways of working that foster innovation.
A well-assembled digital DD will detect both ‘red flags’, as well as opportunities in areas where competitors underperform or markets that remain untapped. As a result, the Private Equity investor will see in which digital areas it is lagging behind its peers and what investments are required to achieve true digital excellence. This provides the basis for a roadmap as Palladium are often involved in the post-acquisition digital transformation.
