Developing A Digital Transformation Program Investment Case For B2B Companies (Part 1)

April 10, 2020 · Paolo Timoni

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Having a clear, pragmatic, and well-articulated investment case for a planned digital transformation program is a key prerequisite for busy senior executives that want to quickly move from consideration to action. Here we start discussing a reference case for a B2B middle market company that can be a useful template for companies preparing for their digital journey.

Understanding when digital transformation should be a priority

In today's world, digital transformation can often help companies achieve three essential goals for long-term success and sustainability:

  • Accelerate organic growth by developing a superior ability to earn attention and engagement from existing and new customers.
  • Increase the level of internal productivity and efficiency across several operational processes.
  • Strengthen customers' loyalty by helping customers achieve higher levels of internal productivity and efficiency.

Developing a superior ability to earn customers' attention and engagement is the most important and most difficult objective to attain.

Attention economics will reshape business economics. As products and information proliferate, attention becomes the scarce resource.

John Hegel, The economics of attention, Dec. 5 2006

Nevertheless, an important question that busy senior executives should ask themself is if their company is ready to embark on a digital journey.

In some cases there might be other priorities that need to be addressed before a company can start focusing on accelerating organic growth and, in other cases, digital transformation might not be the primary approach required to accelerate organic growth (i.e. when a B2B company operates in a market with only a few very large potential customers).

The following cases are a few examples of situations where a well designed and executed digital transformation program would usually produce great results:

  • B2B companies with a strong market position with large accounts in their industry that want to increase their market share with SMBs accounts;
  • Regional B2B companies with a competitive offering for SMBs accounts that are preparing to expand at the national level;
  • B2B companies focusing on the SMB market that aim to increase their share of wallet at existing accounts through greater cross-selling following the acquisition of new add-on businesses and their product lines.

Our analysis of a large sample of top 100 US middle market buyout private equity firms has revealed that typically between 20% to 35% of B2B portfolio companies would significantly benefit from a well designed and executed digital transformation program focused on accelerating organic growth, as they present both a significant upside market opportunity and a digital capability gap.

Identifying a few pragmatic key objectives

Personally, I think that what is commonly referred to as digital transformation would be better described as digital enhancement (however, digital transformation is the trending keyword and therefore the term to be used to gain attention and engagement!). Successful B2B companies that have attracted private capital for a buyout transaction typically have a number of important assets and capabilities, and have committed to execute a few important initiatives to further strengthen their business. What is really required is to enhance the existing assets and capabilities with some new digital capabilities.

Our research and work suggest that for most companies, digital transformation means something very different from outright disruption, in which the old is swept away by the new. Change is involved, and sometimes radical replacements for manufacturing processes, distribution channels, or business models are necessary; but more often than not, transformation means incremental steps to better deliver the core value proposition.

Digital Doesn't Have To Be Disruptive, Nathan Furr and Andrew Shipilov, Harvard Business Review, July-August 2019.

Based on our own experience and the results of several business surveys about digital transformation (see for example Digital Rewrites The Rules of Business, Forrester, February 25 - 2020), we can confidently conclude that, when appropriate, middle market B2B companies should start their digital journey by focusing on the following key objectives:

  • Increase sales & marketing effectiveness by developing:

    • New integrated digital marketing & sales capabilities to generate and convert new qualified leads;
    • New integrated digital marketing & sales capabilities to nurture and engage existing leads and customers in order to improve closing rates and generate new cross-selling opportunities;
  • Strengthen the customer value proposition by introducing:

    • A well functioning e-commerce website (for catalog products) or a workflow automation application (for custom products) to provide convenient and frictionless online ordering;
    • A self-service customer service portal to help customers operate more smoothly, save time and internal costs, and make better data-driven decisions;
  • Improve the company IT function with lower costs and improved agility by gradually migrating to a cloud-based infrastructure, a modern technology stack, and a modern applications architecture;
  • Improve the company decision making capabilities at all levels of the organization by deploying a modern real time business and customer data infrastructure and appropriate analytics tools.

