The physical book has been updated to version 6 but this is the original version of chapter 5.

Digital transformation is the operational transformation of a traditional company into a digital-traditional company. The digital operating partner uses high technology such as the internet of things and data science (analytics, AI/ML) to deliver digital initiatives designed to increase enterprise value.

Digital transformation is hard, but it’s for reasons that may seem counterintuitive. Tech such as IoT and data science is on the cutting edge, so of course it’s a challenge, but tech is a manageable challenge with the right experience and development partners. So it’s not really the hardware or the software that presents the biggest undertaking; it’s the wetware. As in any operational transformation, it’s the human element that presents the biggest risk. However, experience has shown that when employees are in the right environment, this risk can be mitigated.

And that is the purpose of this chapter: to compare how the working environments imposed by different company ownership structures contribute to digital transformation success and to recognize the resulting behaviors to be managed during the transformation.

Assuming similar capital, people and physical resources, we will examine the effect that company ownership structure and the actions they promote have on digital transformation success. To do this we will compare the environments of public and private companies, then private strategics and sponsor-owned companies and finally VC-owned and buyout-owned portfolio companies, to identify the best ownership structure and behaviors for smart digital transformation to succeed.

PUBLIC VERSUS PRIVATE

First let’s compare public company environments with private company environments as they pertain to supporting a successful digital transformation.

The most obvious place to start is governance. Having a multitude of public shareholders to answer to generally results in a more bureaucratic and hierarchical management structure than found in private companies. This structure is great for balancing many stakeholders’ demands but less great for changing priorities and making timely decisions. Public boards are also more defensive in nature, more concerned with risk and not losing, rather than playing offensively to win. Successful digital transformation is more about effective leadership than effective management. Leadership that can make big decisions and then rally the troops to make them happen. The concentrated ownership of private companies ensures more effective decision making and the prioritization of strategies deemed to have the greatest value. With fewer institutional loyalties and distractions, the private company is better able to make dispassionate decisions and then have them carried out.

One of a public company’s biggest distractions is quarterly reporting. The “end-of-the-quarter drill” can derail all business as usual, including, for example, diverting the digital team to help sales close those last few accounts before quarter end. Experience has shown it’s best to establish a digital team, almost like a startup, that’s insulated from public company gyrations so the team members can concentrate all their energy on implementing their digital mandate. This tends to be easier to do in private companies that can afford to have longer time horizons for their investments to pay off.

Defining a digital transformation strategy and creating an internal digital team to execute it implies top-down decisions. But in most public companies just the opposite occurs. Ideas for digital projects mostly come from engineering. Sometimes this can be great, but more often than not, engineering-driven digital initiatives are about the tech—the shiniest bells and the clearest whistles that are supercool technology but not so cool from an investment impact perspective. Experience has shown time and time again that without the right leadership and culture, digital initiatives will pop up in labs without business plans, consuming precious opportunity cost, only to be stillborn because the projects weren’t valuable enough to raise the internal funds necessary to go commercial.

Although most discourse on digital transformation centers on public companies, it is the privately owned enterprises that have a better chance of digital transformation success (Figure 5.1).

PRIVATE > PUBLIC

A private company has a
better ownership structure
for digital transformation
than a public company.

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