Four Steps to Digital Transformation in Private Equity

What is Digital Transformation

The term digital transformation is used consistently to describe the influence of software and technology on the modern world. 

Digital transformation is the process of how digital technology is impacting and evolving the way business is done. 

The private equity industry faces significant changes in the decade ahead as digital transformation becomes a requirement. In this post, we will explore the four steps to digital transformation in private equity. 

Set a Digital Transformation Mission Statement

The first step to embracing digital transformation is to define a mission statement. Not all VCs or PE firms will choose full digital transformation. Some firms will participate in some aspects of the digital transformation while they choose to forgo other parts.

Establishing a digital mission statement will help your firm stay clear and focused. 

For example, a firm may embrace data-driven CRM systems but wish to maintain traditional face-to-face meetings. This could mean that video conferencing tools won’t need to be a major element of the budget.

Firms that understand where they plan to invest in digital, and where they will choose to maintain more traditional approaches, will have an advantage. They can spend more responsibly, prioritizing key growth areas and software investments. 

Connect with stakeholders from across your private equity firm and open up the conversation around your plan for digital transformation. A few questions to consider:

  • What is the digital vision for your firm?
  • What functional areas are ready for digital transformation?  
  • What areas are working well in their current state?

Formulate a Data Strategy 

One area of digital that all private equity firms must embrace is data. Leveraging financial data to make profitable decisions is the lifeblood of any private equity firm. 

Private equity firms can establish a data strategy by answering some of the following questions. 

  • What business areas would be improved with more data? 
  • What problems exist in your ability to capture data?
  • What data do you need to make better decisions for your GPs?
  • What data would you like to have but don’t currently?
  • How usable is your data in its current format?
  • Who do you depend upon to make your data usable?

Choose an Industry-Specific Data Platform

The last decade was all about firms embracing data. The decade ahead promises to focus on using data strategically. Private equity firms need a data management system to support that strategy. 

It’s critical to work with a data platform that is fully equipped to handle the nuances of the VC and PE landscape.

Engage with a SaaS partner for your data management strategy and be upfront about your expectations and requirements. The implementation should be custom-fit to your firm.

Now that your internal team and technology partner has a clear plan for how the data in your new software will be used, it’s much easier to install and configure it for your team’s needs.

Support Behavioral Change

Training your team is the final piece. The last step of digital transformation is often where the process can fall apart. 

Training your team on new digital systems is more than simply training. Along with digital transformation, you must also help your team transform. 

Transformation involves consistently creating opportunities to change behavior, learn new data-driven tools, and adopt new technology. 

Transparency is key. Your firm should communicate internally throughout the process of integrating any new data management systems so your teams can be a part of the process. 

The more you include your stakeholders and individual contributors in the process, the more likely they will be to adopt your new tools.

There will invariably be challenges along the way. Try to anticipate possible issues and prepare with tech resources to help when your team faces roadblocks. If the team can work through problems quickly, it will help them feel a sense of optimism about the new system regardless of any hangups. 

Remember, change happens incrementally, over time. Don’t expect your firm to instantly adopt new technology. Consistent use over time is a necessary component of training. Resistance to change is also a natural part of the transformation.

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.

private equity tech stack