From digitalization to AI: private equity funds drive Italian SMEs’ digital transformation, add value and boost returns

The shift to digital technologies is reshaping our economy, our businesses and our way of life. Different levels of digital maturity have been achieved by organizations and companies around the world. Unfortunately, Italian entrepreneurial companies are still operating with a relatively low level of digital maturity and are lagging behind their peers in the other advanced EU countries.

According to the Digital Economy and Society Index¹ (DESI), developed and monitored by the EU Commission, Italy ranks eighth in the EU in integration of digital technologies. Most Italian small and medium enterprises (SMEs) have at least a basic level of digital maturity. However, looking at the uptake of specific technologies, the overall performance is mixed. As result of legislative interventions, almost all Italian enterprises use e-invoices (95%) and also perform well in the uptake of cloud services, with 52% of enterprises using this technology. But the use of big data is low (only used by 9% of Italian enterprises), as is the use of technologies based on artificial intelligence (6% of Italian enterprises). E-commerce sales have increased in recent years – partly due to the effect of the Covid-19 pandemic – reaching 9% of total sales but still remain below the EU average.

This apparent competitive disadvantage can become an opportunity for financial sponsors and private investors investing in Italy. Private equity transactions in the country mainly concern SMEs: in fact, over the last five years, approximately 85% of buyouts in Italy (a total of approx. 1,500 transactions) have involved companies with revenues of less than EUR 50 million and 250 employees.² The ability of private investors to support and accelerate the digital transformation of relatively small companies is a powerful lever for value creation and can make the difference. 

In assessing the digital maturity of a company to identify improvements to realize, at least four different levels of digital intensity can be distinguished: digitization, digitalization, digital transformation and artificial intelligence.

• Digitization is the process of converting analogue data (i.e., any document with a physical dimension, such as paper documents, videos, etc.) into a digital format. This process facilitates the storage, sharing and usability of this data, making it more accessible and easier to analyze. This is especially important for organizations that deal with large amounts of data, such as health care providers and financial institutions.
• Digitalization builds on digitization by using digital technologies to improve processes and performance. For instance, many enterprises have implemented enterprise resource planning (ERP) systems to streamline their operations — as an example, to manage their inventory, finances and human resources more efficiently.
• Digital transformation goes one step further by using digital technologies to reshape business models and transform business processes, evaluating, reengineering and even reimagining the way you do business (e.g., moving from physical to digital distribution, selling products on an e-commerce site or providing preventive maintenance or remote assistance to installed machinery).
• Artificial intelligence (AI) represents the cutting edge of digital transformation, with the potential to transform businesses and the relationship between people and technology at large. Artificial intelligence is the ability of computers and machines to mimic the functions of the human brain. In general, AI refers to the process of developing systems with the capabilities of human intelligence, such as the ability to learn from past experiences, discover meaning and generalize. Business processes can benefit from AI automation in many different ways, such as increasing speed and efficiency, saving time and, at the same time, providing the insights, flexibility and processing power of an artificial intelligence. It functions as an assistive technology, recommending the best actions to members of a company’s various organizational structures. In this way, the company can customize processes, make accurate use of data, provide better service to customers and ultimately maximize revenues. 

Private equity funds should conduct a digital checkup during the due diligence process, or immediately after closing at the latest, to get an overview of the areas where target companies can improve their digital maturity. Alternatively, they should conduct a digital checkup of all portfolio companies to assess their digital readiness and identify the best way to fully exploit their digital potential.

We have developed a tool to evaluate the digital potential readiness of SMEs to use during strategic due diligence or for assessing the digital potential of portfolio companies. 

Front-end and back-end processes are analyzed to identify gaps to be filled, the relevant investments and objectives consistent with resources of a company with revenue of EUR 50 million, also considering the investment horizon of a financial sponsor.
Customer-facing processes are evaluated on factors such as:

• e-commerce performance
• website and social media presence
• perceived customer experience
• omnichannel approach

The company’s performance is compared with best practices and peers in the industry, with the aim of increasing customer loyalty, reducing churn rates and tailoring offers to individual customers through ad hoc marketing strategies.

Digital diagnostics is particularly relevant in the B2C sector, as these companies are experiencing a radical paradigm shift driven by the proliferation of digital technologies. E-commerce platforms, mobile applications, social media channels and websites all play a key role in shaping the overall customer experience, building brand identity and influencing purchasing decisions. By evaluating online traffic patterns, analyzing the effectiveness of social media engagement, scrutinizing marketing expenditure and evaluating e-commerce KPIs, a digital checkup may help B2C companies refine their content strategies, maximize customer engagement and improve conversion rates, average order value and customer retention metrics.

Looking at back-end processes, the diagnostics tool assesses components such as:

• supply chain
• data management
• process automation
• logistics
• controlling

Benchmarking your company’s performance with best practices and peers can help identify relevant digital gaps. This can lead to smoother operations, real-time inventory management, demand forecasting, logistics optimization and cost control.
Digital diagnostics is particularly relevant in the B2B sector, where back-end digitalization can optimize efficiency, minimize downtime and enhance output quality. Industrial enterprises can proactively monitor equipment and preemptively address maintenance needs, thus maximizing equipment uptime and overall production throughput. 

Conducting a digital checkup is imperative for financial sponsors aiming to support portfolio companies in the digital age and accelerate value creation.

Summary

Italian SMEs face a digitalization gap compared to their European counterparts, and this necessitates action. A digital checkup has emerged as a crucial diagnostic tool for enhancing SMEs’ digital maturity and defining the best tailored strategy to leverage the new digital levers by addressing both front-end and back-end activities.

Authors:
Giovanni Calia, Managing Director, Email
Alessandro Iodice, Manager

Sources: 
[1]    https://digital-strategy.ec.europa.eu/en/policies/desi-italy
[2]    https://www.aifi.it/it/private-equity-e-venturecapital