Digital Maturity: the next benchmark for value?

Key Take Aways

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• Digital maturity is an enabler, not (yet) a valuation driver

• Technology improves saleability more than intrinsic value

• Effective use of data matters more than advanced tech or AI

• ROI comes from context-driven, problem-solving technology

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All businesses are tech businesses now, right?

I think I first encountered that line, or one very like it, more than 12 years ago. Since then, technology has become even more ubiquitous, and AI and data analytics have come to dominate conversations across business, finance and policy.

However, as I travel the world speaking to business leaders and investors about how our own tech solution could help them, I am struck by the way many companies regard digitisation as something that is still to be done and, more surprisingly, that IT in its broadest sense is often seen more as a cost than a strategic driver.

Given the transformative potential of technology today, from enterprise software to AI and data analytics, I wondered whether ‘digital maturity’ – the extent to which organisations leverage technology to achieve their objectives – has become one of the measures by which they are assessed and valued. In fact, digital maturity is already gaining traction as a business assessment tool, with leading consultancies such as BCG promoting it as a route to new growth and AI leadership.1 When I recently explored this idea with a number of contacts in the alternative investment world – all representing global investment portfolios of $60bn – $300bn AUM – they took a interestingly different perspective.

Despite the growing currency of digital maturity – both as a metric and a pathway to growth – alternative investors, do not really see it as a driver of value premiums. Or at least not yet.

‘It’s more of an enabler than a driver of value,’ said one contact.

‘It’s a subtle distinction but we don’t see a direct correlation between digital maturity and valuation, either at investment decision or exit.’

The collective view is that, for most non-technology companies, technology is hygiene rather than a value-multiplier. Buyers will not pay more simply because a company uses sophisticated digital tools or systems. These are expected ‘table stakes’ for a business of a certain size, but they don’t change the core valuation drivers, which are, as ever, growth, profitability, market size, unit economics and management quality. Technology, including AI, clearly has a role to play in each of these drivers, but it’s not considered a driver in its own right. The obvious exception is in technology businesses such as digital marketplaces or SaaS providers where there is a clear link between technical maturity (more from architecture / CX standpoints) and valuation.

However, while digital maturity does not necessarily make a business more valuable, it does make it more saleable. Tech adoption, especially done well, can add strength to the exit story. One contact described it providing the same sort of ‘curb appeal’ that an attractive garden does in a house sale – it improves attractiveness but not intrinsic worth and is likely to get more potential buyers engaged.

That’s not to say that digital maturity, or a version of it, isn’t important to alternative investors: clearly an understanding of a company’s level of technological sophistication can present opportunities to drive growth. But they phrase it differently. They look instead at the effective and appropriate use of technology and how this can create value in a business. We also hypothesize that there’s a bit of AI hype fatigue creeping into the healthy skepticism that investors expressed, especially if they are not investing in early-stage businesses.

‘Where are they with their data? That’s what I look at,’ said one contact.

‘Are they collecting the right data? How good is it? And do they have the resources to make the most of it?’

Across my conversations, contacts emphasised that one of the strongest differentiators between companies, and therefore perceptions of value, is whether they can capture useful data, keep it clean and analyse it. Without these capabilities, they say, higher-order AI or automation is not only impossible, but pointless and probably destructive. And this is the healthy tension we believe investors will continue to grapple with as they juggle the AI possibilities with the organisational realities of their own firms and portfolio companies.

‘It cannot be about technology for technology’s sake,’ said another, ‘but about the effective use of technology – and that depends on the specifics of the business.’

Whether it’s avoiding using a sledgehammer to crack a nut or a canon to shoot a fly, the key is effective rather than maximum use of technology. That, they say, is how you get ROI in technology. Different businesses and different markets have different needs for technology and different ways of valuing it.

So, while a healthcare setting in a modern city will benefit from app-rich functionality, a rural hospital might rely on SMS and voice reminders as its patient interface, particularly if the rural population lacks the technology, connectivity or inclination to interact that way. Achieving ROI, whether it’s ERP, task-specific Apps or AI, is about adapting the technology to the business circumstances rather than imposing it on the business. I am intrigued by the changing nature of a digital operating partner given this sentiment, which I think is going to persist for a few years.

To be effective investors say, technology has to solve a problem for the immediate users – the ‘what’s in it for me’ element – as well as for the business, or it risks becoming an obstacle to the delivery of service quality. One contact cited CRM softwares as an example of a widely misunderstood or poorly implemented tool that rarely delivers on what the organisations expect: ‘Why? Because nobody will sit and fill in the data.’ This is no surprise as users - young and seasoned professional alike, are now hungry for ‘informed outcomes’ and ‘suggestions’ rather than plain data dashboards.

However, there is one technology play that investors agree is repeatable universally. The transition to digital marketing has demonstrated ROI across businesses and sectors and is a major area of investment for GPs looking to drive revenue growth in their PortCos.

Talking specifically at AI, my contacts were keen to look beyond the hype. ‘We’re very happy to support investments targeted at driving growth,’ said one, ‘but we also know from experience very few AI pilots successfully demonstrate ROI.’ Like any implementation, the challenge is seeing past the ‘sexiness’ of the technology and measuring the difference it actually delivers: Has it reduced turnaround time? Has it reduced complaints? Has it improved your NPS? If it’s not measurably helping you grow revenue, reduce cost or improve service levels, then, say my contacts, it’s probably not worth investing. One investor I spoke to put it succinctly and colorfully: ‘AI is like teenage sex. Everybody is talking about it, everybody claims to be doing it because they think other people are doing it, but in reality, nobody has a clue. A lot of it just public posturing to show how evolved they are.’

Several investors also alluded to the technology limitations of the GP teams themselves, saying that many were still relatively early in their own digital journeys and therefore not especially well placed to leverage AI and other tools in their portcos while they were still getting to grips with using them in their own businesses.

So, while there are tools out there that can help to create value across portfolio companies, it is the data context, processes and user incentives within individual companies that determine the effectiveness of the implementation, and ultimately any value add. The conclusion then is that alternative investors cannot simply apply their digital maturity playbook to portcos and expect to see the

same gains repeated across their portfolio – context is everything.

One final word about digital maturity: however they define or try to measure digital or technology maturity, investors do not see it as a destination or end state. Instead, it’s a point on a continuum: ‘Digital maturity is incremental, driven by business needs, resources and market pressures.’