The good news is that the accelerated decisions during 2020 due to the pandemic, were the original trigger and helped those decisions become specific digital transformation and modernization projects, looking into 2021. More good news is that they will continue to strengthen themselves throughout 2022. In fact, according to IDC, the expenses associated with the digital transformation are forecast to reach USD 2.8 trillion in 2025 – more than double the amount allocated in 2020.
Speculations about whether this was merely a wave, a fad, or a trend were stamped out. Some dynamics changed forever, and there seems to be no going back since consumers have made them their own and a part of their everyday experience: from telemedicine to curbside pickup –when retailers deliver their products to clients to an assigned parking spot in a shopping center.
Even if it is true that the pioneers of incorporating innovative strategies are large companies, middle-segment businesses now have the chance to join in with an additional advantage: these technologies are well-proven and the risk of implementation is inherently lower. In an increasingly digitalized world, when people massively embrace consumer electronics and companies integrate and virtualize their transactions, delaying the growth of digital transformation can be tantamount to being left out of the market.
The challenges for middle-sector companies are not insignificant. Some aspects have to be reconsidered: integration, optimization of the value chain, and more remote and intelligent operations that can only be achieved with quality data. The old structures wherein companies operated in an isolated way are rapidly falling out of favor. Today, cooperation and exchange and the use of end-to-end digitalized processes are essential.
One of the current enormous debts of technology is handling data to achieve those objectives. Even if middle-segment companies have been accumulating a considerable amount of data for years, they do not use it to make informed and intelligent decisions that might bring business benefits: higher client satisfaction rates because experiences are more personalized (and the resulting increase in billing), cost savings related to optimal production levels, demand forecasts or higher process efficiency, to mention just a few examples. Another good news is that there are more and better tools to solve these historical problems.
In these cases, the role of the technology partner is more critical than ever. The partner guides and assists the organization to know and capitalize those tools that will allow it to gather higher-value data. Additionally, the partner has the experience and the talent required to help the company adopt new solutions with an optimal learning curve. At the same time, thanks to their expertise, partners are familiar with the possible scenarios. They can even foresee problems and act proactively to avoid actual inconveniences.
Another significant obstacle is culture. Companies –particularly those in the middle segment, for which investment in technology requires a considerable effort in their overall budgets– must be aware that these cycles take time and will not yield results immediately. It is not a question of just creating or modernizing a piece of software, launching it immediately, and seeing instant results. Companies must understand how the product cycle will work, what tangible benefits it will deliver, how long that will take, how it will impact the internal culture of the organization, and how the organization’s talent will need to be trained and coached to be able to cope with the new challenges.
Sustainability is another big issue that must be placed at the top of the agenda of middle-segment company executives, driven by more responsible consumers and by investors who demand ethical and careful behavior from the companies they are interested in. S&P Global Market Intelligence detected that 78% of M&A operations make no progress due to concerns over the target companies’ environmental, social, and governance (ESG) credentials. In contrast, 86% consider that these practices are “important” or “very important” to start an M&A process (a percentage that is 55% higher than it was hardly five years ago).
The context for the companies that can deal with all these challenges is favorable. There are high levels of investment in mergers and acquisitions of businesses; investors are increasingly looking for middle-segment companies with a strong technological imprint. The valuation of the companies that can take an innovative leap quickly reaches the ceiling. It is a virtuous circle that promotes investment in technology inside the companies that a PE later purchases and invests in to modernize and grow their value.
In the United States and Europe, investors have been mainly interested in businesses related to the technology segment. Also, according to S&P Global Market Intelligence, 2,456 agreements were finalized for a net value of USD 109.430 billion, while in the Old Continent, there were 1,625 operations totaling USD 25.980 billion. All estimations indicate that, in 2022, the pace of M&A transactions will continue to grow at record levels.