Finding a digital edge: how to approach digital transformation

This article was written by George Ralph, global managing director, RFA

As the private equity industry continues to rapidly expand, entering new markets and attracting more institutional investors than ever before, private equity managers are under increasing pressure to optimise their operational capabilities. In order to do this, private equity managers need to consider how to digitise their technology and operating models to meet the greater demands from investors, both traditional and institutional.

While it is understood that digitally transforming business operations can create efficiencies, increase visibility of data and reduce cost (thereby increasing the ability to generate alpha), the actual process of “transformation” can appear to be disruptive to business and deal flow. As a consequence, the industry has been seen to be reluctant to embrace digitisation. However, as business and deal flow has evolved, some managers have started to grasp the opportunity and see genuine benefits to their operating model, which could act as a watershed moment for those competitors lagging behind.

Digital transformation is essentially the process of using technology to transform business operating models. The impacts of which can be wide ranging, as can be seen with the exercise of taking manual processes and automating them across the business. But often ‘automation’ can throw up ideas of driverless cars and robots, which fails to describe the intrinsic value of the process. At its peak, digitisation can help managers through greater visibility over their investments and in key decision making.

For a PE firm using a tool such as Microsoft Flow, it becomes possible to automate checklists that have traditionally been tasked within spreadsheets saving a huge amount of time that an individual can put to good use elsewhere within the business. Investor reporting is another great example. A task which traditionally took a person a number of days within any given month can now be fully automated.

In the beginning of any digitisation journey, a manager should start by looking at all the manual processes within their business, the teams and departments involved in the process and their roles within it. The next step is to complete a Proof of Concept, which allows a firm to check the outputs of the newly digitised process over a period of time, making sure the automation is absolutely correct. In this stage, it is important to assess which processes could be outsourced to improve efficiency. From our own experience RFA uses Power BI to get insight into our own data which allows us to use trend analysis to see what of our own processes we should automate. A firm can look at this in the same way you might an outsourced CTO or CITO role. New technology exists that means it isn’t usually a requirement to have the key man skills in house as it would be expensive and unnecessary for most firms.

An effective digital transformation is built on an effective data strategy

The most crucial element of any transformation is your data strategy. An end-to-end managed data solution is usually the most effective approach for a PE firm. A data warehouse will separate the layers of your data via any public cloud provider; AWS, Azure or Google Cloud. You are then able to scale your data and separate data processing and storage to allow you to harness that data for deal making and key investment decisions. Data governance, ingestion and analytics solutions are built to meet the standards of institutional investors and global financial regulators, automating the processes that have been lengthy in the past. With the current focus on ESG, investors are also keen to see that appropriate ESG data management plans have been put in place for investments, built around key performance indicators and related targets. A robust data strategy can help a manager to automate this. Alongside investor reporting, using data and analytics, a manager can benchmark and monitor the ESG issues that are material to ESG performance.

The great thing about public cloud and data warehousing is that it is entirely scalable. An emerging manager and established manager might use different tools for their data and digital transformation journey, but the principal is the same. At RFA we don’t have clients using the same technology set up two years after launch as they did on day one, but the journey is seamless as we scale firms up to manage increased AUM.

In today’s environment, the trend on how we manage data is set to continue. As more and more people get involved in their own data journey, they will discover more anomalies in the patterns of their behaviour as a business, how they operate and also the functions of the business. Alongside those starting out, firms that have already embarked on their digitisation journey are in phase two of their delivery now, and we are seeing firms data scraping into their data warehouse to then review the KPIs on that data in order to see how that impacts their funds performance.

The focus on how to communicate as a firm and with vendors from a satellite office or hybrid working environment also continues. As an MSP, we are working with our clients to build collaboration tools that are specific to their platforms, reporting and deal execution needs. If a firm has multiple systems, the answer isn’t to integrate those systems, it is to pour all the data from every system into a data warehouse. From here, a firm can assess where the burdens to their business lie and what can be potentially automated, via the assistance of a data management dashboard.

The longer term view suggests a firm will need less people to deliver the same performance, if not better. So certain roles within a fund will shift, the end result is that automation can buy people more time to focus on tasks they really need to focus on, such as investor relations and the alpha generation that has caused this seismic shift in the prominence of the private equity industry.