It isn’t by accident that the most valuable companies in history are today’s digital companies. When you think innovation, the engine of growth, your first thoughts aren’t traditional automobile manufacturers, taxicab companies and bookstores.  Instead you think Tesla, Uber and Amazon – companies that use data to create great products, great services and great business models.

These data-driven companies disrupted their industries and invented new ones, and in the process, they became the most valuable companies.  Until recently, digital companies were synonymous with tech companies but high technology such as the internet of things and AI/ML now makes it practical to digitize the offline products and services of traditional companies to bring them online – making them data-driven and smart.

This form of digital transformation enriches traditional companies with many of the same advantages previously enjoyed only by tech companies.

However, in private equity digital transformation is still mostly associated with IT, which while important, is incapable of returning the same amount of enterprise value per tech dollar invested.  High tech or smart digital transformation is the newest form of operational improvement.  Although any level of technology (high, mid, low) can be applied to any type of company, smart digital transformation is capable of transforming traditional, non-tech companies into digital-traditional companies.

Digital transformation doesn’t need to be complicated to make an impact but it does need to be strategic. Most companies will have a few digital initiatives cooking or maybe even baked, but most will fail because they’re being developed for the wrong reasons and managed by the wrong people. The most valuable raison d’être for digital transformation, at least for private equity, is to produce data-driven smart companies.  These digital-traditional companies become more valuable by using the same digital value creation playbooks as Tesla, Uber and Amazon, who create value with digital-enabled business models and intangible assets.

So, what is digital transformation? For private equity it’s a new source of alpha.