The New Private Equity: Creating Value Quickly and Reliably Through Digital Transformation

Any smart PE executive will ask to see the numbers before they read more. Here they are:

30%Reduction in costs in first 18 months

40% Reduction in processes due to automation

75%improvement in lead time for order fulfillment

2xGrowth in digital revenue in 18 months for an automotive parts supplier

10xNew platform capable of handling 10x more customers

What drives those numbers? The New Private Equity recognizes the shift of digital from the periphery to the core

Not long ago, old line Private Equity executives knew little about Digital Transformation, and cared even less.

'Who cares about the plumbing?' they'd say. 'I care about where the money is. In our model, we focus on the big things first. If we can find a few dollars in digital later, fine, but that's just gravy.'

What a difference a few years makes.

Six years ago, there were 39 Unicorns valued at $1Billion each. Today there are close to 500 Unicorns around the world. Most of these Unicorns are digital natives, which embraced cloud-first, mobile-first strategy.

Digital, once dismissed as dull but necessary plumbing, is now recognized as being among the most powerful assets in any company's toolkit. Next generation PE firms are leveraging Digital Transformation as a core part of their strategy - to crush costs, improve customer experience, and even open new revenue streams. Digital Transformation is a proven way to drive tangible value quickly, inexpensively, and reliably.

No wonder that today, the top-performing PE firms are racing to hire their own Chief Digital Officers, who are already playing an active role in informing investment theses, identifying assets within acquired companies that can be quickly sold off, and beyond.

For modern PE firms, the implication is clear: If you care about money, you have to care about Digital Transformation

Why Digital Transformation, and Why Now?

1. You have an enormous amount of capital seeking returns.
   Private Equity firms have raised enormous amounts of capital over the last three years. PE firms now globally manage more than US$3.8T in assets, more than double the amount they managed during the global financial crisis (GFC). PE funds are currently estimated to hold more than US$1.4T in immediately deployable funds, and when other adjacent asset classes are added - credit, infrastructure, real estate, growth capital etc. - the aggregate amount of committed capital PE can readily deploy stands at more than US$2.6T.
2. You're facing a down cycle which could be quite prolonged.
   PE firms know from hard-won experience that investments made during the down-cycles can produce healthy returns in short order. If you're like most PE firms, you have operating partners whose focus is to help your portfolio companies manage operational disruption and economic dislocation. As you evaluate where and how to do that, remember that as companies that compete with those in your portfolio fail, their customers will actively seek new vendors that are fully digital-ready.
   PE firms capable of real agility in transformation have a window of opportunity to drive returns as high as 3-4X.
3. COVID-19 is transforming global supply chains, creating a different set of challenges and opportunities.
   Faced with the current Covid-19 crisis - also exacerbated by the economic crisis - some PE portfolio companies are tempted to preserve cash, postpone capital expenditure or draw down on their credit-lines in order to survive through the current crisis.
   But as the saying goes, 'never waste a crisis'. Marketplaces are being fundamentally reset, and the opportunity is now. Indeed, the wave of change impacting global supply chains makes Digital Transformation a more urgent need. At some companies, some level of Digital Transformation may be unavoidable to avoid real risks of failure. At others, disruptions in the competitive landscape create potentially far larger exits for companies with the courage to invest to become category winners.

The new Private Equity combines the best of routine practices with the power of Digital Transformation

PE firms are masters of 'what works'. In the short few years you have to turnaround portfolio companies and enable the maximum exit, you know that everything that can go wrong, will.

You already know how to deal with acid moments from unforeseen risks and a suddenly unfavorable business environment. But the routine practices - simplifying the complexity built over the course of many years, creating smarter integrations between business units, exiting from non-core product lines, streamlining and simplifying reporting, policies and procedures can only get you so far.

In the end, there's only so much low-hanging fruit and every one of your competitors already knows where it is and how to pluck it. That's why the best-performing PE companies are pushing to be much more creative.

If your singular goal is to maximize the value of your investments, then one major hypothesis - embracing Digital Transformation is a must.

If you remember only three things, remember:

• IT is not only for cost-cutting, but topline revenue growth.
• As business realigns in the wake of COVID-19, how do you go digital matters.
• Look at expertise in BPO as a core value driver. If you invest in the right structure, the right improvements, and create the models for going digital, you can drive outsize returns.

