Market Hill | a northdoor group company |

Working on big, expensive, complicated technology problems.

transformation

What does a fresh coat of paint and technology value creation have in common?

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It’s the new year, so I’ve been painting the walls in my living room (Sage green) over the last few evenings. One of those jobs that has been sitting on the list for too long. It got me thinking about the similarities between painting and technology value creation…

When painting a wall, there are three essential steps: masking, priming and painting.

Too little time masking asking you’ll have paint everywhere at the end. Too long or too little priming and the colour won’t be even. Too long painting, and your wife will ask what you’ve been doing all that time.

When it comes to technology value creation, the three essential steps are: Planning, scale testing, implementation.

Technology teams typically take one of three paths.

  1. They spend too little time planning and scale testing and jumping straight to implementation. They are often causing issues in production that affect end users.
  2. They spend too long in the planning and scale testing phase that they deliver very little actual value. Users can be equally frustrated by the lack of new features and functionally.
  3. They get the mix right between planning, scale testing and implementation. They deliver a technological transformation that adds significant incremental value.

Only 16% of all transformations succeed.

Some symptoms to look out for; reacting to these early will keep your value creation programmes on track.

Tech change is hard. Cost is increasing while user experience is degrading.

The benefits of being in the new platform or technology aren’t realised.

Service outages and platform Instability are occurring despite increased investment.

The best portco tech teams will know when to stop masking and start priming.

They will look at how they can remove barriers to growth, bringing innovative tech solutions to the board. Tech change will feel natural.

They will measure technology-related churn, NPS and survey results to drive product development. Increased investment has measurable ROI linked to EBITDA and revenue growth.

They will measure, assess and reduce their cost profile, starting with the cost to service an individual user.

How would you benchmark your portco tech teams approach to value creation?

Could they use a second coat?

Until next time.

Thomas

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A nice story, but what does it have to do with technology value creation?

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For the first time in a long time, I took an international flight. In 2021, you need to complete some new forms…

A passenger locator form, this lets people where you are going and why. A negative COVID-19 test certificate 48hrs before departure. A copy of your vaccine certificate, 0 1 or 2 doses.

The airline I flew with had a handy portal when checking in. The portal ‘associated’ these records to your digital boarding pass via an upload tool.

Seems simple enough.

However, when you get to the airport and try to check in, it turns out that the upload portal was merely a facade.

The airline operator doesn’t have the technology to access the uploaded info. You needed to remember to print a paper copy just in case for manual checking.

It’s not over yet.

You then get a small slip of paper to be presented at the boarding gate to say you’ve been ‘checked’. The number of people I saw who lost this piece and had to go through this process again was significant.

You might be thinking, well, that was a nice story, but what does that have to do with technology value creation?

I’ve been having an increasing number of conversations with firms looking to speed up digital transformation.

The first step most teams want to take is building a facade similar to the example shared here. Technology teams can forget that their applications help real people do real things. If they don’t work as expected in the real world this has a real impact to peoples lives.

Instead of asking how quickly can I do this transformation programme, the best teams ask…

What can I help our client do now that they couldn’t before? What’s the most value we can deliver within our current limitations. What will people see and think when they see this.

These same teams will monitor the impact positively and negatively.

Looking at technology related churn, NPS changes and customer survey results.

How often do your tech teams actually use their product they are building? Have you seen changes to NPS after a recent software change?

How would you value the benefit of getting this type of change right or wrong?

Until next time.

Thomas

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Can an incomplete Digital Transformation still create value?

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Picture this scenario, you’re getting geared up to exit an investment.

The Cloud Migration you’ve been working on is only 75% complete. The new product you’ve been working on is three months away. You’ve done all the heavy lifting. Taken all the pain. Today the value of all your hard work is $0.

Imagine you could launch a brand new technology product in the first 100 days.

Even an unfinished digital transformation has a $ value. There are five areas where tech change is often undervalued:

  1. Reducing technology-related customer churn
  2. Optimising technology cost
  3. Reducing critical service outages
  4. Creating tech data and insights
  5. Improving sprint velocity

For PE firms can position these incomplete transformations, the rewards are substantial

The reality is that most digital transformations fail. 84% of initiatives are abandoned after 24 months. Those that succeed still often experience significant, sometimes multi-year, delays. PE firms can accept some short-term pain in the investment, away from the market’s eyes.

