Several studies have shown that less than 20% of digital transformations deliver significant value. Multiple researchers claim that hundreds of billions of dollars are wasted every year on IT projects that don't produce any business benefits.
Is there something we can learn from private equity' value focus to ensure our digital project will be one of the winners? I sure think so.
I always admired the relentless value creation focus of private equity. While public companies are often prone to endless technology pilots and experiments, private equity focuses their companies to the tangible business impact of such programs. They ask the management teams to do fewer initiatives with higher value delivered. So I assembled my favorite 6 questions I hear the most from private equity firms when they review and approve digital initiatives. I covered some of these in more detail in other videos. Check them out too.
QUESTION 1) What is the Art of the Possible?
One of the greatest way private equity guides conversations around digital transformation is to ask for the ultimate value impact of the project. This is often the best case scenario, but helps management determine if the "juice is worth the squeeze", so to speak. If the best case is not exciting enough, then a more realistic estimate will clearly miss the mark. Asking for the art of the possible also forces the business and IT to go beyond the safe and comfortable use cases for digital projects and push the agenda to areas with the highest value impact: revenue growth, customer retention and fundamental cost structure changes, not just process efficiencies.
QUESTION 2) What is the value of the project in cash flow terms?
Business valuations ultimately boil down to discounted cash flows. It may be harsh but everything we do in business is either increasing the value of our company or reduces it. Any project that does not create positive cash flows will hurt shareholder or equity value. That's just the physics of business. There is really no way around it. But value needs to be viewed enterprise wide and over time. A customer experience initiative will have negative cash flow within IT but bigger positive cash flow in sales. The reverse is also true. IT focusing on only TCO reductions within their own budgets vs focusing on enterprise cash flow impact in the business could be one of the main reasons why many IT projects end up creating little value.
PE firms push their companies to show value in hard benefits, free cash flow (that is EBITDA). Soft benefits are useful and they help with change management and adoption but no project should move forward until the hard benefits in cash terms are clear.
QUESTION 3) Who will sign up to the benefits?
By private equity logic, someone should own the benefit numbers. An executive with a P&L will need to commit to the cash flow / EBITDA impact in their budget. Not just the cost but the upside as well.  This is the true test of project buy-in. Many IT project managers complain that the business is not as engaged in the project as they should be. A great way to fix that is to ensure that some executive's success is tied to the financial success of the program. This also implies that the benefits will be significant enough to the business. A great conversation I heard was when an IT team asked their business counterpart the following: "how much in EBITDA gains does this project have to deliver to make it a priority for you?". There is always a number. And project teams that fail to ask are, frankly, asking to fail.
QUESTION 4) Do we have the right skills?
This may seem trivial but digital transformations require a new skillset. Most companies address the obvious skills, like developers, data scientists and project managers. There are other skills that are often missed. These include the roles focused on value creation. Ensuring that the program office has experience managing projects to value ta