Three Steps for Digital Transformation in PE

Step I: Look forward, not backward

You can shrink a company to profitability, but you cannot shrink a company to greatness.

Often, you're acquiring companies that have been in distress for some time. When was the last time your portfolio company thought seriously about the future, beyond making next month's payroll?

DO	DON'T
Reinvent for the future	Optimize for the past
Embrace a robust cloud platform strategy	Hold on to your legacy assets
Map out your entire technology infrastructure, both internal and with partners	Dismiss the tech infrastructure as 'just the plumbing'
Aggressively weed out 'inherited inefficiencies'	Forget that combining inefficient companies inevitably creates a tangle of redundant and inefficient tech and processes
Go asset-light: shed non-core IT assets and/or back-office operations	Ignore substantial recurring cost savings that often lurk in the dark
Consider a shift to online commerce	Assume only existing sales channels can drive significant revenue
Create online digital marketplaces to expand your portfolio company's geographic reach and service clients worldwide	Assume the company cannot expand its total addressable market
Create new buying experiences for customers based on AR/VR technologies	Assume buyers will buy the way they did before the pandemic
Embrace new global digital-based supply chains	Settle for more aggressive terms with existing vendors in the supply chain
Look for value-creation in IOT and sensor-data analytics	Overlook substantial data assets the company may create in its normal course of business that may not be captured today
Monetize in 'passive-IP'	Ignore hidden assets that could be of potentially much more value to someone else
Seek investment opportunities in sleepy industries that have good fundamentals but have not seen innovation in a long while	Miss out on undervalued 'ugly ducklings'

Step II: Focus on the Big Three: Business Operations Optimization, Technology Modernization, and Sale & leaseback of non-core assets

Modern PE companies, like legacy PE companies, remain laser-focused on where the money is. In today's enterprises, the most powerful levers to shrink cost or drive revenue fall into three key areas.

Business Operations Optimization

In the course of working with 1,000+ large Enterprises, Wipro has built an unparalleled and hard-won knowledge base of where to look first for value. Wipro has developed industry-leading 'golden process maps' for top PE firms. These are used to benchmark operations performance against the processes of the best in the industry.

Significant wins can be gained by maximizing throughput and efficiency while minimizing cost by managing centralized, automated and digital shared services organizations that are right-shored to enhance internal and external customer experience.

You probably already know that Artificial Intelligence and Automation infused within transformed processes can significantly bring down costs and improve the process' productivity multifold. But the biggest challenges faced by customers in AI and Automation are what the technologies can do for them, how they can get past the adoption hurdles, and how to achieve non-linear growth in speed, scale, and agility.

Wipro's HOLMES platform enables out-of-the-box value extraction from many processes. What's more, Wipro's Automation and AI portfolio extends beyond the range of solutions that HOLMES platform offers. We provide vendor-neutral advisory services and prebuilt solution assets on ecosystem partner marketplaces. We help PE firms identify the right business problems, define success criteria, evaluate the best technologies, smooth implementation and adoption, risk and change management and governance. 

WHAT BUSINESS OPERATIONS OPTIMIZATION CAN DO FOR PE

A leading PE firm turned to Wipro to help one of its portfolio healthcare companies to streamline processing claims and attend to member calls.

We're rapidly modernizing digital operations leveraging Hyper Automation, AI, and Process Reengineering to:

• Process $10 B+ claims
• Attend to 10 Million provider and member calls
• Provide decision support for 3 Million appeals
• Address 2 million Provider Rework Claims/year

IMPACTS: Cost Savings | Staff Reduction | Improved Customer Satisfaction | Reduced Customer Churn

Technology Modernization

As software becomes pervasive, it is imperative for organizations to view technology as a critical business driver. Taking an end-to-end modernization approach with design-led thinking can provide an enterprise with a significant competitive edge and place it on a path of growth. Wipro's acquisition of design houses like Designit & Cooper Education, and subsequent integration into our digital business unit, uniquely enables enterprises to combine design-led technology modernization that are aligned to improve customer experience, employee experience, and enhance value of the organization. Technology built on microservices and Kubernetes makes it scalable, re-usable and highly flexible. In addition, platforms that enable low-code / no-code features allow business users to access technology seamlessly.

This isn't just about changing technologies. It's about transforming cost structures.