Technology is a resource that PE firms are extremely well-placed to take advantage of this. Let’s not forget that a transformations goal is to make future change easier.

But you need a firm eye on measuring the value created today and the value creation potential. If you can put a $ value on it now you can put a value on it at exit.

Considerable value is being left on the table at exit for sellers. And there is an big opportunity to jump start value creation for the buyer.

Will you put a $ value on incomplete transformations going forward?

Thomas

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Digital Transformation and Private Equity, one buzz word at a time.

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Google ‘Digital Transformation’ and you’ll be treated to a myriad of different buzz words. Search ‘Digital Transformation Private Equity’. You’ll get the same buzz words, but you’ll be told you ‘need’ to do it fast… Here’s a very well-written FT article telling you to do just that.

https://www.ft.com/content/1ba9d897-d3b2-4786-a8c0-304617d817a7

Digital transformation has become a catch-all term for technology change.

It could mean taking something non-digital, like a call centre and making it a fully digital process. It could mean taking a technology that exists in your data centre and moving it to the cloud. It could mean changing the way you develop applications and technology using DevOps.

Basically, anything that involves the technology you use and making changes to it.

For Private Equity the most important part of a digital transformation is not speed, it’s that it adds value.

Defensively by reducing the cost of running that tech or the risks that exist by not changing.

Offensively by enhancing revenue, creating something new and making what you have better. Taking market share away from your competitors.

Watch out, most digital transformations fail (84%). Those that don’t experience delays, multi-year delays.

These delays can often lead programme cancelations or alternative ‘acceleration’ projects. A common reason for failures is a lack of upfront commitment. Setting realistic timelines with measurable milestones goes a long way to help this.

‘The Phoenix project’ by Gene Kim, Kevin Behr and George Spafford does a great job of helping you to empathize with the pain that tech leaders experience. (Thanks Jim, for the recommendation).

Data and the insights are just as important as the change itself.

Getting more data, using that data to create insight and using that insight to make change happen. Finally, turning that change into competitive advantage to increase EV.

Do you get involved with your tech leaders?

How successful have your previous transformations been? What have you learnt that you wish you knew first time round? What will you do differently?

Nearly all businesses are tech or tech enabled. Can you afford not to focus on transforming your portcos tech?

Thomas

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TikTok is the most exciting big tech buyout in recent years.

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Could you have ever imagined an executive order from the president of the United States, saying that in 45 days all firms have to stop working with a Chinese run app?

After speculation that Microsoft would get the deal, it seems like Oracle have found the formula that works for both the US and China.

Oracle was ‘OK’ with not becoming TikTok’s parent company and was content becoming its cloud services provider, keeping US data in the US.

You can’t help but feel if it goes ahead, Oracle has got a great deal.

TikTok spends almost as much with Google Cloud as Netflix do with AWS.

Netflix’s recent earnings report showed they have committed $900m “primarily related to cloud computing costs,” over the next three years.

In 2019, TikTok signed a three-year agreement with Google Cloud (GCP) to buy more than $800 million in cloud services.

A deal anything close to the Google deal could be huge for Oracle, it represents a 5% increase in their cloud services business which had only grown 1% in 2020.

However you cut it that’s a lot of cloud services.

$ Cloud Spend p.aMonthly Users (m)$ per user
Netflix$300m200m$1.5
TikTok$266m500m$0.5
Simple $ per user model

If you asked these companies how much they spend per user on the cloud, they wouldn’t know. A crude model is taking subscribers and dividing by cloud spend.

There are much better ways to do this but even some of the biggest companies don’t even use this basic model.

So, do those numbers sound alright or like a lot of money?

On the surface they both sound like very reasonable numbers.

The reality is they are both excessively high. Nearly all organisations are spending between 50-70% more with their cloud providers than they need to. For Netflix, this could see their cloud spend per user down to 45c and TikTok to 15c.

Why should I care about the cost per user?

You could look at this two ways: 1) Spending more liberally means potentially faster products, more innovation 2) Less efficient code, less understanding of how your tech works, less innovation.

Either way, a cost per user is a good place to start. The more you understand your systems at a deep level, the fewer incidents and outages and the less they cost.

TikTok might be more worried about operating in the US or not.

What’s Netflix’s excuse?