Defining an appropriate action plan and timeline

To ensure the successful execution of a digital transformation program setting realistic expectations about its timeline and its major activities is extremely important. While any generalization is always difficult, based on our experience the following high level workplan is a good example of a well paced digital transformation program focusing on the objectives articulated above:

  • Year 1

    • Complete initial assessment and planning phase and assemble appropriate execution team (Q1)
    • Setup and launch outbound prospecting process to generate new qualified leads and customers (Q1)
    • Select and deploy other required sales and marketing SaaS tools and customer data infrastructure (Q2)
    • Setup new CRM based structured sales processes for qualifying new leads and managing new opportunities (Q2)
    • Prepare and launch initial set of multi-channel inbound leads generation digital marketing campaigns (Q2)
    • Design, develop and release initial version of online order taking application (Q2 - Q3)
    • Start building pipeline of new opportunities and when possible close opportunities into new deals (Q3 - Q4)
    • Assess initial program performance and confirm program continuation (Q4)
  • Year 2

    • Optimize and scale digital marketing & sales activities to accelerate new customers acquisition and improve conversion rates (Q1 - Q2)
    • Expand and optimize functionalities of online order taking application (Q1 - Q2)
    • Design, develop and release initial version of online self-service customer service portal (Q3 - Q4)
    • Select and deploy realtime business data infrastructure and analytic tools (Q3 - Q4)
    • Continue to scale organic revenue growth (Q3 - Q4)
    • Start optimization of IT spending (Q3 - Q4)
  • Year 3

    • Continue optimization of IT spending (Q1 - Q4)
    • Continue to scale organic revenue growth (Q1 - Q4)
    • Expand and optimize self-service customer service portal and optimize internal customer service processes (Q1 - Q2)
    • Identify internal hiring requirements and launch recruiting and onboarding processes (Q2 - Q4)
    • Initiate transitioning of all operational and managerial responsibilities from interim digital team to the appropriate internal functions (Q3 - Q4)
  • Year 4

    • Complete transitioning of all operational and managerial responsabilities related to the digital program to the appropriate internal teams (Q1)
    • Complete optimization of IT spending (Q1 - Q2)
    • Continue to monitor digital sales & marketing activities providing mentoring and coaching where appropriate (Q2 - Q3)
    • Disengage the interim digital transformation officer (Q4)

Having defined a digital transformation program high level workplan, there are two natural questions that needs to be addressed:

  1. Who should lead this effort?
  2. When and how will the company be able to assess if the digital program is working and creating equity value?

Since there is a lot that needs to be done in a relatively short time, it is clear that involving an experienced interim digital transformation officer that can assemble and lead a properly qualified multi-functional team to build new capabilities in partnership with the existing management team will be extremely valuable.

With regard to when and how to assess if the digital program is working, in my experience the earliest time will be at the end of either Q4Y1 or Q1Y2 depending on the average length of the industry specific selling cycle. The best way to do it, on the other hand, will be to analyze the trend, during the initial 6 to 9 months, of the following three key metrics (and not the absolute level of the revenue generated):

  • New leads volume generated in any given period: while the absolute value will depend from many factors and be less important, a well functioning program will display an increasing volume of monthly new leads;
  • New lead acquisition cost (LAC): during this initial phase the program LAC will still be higher than the targeted level since it usually takes between 18 to 24 months to fully optimize new digital marketing campaigns. However, a properly structured digital program will display a gradually decreasing LAC;
  • Early conversions (conversion of new leads generated by the program into new customers): the ability to generate new paying customers is obviously the ultimate measure of success. Since selling cycles are relatively long in B2B industries, what should be expected here is an initial pipeline of new opportunities in advanced stages of negotiation and possibly some early conversions.

In any case, by the end of Q2Y2 when working well the program will have generated a few million dollars in incremental revenue and there will be solid evidence that the new sales pipeline is working well.

We will resume the discussion next week and jump right into how to develop the digital transformation program investment case.