In many cases, smart modernization efforts can transform cost structure from capital expenditures to variable expenditures. When workloads start moving on cloud and capabilities are sourced using a crowd rather than large permanent teams, everything changes. For example, leveraging crowd sourcing platform Topcoder can move application development, testing, design, and data science talent acquisition to variable cost structures.

Giving your portfolio companies the ability to ramp up and ramp down quickly on an as-needed basis boosts agility and improves financial performance.

WHAT TECHNOLOGY MODERNIZATION CAN DO FOR PE

A leading PE firm bought the Baking, Cooking, and Spreads business from one of the largest CPG companies in the world. Wipro worked closely with the PE firm and its portfolio company on the greenfield IT set up, which resulted in a right-sized retained global organization predicated on a highly outsourced operating model, focused around HQ and shared services in India.

Wipro leveraged its deep IT and business transformation capabilities to deliver value across Applications, Infrastructure (including hosting a new SAP S4/Hana system in the cloud), Integration of overall landscape, Operational data services layer and Analytics.

As a direct result, the PE firm and its portfolio company enjoyed the business benefits of an Intelligent Enterprise with improved agility and an early exit from the TSA (Transition Services Agreement).

IMPACTS: Improved agility | Intelligent Enterprise | Improved Customer Data for Marketing, Personalization, and CRM

Sale & leaseback of non-core assets

Sale & leaseback of Information Technology and Business process services is a way to offload a portfolio company's IT and business process assets (and teams) from their books and consume it back as a service.

This may be a captive center, data center, or a department/team within the shared services organization of the portfolio company.

Every modern PE firm we know looks at key levers like global talent (right-shoring), process simplification, the movement to the cloud, and hyper-automation. But obviously, these must be applied at scale to gain maximum benefits - which may not be possible within the technology and operations landscape of a single enterprise.

The answer? Consume what would be considered non-core to the business as a service, instead.

For example, why hold on to a Data Center as an asset when it can be converted to the monetary value in return for best-in-class scalable technology? Azure, AWS, and Google Cloud can all enable powerful growth with rock-solid stability.

If you're looking into shedding assets, Wipro will work with you before you acquire the company, at no cost to you. We will not only help you identify assets to shed in advance, but will sometimes agree to buy that asset, creating upfront monetized value for you.

We know you're competing hard against other PE firms. Our mission is to help the firms that work with us win.

WHAT SALE AND LEASEBACK OF NON-CORE ASSETS CAN DO FOR PE

A leading PE company took an entirely innovative approach to partnering with Wipro with its portfolio company, a leader in technology-enabled health, wealth and Human Capital Management (HCM) solutions. Rather than a typical client-vendor approach the relationship explores strategic opportunities and portfolio alignment spanning both organizations. For example, Wipro acquired the India captive center of the client and transferred 9,000 staff onto its books. Wipro also assumed responsibility for the services delivered from the firm's India locations, while the PE portfolio company acquired Wipro's Workday and Cornerstone OnDemand businesses for a combination of cash and deferred consideration payable at the end of 12 months based on Wipro's ability to hit performance targets.

IMPACTS: Unmatched Technology Agility | Asset Monetization & Hyper Automation | Core Product Improvements |

Step III: Work with partners who know PE

Wipro works with 7 of the top 10 PE firms in the world, including Alight (Blackstone) and Magneti Marelli (KKR/Calsonic). We work with about 80 companies world-wide that are part or wholly owned by PE companies.

Most of this work is based on structured contracts to provide both support and digital transformation services in order to help accelerate their exit from the investment with desired multiples.

Key Takeaways

THE NEW PRIVATE EQUITY

• Creates value quickly and reliably through Digital Transformation
• Recognizes the shift of digital from the periphery to the core
• Knows the Dos and Don'ts
• Understands it's not just about changing technologies; it's about transforming cost structures
• Works with partners who know PE

THE NEW PRIVATE EQUITY WORKS WITH WIPRO

About the Author

Aswatha Amarnath (Amar)

Senior Vice President and head of Global Sales Operations, Wipro

Aswatha Amarnath (Amar) is a Senior Vice President at Wipro and is head of Global Sales Operations. He has three other global responsibilities: 1) he leads Wipro's efforts in helping pre-IPO companies and Unicorns scale; 2) he leads Wipro's business portfolio with Private Equity owned firms; and 3) he heads Wipro's Silicon Valley Innovation Center (SVIC) in Mountain View, California. This center is a crucible of next generation digital and industry showcases across 30 sectors.